When I started out in investing (in my 20s) I was nothing special. I had no confidence, no extra knowledge, just a burning desire that I wanted to get my money to work and produce passive income so that I could leave the work I didn’t like. (I was running my own company which made things more complicated. On one hand I had the money to invest, on the other hand quitting your own company is not the easiest of things.)
Lesson 1: Your financial status and level of knowledge always converge.
I was a guy with a relatively low level of investment knowledge and a high amount of money to put to work. “A fool and their money are soon parted” you know. Since getting my knowledge level up was not a short process, but the money part of this equation could move much faster, the result was that I’ve lost plenty of money with various investments during the years I was building up my knowledge. (Money level moving quickly downhill, knowledge level slowly climbing up… it was utterly painful until the point these two met somewhere in the middle.)
For the sake of illustration: I invested in exotic property (a hotel in Thailand to be more exact that was really hard to sell), a sheep farm (lawsuit still in progress), forex robots (all of which lost money), some outright Ponzi-schemes (most of the perpetrators are in jail), startup companies (with dishonest partners) and stocks of disastrous public companies. My journey to success was very long, painful and expensive. In fact, investing was a very expensive hobby until I figured out how to do it right!
At some point, I found an investment newsletter many people were raving about. Its title even included the magic word “dividend” and I thought my savior arrived: a guy who knows how to pick stocks that would provide the passive income I so desire. I subscribed to his newsletter and at first I felt somewhat uncomfortable with his recommendations. By this point I have read tons of investment books but I was very far from coming up with my own system, so I just suppressed my feelings and followed this ‘expert’.
One of the stocks he got me to buy was Transocean (RIG). I never really understood his reasons behind this purchase since this didn’t look like a safe dividend stock to me and he was very secretive about his stock picking system. Long story short: the company stopped paying dividends and the share price fell from $38 (where I bought) to single digits. That really hurt! This was the wake-up call I needed.
I started thinking. (Better late than never…) What do all my failed investments have in common? In most cases I totally relinquished control and didn’t fully understand how these investments worked and could make money. All the guys selling these investments were sales and marketing superheroes, their confidence seemed to be sky-high (compared to mine at that time), but the actual results I got were woeful.
Of course the newsletter guy kept smiling, dusted himself off and went on to get new subscribers to fill the void left by the ones whose financial lives he managed to ruin. Following his recommendations was very stressful for me since I didn’t understand the underlying logic so I didn’t have a conviction about any of the stocks that landed in my portfolio. Can you imagine how you’d feel if one of your stocks fell by 80% and you knew nothing about the company?
Lesson 2: Relinquishing control over your money never works.
Do you notice the pattern I’ve followed? I tried to escape the responsibility of managing my own money as I found it stressful. What I got in return was more stress and dreadful results. Successful people take responsibility and want control.
Lesson 3: Never invest in anything you do not fully understand!
Keep asking. If you do not get the answers that make you comfortable with the decision, have the confidence to say no and walk away. Looking back, even in my late 20s I knew much more than most people on the other side of my failed investment stories, yet my lack of confidence let them walk away with my money.
Lesson 4: Is it a system, a structured process or just some fancy marketing?
Selling an investment to someone who is not an experienced investor is really easy. A guy with no integrity can always come up with a story that sells. But here’s the catch: can that person describe what structured thought process, what kind of system led him to the investment opportunity he is proposing? Only invest if there is an underlying process you can fully understand. If you keep asking and really want to discover an investment system only the honest guys will keep answering. All the get-rich-quick salesmen will rather go for the easy money and yell: “Next please!”
You most certainly don’t want to be that “next” person. Learn from my mistakes, save years of agony and plenty of money by having the confidence to only invest in something you understand; or better yet: follow a well-structured investment process you understand instead of blindly trusting the sales guys out there. Understanding leads to peace of mind and this is crucial for both long-term results and a quality life.
If you enjoyed the blog post about my crazy investment stories and have a few minutes, let me know what your worst investment was so far, along with the lessons you’ve learned. I read all my emails and I would be happy to hear from you.
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