How My First Stock-Market Losses Made Me Wealthier
The important lessons you have to pay for before you start earning
Investing while in college is the cool thing to do. Discussing stock picks with classmates and who’s making the best returns.
All the cool people invested. So did I, although I wasn't cool.
Not knowing anything about investments, I opened an account and started researching companies.
I listened to my stockbroker, chatted a lot with classmates over a beer, and read the Wall Street Journal. And now I’m ready to invest and reap the returns!
Out of the 7 companies I invested in, very soon, 2 companies performed very well, eBay and Apple. I was eager to capture the first profits that I closed the profitable positions within a few weeks. I stayed in the remaining 5 loss-making companies waiting for the sunshine.
College is almost over, and the 5 companies I invested in my Sophomore year are down 75%.
They were companies from industries I knew very little about. I don’t know why I insisted on waiting, but I felt I had to be professional and not think with emotion. “Be patient, have discipline, be mature.” I would tell myself.
What a joke I was living in.
At some point, I needed cash, so I closed all positions realizing losses.
I lost $15,000 in those two years. That’s including the first two stocks’ gains.
Best money I’ve ever lost.
Here is what I learned and have applied ever since.
Stock Pick in Industries You are An Expert
I invested in a seafood restaurant company because I loved seafood, so I thought it should do well. How can you bet in the restaurant business when the only thing you know is that you like the type of food they serve? Thinking about it today makes me laugh.
To value a company and foresee its capacity to grow, you must have a deep understanding of its industry.
I work in the maritime sector. Since graduating from college, I have only invested in maritime industry companies. My entire working experience is around this sector, and I still get investments wrong.
Other times, I get it right. That’s because we track how the maritime market is behaving before the public markets react. We speak to industry specialists, know the people running the listed companies, and run our own maritime business.
For every industry, this is the only way to follow a stock position, either long or short. You have to be part of the industry. You should be able to give 10 one-hour lessons on it. Be a professional who can say, “I know the restaurant business from the inside.” Only then should you invest in the restaurant industry.
“You can outperform the experts if you use your edge by investing in companies or industries you already understand.” — Peter Lynch
Listen, But Form Your Own Opinion
Sharing ideas for stocks is good, but it should not guide your decision making. Many enjoy showing off how much money they made on a trade. Don’t follow. Let it go.
Most friend recommendations on stocks don’t turn out well, either giving or taking. Either way, someone may get angry. A friendship may not be the same after that.
So stay out of investments based on what you hear. Base your actions on what you understand. Ensure whatever you hear won’t impact your position.
You may get lucky a few times, but long term, you won’t succeed.
Own the position, not its reputation.
Ensure your knowledge is solid before you invest.
Don’t Take Quick Profits, Instead Sit Back
Invest for the long term. Every company I sold soon after for a profit has grown at a multiple unimaginable at the time.
Companies with true value will always grow.
Don’t stare at your portfolio all day. It’s not worth your time. Check-in once a day in the evening.
You have no reason to exit a valuable company that is growing every year. Best of luck if you are a fan of day-trading.
“If you aren’t thinking of holding a stock for 10 years, don’t think about owning it for 10 minutes.” — Warren Buffet
If You Don’t See Value, Take the Loss
Geopolitical or systemic developments can result in the decline of the stock price. But if it’s because of the company itself, offload it.
Losing hits our self-confidence. You don’t want to accept it.
During the unrealized loss, you live in denial. “It’s going to turn around. There’s no way I took a bad decision.”
Get over yourself. Accept that there is a good chance you made a bad investment. It happens to the best of us.
Don’t take it personally. It’s not even your company.
When the position closes, stop thinking about it. It’s over, and it’s not turning back. Move on.
Don’t get emotional. Treat financial losses like losing your keys or a pair of shoes. You’ll buy a new pair, and you’ll love them.
“There’s no shame in losing money on a stock. Everybody does it. What is shameful is to hold on to a stock, or worse, to buy more of it when the fundamentals are deteriorating.” — Peter Lynch
Follow a Strategy, Not Your Instincts
Stick to a specific growth plan for your portfolio. Set your financial targets, and when reached, whether loss or profit, liquidate.
Don’t overthink. That's the problem with our brain.
It constantly tells you what-if questions?
What if I sold the stock earlier? What if I bought the stock at a lower price? If you don’t allow this thought process, it won’t end.
Make your decision making part of a structure. Remove all impulses.
Let’s Put it Together
Following these principles has offered good returns on my post-college life.
They are simple and straightforward. Applying them requires consistency and reasoning.
- If you single pick stocks, I suggest you are an expert in the industry.
- Don’t take opinions seriously. Take time to form your own.
- If you strongly believe in a company, invest for a decade.
- If you are not sure about the fundamentals of a company, liquidate.
- Follow a structured plan, not your brain games.
If a friend tells you over Sunday brunch to invest in a company, do so only if he’s the CEO.
