In the fall of 2017, I started to invest in Marijuana stocks. I threw all the money I had at any company to do with marijuana. In Canada, this was the run up to legalization and I thought these companies would have licenses to print money. And I was right…….at first.
I made more money during the run up to the new year than I did at my teaching job. And I thought I was God’s gift to investing. In only 4 months, I achieved a 97% return on my investment. What a rush! It’s so exciting when a stock you heavily invested in doubles or triples in the span of a week.
In hindsight, my initial investing success was a curse. I became addicted to quick gains and thought that 8% annual returns were for suckers.
After the marijuana boom, I did what any good investor does. I sold at the top. But I was addicted. The marijuana run was over but a new industry was gaining traction; blockchain. I put all my winnings on 4 blockchain stocks (HIVE, PERK, FTEC, and BLKCF. All of which have since fallen over 90% or have become delisted. I thought I was diversifying by reinvesting into 4 different stocks.
I’ve made so many investment mistakes. They all hurt. I’m just thankful I made and lost fast money early on in my investing journey. But even at 40 years old, I still am prone to making poor financial decisions. I’m not special. The mistakes I make are textbook and the sooner I come to terms that I’m not going to beat the index or get rich by picking stocks, the sooner I can achieve financial independence.
I’m going to talk about some common mistakes investors make and I’ll include examples from my own life to illustrate.
# 1) Fear of Missing Out (FOMO)
Nobody likes missing out on a fun party. My feelings of FOMO can be traced back to my youth when I’d be worried about missing a house party.
In finance, fear of missing out (FOMO) is often used to describe an investor who is worried that he/she will miss an oppotunity that others are taking advantage of. Most often, it is a stock or investment that is rising unsustainably fast.
When people you know are making fast money, it’s difficult to stay on the sidelines as others ret ‘rich’. I’m embarrassed to say that I have been swept up in marijuana stocks, blockchain stocks, robotic stocks, and meme stocks. I’ve managed to stay out of artificial intelleginance (AI) stocks for now. Maybe I’m learning.
Trying to jump on a stock bandwagon is almost always a bad idea. By the time you or I hear about a hot stock, it’s too late. Don’t listen to people on stock message boards or what your friend says. Picking stocks because other people have them is almost always a bad idea.
People always talk about their investments when they are on a meteoric rise, but go quiet when markets are down. In the case of FOMO investments, the falls are often steep and deep.
Lesson: By the time people you know are making money on a stock or investment, you are too late. You are the sucker buying stocks at high prices from the people that bought low.
# 2) Sunk Cost Fallacy
The sunk cost fallacy is a behavioural phenomenon where people are irrationally motivated to continue a course of action because they’ve already invested time, resources, or money.
Some examples include:
- Eating a bad meal because you’ve already paid
- Continuing a bad relationship because you’ve already invested time
- Watching a bad movie to the end because you’ve already paid for a ticket
In the finance world, it’s continuing to invest or hold a stock because you’ve already put your hard earned money into it.
Part of being a good investor is to recognize and acknowledge when you’ve made a bad investment.
I’ve held quite a few stocks that gradually declined to zero. My most recent one is Canopy Growth Corporation (WEED). Canopy Growth made me big money in 2017 and 2021. I thought it would continue to make money in 2023. Whoops! That was a huge mistake.
For many of my stock purchases, I would have never bought shares if I didn’t already own some. I love averaging down. Which is a great strategy when investing in index funds. But it’s a horrible strategy when investing in stock in bad companies.
I’ve continued to buy into stocks when they relentlessly fall in the hopes that they would rise again. Sometimes this has worked for me. Mostly it hasn’t. If a stock continues to fall, it’s usually for a good reason. It’s a s@%t stock and the only reason I continue to buy more is because I already own it.
Lesson: Stocks go to zero, get delisted and go bankrupt……all the time. There’s no amount of averaging down that can save the investment.
# 3) Confirmation Trap/Bias
The confirmation trap/bias involves seeking out people with the same viewpoint as yours. Examples of this would be visiting stock message boards to find comments that support your investment choice and dismiss the ones that didn’t. You can always find a person, blog, website, or message board that reaffirms your viewpoint or decision.
My Example: In July 2021, Didi Chuxing, the Chinese Uber, had their initial public offering(IPO) on the New York Stock Exchange (NYSE). Jim Cramer sold me on this one. After that, all my ‘credible information’ came from the message board on Stock Twits.
Needless to say my averaging down hasn’t worked yet. Didi was delisted from the NYSE but continues to trade over the counter(OTC).
Lesson: Stock messages boards aren’t great places to get investment advice.
# 4) Superiority Trap
The superiority trap is the behavioural phenomenon where investors are over confident in their investment abilities. As I wrote earlier, in 2017 I got lucky on a bunch of marijuana stock picks. I was overconfident about recent success and fell into the superiority trap.
The trap I fell into, and fell into hard, was the blockchain stocks. Ouch! It still hurts. I still have a bunch of delisted stocks that sit in a sea of red in my porfolio. And I can’t get rid of them. They are a constant reminder of my bad investing decisions.
Lesson: Just because you got lucky on some stocks in a bull market, doesn’t mean you will continue to get lucky.
# 5) Anchoring Bias
Anchoring bias covers a whole range of investment errors. It’s basically a mental flaw that affects a persons’ ability to gauge the value of an investment. The bias is irrational. People weigh the first piece of information they receive about something. Whether that be an investment, topic, or price of a good.
For example: My first experience with Freshii was positive. I loved their healthy wraps. So when the company had their IPO I bought a couple thousand dollars worth of stock. My rationale was incredibly simple. I like Freshii so I’m going to buy their stock. That was the extent of my research. My bias was anchored with the taste of the Freshii wraps.
Freshii has an IPO price of $12 and was bought out by Foodtastic for $2.30/share. Another painful lesson.
Lesson: Just because you like a company or had a good first experience with a business, doesn’t mean it will be a good investment. Before you buy a stock, ask yourself, “why am I buying this?”.
Conclusion
The longer you invest, the more lessons that you will learn. It’s always best to learn lessons from other people but for me, I only learn by making my own mistakes.
I think I have a good habits when it comes to saving and investing. I’ve just been directing them at the wrong investment vehicles. Moving forward, the majority of my money should be going toward broad based index funds like All in One Portfolio Funds.