Hey $avvy readers! We have a unique guest post today from Troy over at Market History. He shares his terrible investment decision he made a few years back. There are some very valuable lessons to learn from his mistake. A good word of advice is to NEVER invest in the market with your emotions. Enjoy! – T$C
I believe that we learn more from our failures than our successes. Success can happen for a variety of reasons, one of which might be sheer dumb luck.
I made a terrible investment by reading the market wrong that resulted in a big loss (percentage wise) more than 5 years ago. Here’s how I made that mistake and what lessons you and I can draw from it.
My Investment Mistake
I guess I’ve always been a bit of a gold bug. This is because my first big profitable investment was when I bought silver at the bottom in 2009. Over the next 2 years, silver promptly soared 400%! By early 2011, I was convinced that gold would soar past $2000 an ounce and silver would skyrocket past $50 an ounce.
I could see the writing on the walls: inflation was going up and the Chinese economy was booming, which would push commodity prices even higher. Gold and silver prices just HAD to go higher.
As a result, I did not sell a single ounce of silver. Silver promptly peaked at $50 and instantly crashed down to $35 before bouncing back up to the $40’s range. Over the rest of 2011 and much of 2012, silver bounced in a big range between $26 and $40. I was convinced that this was just a temporary pause and that silver would soon rise above $50.
What The Market Actually Did
As time went on, the fundamentals changed. Inflation started to come down by late 2011, and the Chinese economy had drastically slowed down by 2012 (reducing demand for commodity prices).
Being the stubborn person that I was, I stuck to my silver holdings only to see silver tumble to $18 an ounce in 2013. I sold all of my silver on the bounce at $24 an ounce.
So what was supposed to be a 400% gain was cut into a mere 140% gain. Not a bad investment, but it certainly could have gone a lot better.
Below are a few lessons to learn from my mistake.
1) Understand the Fundamentals Impacting Your Investment
First and foremost, you need to understand the fundamentals that are impacting your investment. The state of the economy drives the stock market in the long-term. It’s not hard to understand the state of the economy. You do not need to know where the economy will go in the future. You only need to know if it’s growing or shrinking right now!
The economy never goes from robust growth to a sudden slowdown overnight. It always changes in a slow and noticeable process that gives many signs to the savvy investor. Following the economic news will give you a sense of how well the economy is doing right now.
At the time, I did not know much about gold and silver’s fundamentals. Gold and silver are closely linked to rising/falling inflation, but all I had in my head was the dogma “money printing from the Federal Reserve will drive inflation (and precious metals prices) through the roof!” Instead of looking at the solid facts in 2012 (inflation was coming down, which was bearish for precious metals), I stuck to my predetermined conclusion.
2) Be Flexible When Investing in the Market
When investing it’s always important to be flexible. Investing is very different from business. In business, we are taught that it’s important to be persistent. “You just got to grind through all the difficulties if you want to pull out ahead!”. In investing, it’s probably a good idea to cut your losses if the investment is deeply underwater after 1-2 years. Perhaps you missed something (a fundamental factor) when you made the investment?
3) Be Afraid When You’re 100% Certain
It means that you can’t see the potential risks, and those are the risks that usually hurt you. I believed that gold and silver just HAD to go up in 2011. I could not see any reason why they would go down. That’s usually when the market is at a long-term turning point, which isn’t good for your investment.
4) Don’t Get Greedy
Finally, the best time to sell is when you’ve made a huge gain (e.g. a couple of hundred percent in my case). Sure the market may keep going up, but at least you’ve avoided the inevitable big decline.
This is just a law of nature. When you’re on a winning streak, the odds of you losing next time increases. Winning streaks don’t last forever. That’s why buying on the dip works in a bull market.
The more the market falls, the more likely it is to rise. And that’s why you should sell on the way up and not wait until the market’s long-term top is already in (like I did). Selling on the way down is really damaging to your self-confidence and psyche.
Have you ever made a bad investment decision?