My Investing Mistakes and How to Avoid Them

new jobWe all make mistakes, but the worst are mistakes that cost you money.

I remember very well my worst investing mistake. One day I opened the mailbox to find promotional material for a pink sheet penny stock. This company was it! It was going to end global warming and making a boatload doing it. It had a fantastic business model whereby it would take the dirt from old mines, dump it in the sea, and create farms of plankton that would sequester carbon dioxide.

Yep. This already sounds strange.

The company eventually went under, I think. I sold out for mere pennies, walking away with my tail between the legs for being so dumb.

What I did wrong

You can’t count on one hand how many mistakes I made with this investment. Let’s go through a few of the worst mistakes I made.

  • I didn’t understand it – The worst investing mistake that anyone can make is investing in something they don’t understand. I did just that. I didn’t know anything about carbon credits, the chemistry behind the business, or even the business itself. I just went off what was sold to me.
  • I believed a lie – Stocks should sell themselves. A company that spends money to market their stock to you is a company that isn’t worthy of your investment. I believed everything in the glossy advertisement, and legitimately thought that I would be rich from the investment. Never, ever buy into someone else’s analysis, especially when they’re paid to “analyze” it to sell it to you.
  • I didn’t do my own research – I never checked the financials behind the company before buying into the stock. If I had, I might have ran away quickly and avoided the loss. Always do your own due diligence with source documents – an annual report, quarterly report, and letters from the CEO. This company was a perpetual stock issuer, creating new shares and selling them via direct mail sales pages only to burn millions of dollars each year. Not only were investors burned by the business model, but their ownership was slowly eroded by the issuance of more and more shares.
  • I played a role as a venture capitalist – New businesses are the worst kind of businesses, especially those that are built around some new technology or process. Companies like Procter & Gamble, Coca-Cola, and Clorox have existed for years selling the same stuff day after day. They’re solid, world-wide companies that have a history of success. A new company will either make it or break it, but it’s more likely to go under than become the next household name. Today I never, ever invest in new companies, since a track record really is the best predictor of the future.

Don’t make the same mistakes

Becoming a successful investor is not easy. It’s undoubtedly one of the hardest things in the world.

I did everything I shouldn’t have done by investing in this company. I bought something I didn’t understand that was marketed by someone I didn’t know who got paid to push the stock on stupid investors like me.

I didn’t invest. I gambled. The difference between a gambler and an investor is knowing the risks and the rewards. I thought I knew the rewards, but never did I think about the risks.

Investing is inherently risky. If at any point your money is in something other than a savings account or CD, you’re taking a risk. You can remove that risk by doing very serious work analyzing your investments. Know everything about a company before ever thinking about buying a piece of it. At the end of the day, a share of ownership is a piece of a living business, one that will either succeed or fail, but it won’t do both.

My biggest mistake was knowing absolutely nothing about a company that I thought I should own part of. Don’t make the mistake I did; do your own research before investing in anything. No one cares about your money more than you do.

3 Responses to My Investing Mistakes and How to Avoid Them

  1. Those mistakes you made are really avoidable. Thanks for sharing them, I will surely take note of them when I start investing next year.

  2. Most of us fell for an investing mistake. It’s mostly because of the lack of knowledge and you believed a lie. These are reasons are true. So you can avoid them by researching more first.

  3. That is definitely a random business model. Buying only what you know is powerful. Understanding the company helps you understand what it’s potential strengths, weaknesses, and opportunities are.

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