Today I have to give you one of the most valuable articles of my experience investing in the stock market. I know that many times we like to comment on our gains, but in reality, it is in our losses where we learn the most, and to be frank, where I enjoy the most lately. I like to train my mind to face “failures” and see them more and more as something more positive, not only applied to the stock market, but in all my investments and in life.
But as the title says, this time we will talk specifically about the stock market, and I will give you the answer to many questions. What were my biggest losses? What could I have done better? How did my emotions make a bad move on me? In this article, I will summarize everything that I have learned in the last two and a half years investing in this area and how I think I could have avoided them so that you too can learn from those mistakes.
I hope you can take something of value and consider it to apply to your own investments. Above all, the last mistake is the most recent and is due to a lot to the current crisis, so stay tuned until the end. Here are my 10 biggest mistakes when investing in the stock market. I hope it helps you!
1. You cannot live solely on the stock market
When I decided last year to stop working for other people and live solely on investments, my plan was to set aside money to live one year and invest the rest, with the intention that the earnings from the investments exceed my cost of living for one year. I invested the vast majority of my capital in stocks and the rest in loans and real estate. For the shares, my plan was then to sell them when they are at a high enough price, and with those profits pay another year of life and the rest to reinvest it again. And so on year after year. Sounds good, doesn’t it? Fortunately, it worked for me, but I was incredibly lucky, what happened this year is not something that can be repeated constantly, and it is actually not such a good idea to depend so much on the stock market.
If you have all your money invested in the stock market, and you want to sell when one stock is very high and buy another when it is low, it is equivalent to wanting to guess the market. By this, I mean that wanting to give it to you from the maximum know-it-all and enter and exit at the right time in the market, it almost never happens. I have sold shares when they are at what I thought was a high point and over time they have continued to grow, while some of the new shares that I bought at a price that seemed good to me have decreased, losing the gains I obtained at the beginning, making more the role of a trader than an investor. So discard this technique since in the short term (1 year or less), no matter how much you have analyzed the fundamentals of the company, the market may behave completely differently,
On the other hand, if you want to get your earnings out of the box over time, it is also another mistake. Well, if you do that, you are taking away the value of your investment, putting a brake on it instead of an accelerator, and taking the whole point of the meaning of compound interest, where your money grows at exponential levels the longer you wait. In addition, if you need the money to live after a year, it is constant stress, because no matter how much you have studied the companies, you do not know when a recession or a crisis may come, and that goes down and wipes out all the stocks no matter how much. good is your balance sheet or income statement. Finally, having everything invested, you do not have the cash to take advantage of market crises or corrections, and buy more shares when the price drops,
What do I recommend? The best thing you can do is have a constant cash flow of income, apart from the capital that you have invested in the stock market. That cash flow can come from a job, your own business, or also from cash flow investments such as a property rental or investing in stocks that pay you dividends. In this way, you have money that comes in constantly and you are calm, and instead of fearing market declines, you wait for them with anxiety to buy more shares, lower your average price, and hope that everything will rise in the long term, as almost He always does.
2. Fundamentals can take a long time to take action
I learned this lesson with Facebook. It was a company that I had for almost two years and the stock did not move at all. It constantly grew in users, in billing and in profit, but it did not grow in valuation. It was a stock that despite having incredible fundamentals, every time it grew in price, an event such as the Cambridge Analytics disaster and the lawsuit against Facebook would appear, a large fine to pay, a boycott of users wanting to close their accounts, then a boycott of companies that wanted to close their accounts, and so on. But, despite all these problems, it kept growing in fundamentals, and no one was realizing this, or so it seemed.
The covid crisis arrives, and I decided to sell several shares, including Facebook, until the waters of the crisis calm and everything returns to normal. It turns out that right there, in the midst of the crisis, the stock responds and begins to rise in value in an incredible way. Who would say? The company grows in sales constantly and only when everything is uncertain due to the crisis, does it decide to raise the price of the stock, and I lose that great increase in the value of my investment because I had sold that stock without profit or loss. in March, completely flat.
What do I recommend? Always have faith in the fundamentals, sooner or later they come to light, and sometimes you have to be very patient to see it. If you believe in a company because you see that it grows in sales and profit, but not in value, simply buy more shares, since sooner or later that moment will come, because the value of the company always follows the numbers of the fundamental analysis, it is just which can take a long time to arrive.
3. The P/E ratio does not apply as much for technology companies
Before I started investing in the stock market I read some books, I must say that they are very good, however, a bit outdated. I have a lot of respect and appreciation for characters like Warren Buffet, Benjamin Graham and Peter Lynch, from whom I learned to invest in the stock market thanks to their books, but there are some tips that do not apply much to the technology field, and one of them is to pay attention to a lot the Price to earnings ratio.
I give you an example, the first stock I bought was Amazon.com. I invested 3k dollars and did it to test the bag, I did not see its fundamentals, and I just thought “Amazon is incredible and will continue to grow as a company”. Over time I investigated more about the stock market, I began to see its fundamentals, and in general, I liked it, but from there I learned what the P/E ratio was, and Amazon’s seemed to me to be through the roof. I bought that stock at $1,440 and sold it at $ 1,660, earning 15% in a matter of 3 months. I had never seen such a result in an investment, you must understand that, before that, my investment was a department, which yielded 25% in more than 4 years, according to me with 15% in 3 months, it was already the best investor in the world.
I don’t remember the P/E ratio well at that time, but it was definitely above 80. And I remember thinking “the one I got rid of”, in one of the books there is a part that says “be careful of those P/E ratios above 40 ”, and I did not hesitate to sell it quickly. But guess what? It continued to grow, and to this day, a little over two years later, the stock is worth USD $ 2,974, it would have been more than 2x growth in two years if it held it. And then I thought, that must say it is even more inflated, so I started researching Amazon’s track record, and for almost its entire lifespan, Amazon’s stock has always been at an incredibly high P/E ratio, and still, It has continued to grow at exuberant levels since its technology and its valuation are always valued in the future and not at the numbers that they show today. The same could be said about companies like Tesla, Nvidia, and many more. They are companies that are working on technology that can dominate the world like never before, setting great trends, and some, like Amazon, are already doing so. What do I recommend? The P/E ratio should not be taken very seriously in some technology companies, much less when they are just starting to grow.
4. Do not enter an industry that has been growing rapidly or is fashionable
I had to learn this lesson with the Cannabis industry. I got incredible confidence because I was making a lot of money in the stock market, I felt on a streak. I had an average growth of almost 50% in my portfolio in just a matter of months, and I was carried away by a constant increase in the stocks that I had. Because I had many stocks in the technology business, I decided to diversify a bit by going to the cannabis business, as it seemed to me to be a very interesting growing business.
I saw that the business was growing in an incredible way, but at the same time, I saw many companies inflated and without profits. Of all the ones I saw, I decided to enter the one that seemed safest to me, which, as I already mentioned in How I made more than $ 25,000 in the stock market was called Village Farms International. A tomato and cucumber production company with many greenhouses and years of experience, which later moved to the cannabis business through a joint venture, creating a company called Pure Sunfarms. Apart from years of experience, he had profits, growth and a good plan for the future. At the same time, just that day their results report came out and they had reached their profit and billing goals. Finally, it was 25% below its “all-time high” which was 3 months earlier. So, a company that reaches its goals, that grows in turnover, has years of experience in the market, has profits, and in an industry that is growing more and more. Not a Gol? Well no, haha.
Ever since I bought that stock, I’ve only seen it go down and down further, a downward dive that lasted for months. What had happened? There was a bubble in the cannabis industry. Everyone was getting out of it as quickly as possible, for 3 reasons basically: 1) People preferred to buy cannabis on the black market because they were getting better prices, 2) there was an overproduction of cannabis products that exceeded the supply that There were in legal and regulated establishments, 3) the legalization of cannabis was not growing so fast, limiting the number of stores that could open in the U,S. and the world. So, just as stock becomes fashionable where everyone wants to enter and grows incredibly (like bitcoin and Tesla), here the opposite happened, it became fashionable but to leave the industry. It was the stock where I invested the most (USD $18, 000 in two rounds). It fell from $14.22 to $6.86, where I bought more shares thinking that it could not go down anymore, but it continued to fall until it reached a price of $2.82. That’s more than an 80% drop, resulting in one of my biggest lessons in the stock market and experiencing a true market crash in an industry.
What do I recommend? Look carefully if the industry, in general, is inflated before buying a stock, because if the market decides that there is a crash in the industry, all the stocks of the item fall regardless of their fundamentals or numbers, the market does not forgive any, and It can take a long time to recover, and you must be willing to take that risk and wait a long time or for it to recover if it does.
5. It is not enough to see the financial fundamentals of a company
Although the fundamentals are the main part to look at a company, there are other things that are also important and can affect a company. This could be seen more than ever with the crisis that we have experienced in 2020, where the pandemic affected companies that were doing very well in their fundamentals, but still devastated everyone by basically stopping the global economy. Tourism is a great example of this.
If you look at companies like Carnival Cruise Lines or Booking.com, they were companies with incredible numbers, solid companies to invest in for the future without a doubt. However, the pandemic paralyzed their operations completely, raising doubts whether they will ever operate again or show the numbers that were there before. Macro situations like these are definitely things to consider in your analysis.
The global pandemic is something unexpected and it could be said that it is something exaggerated that happens once every 100 years, but there are other events such as the US-China trade war, lawsuits against certain companies (example: Facebook, Microsoft), legalization or imposed barriers. in countries for certain companies (example: Uber and Airbnb), among others. Events that can cause a strong impact. If it is something that will only affect you in the short term, as in the case of lawsuits, there are no problems, but if it is something that can lead the company to bankruptcy, as in the case of this pandemic with some airlines, if I recommend not risking too much unless you really know what you’re doing.
6. Beware of free digital brokers
There are many digital brokers today, which allow you to buy and sell shares in real-time, and some are promoted a lot for the fact that they do not charge any commission. There are many examples such as E-toro, IqOption, TD ameritrade, WeBull, among others. Some are definitely more reliable than others, I personally do not use digital brokers and I prefer to invest through a SAB, and here I explain my reasons:
- You must consider the cost of sending money. In many cases, you cannot invest in these platforms from a local bank account, you must send your money abroad and consider that shipping cost, both outward and return (in the purchase and in the sale).
- The Peruvian government gives you a great benefit in taxes, paying only 0% or 5% taxes on your profits, and these include foreign stocks such as Apple, Amazon, Facebook, Tesla, Nvidia, and others that have had exponential growth in recent years. . It only gives you them if you invest in these companies through the BVL, and many of these applications do not allow you to invest in the BVL, only in exchanges such as NYSE or Nasdaq directly, for which the tax benefit would not apply and you would have to pay between 8% to 30% tax on your earnings. You can see more about this in: It is better to invest in the stock market from Peru or the United States.
- The SAB’s are regulated by local institutions, such as CAVALI and the SMV, where your money is insured in some way if these institutions fail or are not making investments correctly. Online brokers are often regulated by institutions that I had never heard of, and in super remote countries such as Cyprus, Malta or places that I simply do not know or do not inspire confidence to invest large amounts.
7. Do not buy a stock just because it has a low price
Buying a stock just for the sake of holding a low price is very tempting. And I understand the logic behind this, why buy a share that is worth $ 1500, when with that same money I can buy 1500 shares of $1. And besides, there is much more chance that that stock of $1 will grow exponentially, while the one of $1500 has already gone very far and I doubt that it will grow that fast. If it only goes to $ 2, I’ve already doubled my money, and if it goes down, how much can it go down? If it is already worth $ 1 a share!
The answer to that is, it can still go much lower. I have seen stocks of this type that have gone down to pennies of a dollar, falling below 85% (ex: Medmen, MMNFF) and I have also seen stocks that were worth $ 1440 that a year or two are already worth $ 3000, (exm: Amazon, AMZN). What do I recommend? Always look at the fundamentals and macroeconomic aspects that can influence the industry where the company is located, and never be guided only by price.
I know you can think how cool it would have been to invest in Google or Apple when they were worth $3 or $4 a share and they want to replicate that investment in a new company. The truth is that when these companies were worth those amounts they were much riskier compared to today, and there was a great chance that they could not get out of the dot.com bubble crash at the time. Those investors who today grew exponentially with those stocks, made a big bet and deserve that return. If you want to do the same, you are fully entitled and I even applaud it, but you must be willing to accept the consequences in case it does not go well.
8. Investing in the long term is much better than in the short term
This is something that I have already verified several times according to my experience in the stock market. Absolutely all the stocks that I have ever sold, today they are worth more than the moment I sold them. I have gone through 3 crises during my time as a stock investor. One caused by the US-China trade war, another was when the Cannabis stock bubble burst, and now last, the Corona Virus crisis. News like these can lead you to think that it is the end of the world, or that all stocks will continue to decline. You fear a repeat of a 2-year bear market like 2008 or worse, a crisis like the dot.com bubble of 2000. Do you think you really have the ability to sell the stock at the highest point, hope that go down, and buy shares at the lowest point, when the chances of that happening, are almost nil.
If you have already invested in a company, and you plan to be in it for the long term, you should not care much about the news that can make a stock go up or down in the short term. By short term I mean months or even a couple of years. It gives you incredible peace of mind knowing that you are investing in something that is going to be huge in the next 5 or 10 years and not necessarily in the next few months. This applies well in real estate, but not so much in the stock market. If you buy a property, you don’t expect it to go up in value for a few years, and if it goes down in a year or two you don’t worry much, since history shows us that in the long term a property always goes up in value. Maybe you never find out, there is no daily indicator that tells you how much your property is worth today, you can have an approximate in your head,
In the stock market, it should be the same mentality, but the difference is that in the stock market you have the public price rising and falling day by day, and besides, you have thousands of newscasts and analysts making you think more than once about your decision when they come out to say what “Good” or “bad” which is stock. This simply increases your anxiety and fear, especially if you have not done a proper analysis. You can see how to do an analysis in: How to analyze companies to invest in the stock market?. As Chamath Palihapitiya says: “Your job as a smart investor is to separate fact and news from fiction and noise.” What do I recommend? Investing in the long term is safer, smarter and less stressful.
9. Don’t sell stocks during a crisis
This is definitely one of the biggest mistakes I made on the stock market, and I had to live it this year. The worst of all is that it is something that I already knew in theory, but did not apply it in practice. In March of this year, when there was a crash in the market due to coronavirus and stocks began to fall, I did the right thing, I started buying shares taking advantage of the fact that they were super cheap, and I began to build my positions. But then something unprecedented happened, the market began to recover, but in a much faster way than expected. So much so that the stocks I bought or already had returned to their regular prices and even started to rise.
My logic was, with so much unemployment and people at home without consuming anything, how is it possible that stocks continue to rise? Doing an analysis of my portfolio in its entirety, I had obtained a 30% profit on my investment in one year, it was above the goal that I had set for myself in the stock market (this is counting the 80% loss that I had in VFF, which was balanced by a 3x profit on Tesla in months). So, I decided to sell almost all my stocks, including those that I bought in very low positions, and I decided to wait for the results of Q2 to get a better scenario of this crisis and see which ones I decide to invest in. In other words, I thought that the shares would go down even more and I was going to be able to buy them at an incredible price.
Quite the opposite happened, from the moment I sold the shares in April, they grew much more. Even Tesla that I bought at $250 and sold at $800, when I thought it was impossible for it to grow more, it kept growing and today it is at $1500! It could have been a 6x gain instead of 3x. The reality is that from the moment I buy the stocks, in the long term, all but one have risen, which represents almost 90% of my portfolio. That waiting to buy at the lowest point depends 100% on luck and not so much on a deep research analysis for an investment, and many times you end up burning yourself. I spend time with Facebook, Tesla, Nvidia, Apple, Match Group, VFF, among others. I did not lose in most of these stocks, but I did lose an immense amount of money thinking that it was time to sell because of the uncertainty. What do I recommend? It is best in times of crisis not to sell your stocks, remember that you are in it in the long term, and if they go down, simply take advantage of the low price to increase your position in them and wait quietly. Crises come and go, history teaches us that, and despite all that there were, good companies continue to grow in value over time.
This is a summary of my 10 biggest mistakes when investing in the stock market. As you can see, many of the mistakes I actually made I already knew in theory, but I still fell for some of them because of my emotions. It is true that no matter how much you read about something, it simply is not the same or you do not learn it well until it really happens to you. I was very lucky not to lose in this crisis, I just “stopped winning more”, so I didn’t get along so badly, but it could have been much better. There were great losses and many moments of beginner stress, especially when you see that the stock where you put the most money falls by 80%, but they are lessons that better train you as an investor and train you to remain calm in adverse situations.
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