I am a brilliant investor.
At least, that’s what I thought at the time…
It was the late 1990s. I had saved about $20,000 from different jobs that I had worked through the years, and I was in college when my father called me up and said, “Let’s each put $5,000 into Legg Mason’s Value Trust fund.”
My father’s a great guy, and I trust no one more than him in life.
So I joined him, and we each put $5,000 into LMVTX. Anyone who knows me well knows that I HATE most mutual funds. But I didn’t know any better back then.
My dad then came back to me, probably a year later, to say, “We doubled our money, let’s sell.”
My $5,000 had quickly turned into $10,000.
Of course, I now know that it wasn’t skill that allowed us to double our money so easily.
Rather, it was a good bit of luck, along with the massive tailwinds of the growing dot-com bubble, that pushed the entire market to dramatic new highs in a few short years.
In other words, to borrow the old Wall Street cliché, I made the mistake of “confusing brains with a bull market.”
Of course, neither my luck nor the bull market stuck around for long. And left to my own devices, I proceeded to struggle with my investments for much of the next 15 years.
I fell victim to what’s known as the “winner’s curse.”
My overconfidence led me to make just about every mistake in the book. I swung for the fences on every investment I made. I risked too much money on individual positions. And I would double down on my losers again and again while routinely selling my winners too early.
(In fact, I sold that first investment WAY TOO early.)
Eventually, I had no choice but to admit the truth: I wasn’t as great an investor as I thought. In fact, I had no idea what I was doing. And I realized I needed to take the time to learn the basics of proper investing if I was ever going to succeed.
My turning point
So, that’s what I did. I started reading every investment book, blog, and newsletter I could find.
However, in hindsight, I believe that most of my difficulties can be traced back to that first trade. Ironically, it was that early success that sowed the seeds for years of failures.
You see, quickly doubling my money had inflated both my net worth and my ego. The humility my parents had instilled in me went out the door as I dreamed of the untold riches I would soon make in stocks.
Had I lost money on that first investment, I likely wouldn’t have been so brash. And as a natural-born tinkerer who was always asking questions, I suspect I would’ve been drawn to learn more about proper investing years before I did.
Now, I wish I could tell you my experience was unusual.
However, in my role as CEO of TradeSmith, I’ve had the pleasure of speaking with hundreds of individual investors over the years. And I’ve read thousands of pieces of feedback. (Thank you!) And the winner’s curse appears to be incredibly common among those with early success in the markets.
This is really concerning, considering what’s happened over the past couple years.
The combination of COVID-19-related lockdowns and massive government stimulus had two important consequences: It ignited a massive rally in speculative assets AND it gave millions of Americans both the free time and the financial means to begin investing for the first time.
I suspect many of these new investors got the impression, like I did, that making money in stocks was simple.
For much of the past couple of years, you could practically throw a dart and buy anything – SPACs (special purpose acquisition companies), meme stocks, dog-themed cryptos, and even digital pictures of rocks and apes – and make a fortune.
But now that the bull market has turned into a bear, that’s no longer the case. And these same folks are likely to face a long, difficult road ahead as they learn the same lessons I did.
Given the sheer number of folks who have opened brokerage accounts since early 2020, more than a few Money Talks readers are probably in the same situation today. And I don’t want that to happen to you.
Fortunately, avoiding this fate isn’t difficult. And it all starts with a little humility, as I alluded to before.
In short, you can either choose to be honest with yourself now about what you do and do not understand about investing, or you can wait for the market to do it for you later.
From there it’s as simple as making a commitment to learn more. And your free Money Talks subscription is a great place to start.
Other tips to learn
First, I’d recommend you study the basics of proper risk management. This includes three simple but critical ideas. (You can learn more about each by clicking the links below.)
- Don’t put all your “eggs” in one “basket”
Be sure to spread your investments across different asset classes like stocks, bonds, real estate, commodities, etc. and hold enough cash to cover emergencies and sleep well at night.
- Balance your risk across investments
Aim to take roughly the same amount of risk in every position. In practice, this typically means investing more money in lower-risk stocks and assets and less money in riskier investments. (If you’re a TradeSmith subscriber, our powerful Risk Rebalancer and Pure Quant tools can do this for you automatically.)
- Know exactly when or why you’ll sell every investment you own
Most successful investors have a clear exit strategy for every investment they make. Here at TradeSmith, we prefer trailing stop losses. But honestly, just write down WHEN you’re going to sell each stock or fund you buy. I don’t care what you do, so long as you have a bona fide, pre-planned exit strategy.
Again, these ideas are simple, but don’t let that fool you. They are absolutely critical to long-term investment success. In fact, if you did nothing else but strictly follow these three ideas, I suspect you’d likely do better than 99% of individual investors out there. They’re just that important.
But the Money Talks archives have a ton of additional educational material that can help you on your investment journey, including:
- The ideal number of stocks to own
- Common-sense fundamental analysis
- Why “the trend is your friend”
- How “factors” can help you make better investments
- The best kinds of stocks to own for the long term
- The problems with most mutual funds
- How to interpret market sentiment
- The power of dividends
- The one book every investor should read
- How to maximize the benefits of your 401(k)
- The best conservative income strategy I know of
- How to navigate a bear market
When you’re ready for more, I’d also encourage you to bookmark our free TradeSmith Daily publication for easy access, where you can find even more investing insights. Sign up for TradeSmith Daily and those insights will come straight to your inbox five days a week.
That’s it for this week. As always, you can reach me directly with any questions or comments at [email protected]. I can’t respond to every email, but I read them all.