When I started this blog, I was talking a big game about investing. I was all “we the people have to grab investing by the balls!” and “here’s how you gotta do your stock research” as if I knew something. Well, I have a confession to make: I don’t know SHIT about investing. Yes, I majored in business and I have a background in management consulting. I read business news daily and I know some fancy Excel tricks. But my work never had much to to do with securities markets besides the occasional basic look at the fundamentals of public companies. Trading was simply never a part of my professional career. And I am going to stop pretending I know what I’m talking about. Remember how I said you should write down your regrets to get over them? Here is one of my biggest mistakes and I’m ready to get over it.
My $5,200 Mistake
I have a retirement account from my first job out of college. At one point it had about $10,000 (my contributions, not the company’s) in it, but then the 2008 crises tanked the value of the mutual funds I was invested in and when I finally rolled it over to another firm to actively manage it, it was around $6,000. Beginning in May 2009, I began buying and selling call options on tech stocks to slowly increase the value of my account. A friend of mine who is very careful and deliberate in his investing advised me on this. And we were successful. There was a stock that he believed to be undervalued and using a variety of call and put option strategies, I made over $3,000 on trading only one stock’s options from 2009 to mid-2011. Around May 2011, I bought several call options for that same stock when the stock was sitting lower than it normally did. The call options expired in July, which meant I had 2 months for the stock to move above what I had bought it at for me to make a profit. Well, it didn’t go back up once in those two months. If you were watching the markets in the summer, we experienced a market correction and it had nothing to do with the individual stock. But because I wasn’t holding the actual stock and only the options, I stood to be wiped out on what I had bought the calls for. So right before the July options expired, I sold them and bought the equivalent amount for August, plus even more call options for August, making my potential losses even larger! The only way I can explain this irrational behavior is that it had consistently made me money for over two years. Even though the price of the stock was very volatile, I was looking at the fundamentals and truly couldn’t believe how low the stock was falling. However, if the calls fell below what I bought them for and stayed below on the August options expiration date (the third Friday of the month), then I would be wiped out.
So I waited. And I watched. I checked Yahoo! Finance fanatically. I kept waiting for the stock price to at least go above the value of the call option (so I wouldn’t be wiped out). About one week before the options expired, the stock price went above the call option I had purchased. Not close to what I had paid for the option, but enough for me to sell my options and recover about $2,000. What did I do? NOTHING. I was paralyzed. Selling at that point meant losing over three thousand dollars. It was the one day in nearly two months that I had a chance to recover any of my money and all I did was just sit there. Crazy, right?
Well, not that crazy. One of my favorite books, Sway: The Irresistible Pull of Irrational Behavior, talks about a behavior phenomenon found in trading, one where people find themselves unable or unwilling to sell a stock that is plummeting in price and cut their losses. People simply do not want to accept their losses. In my case, options are even more risky because they have an expiration date. If I had been holding the stock, I would have been able to simply ride out the summer (the stock is now back where it was in May 2011).
It was a good chunk of money and part of what I was hoping to use for a condo down payment, but I learned some valuable lessons from it. Here’s what I can say:
1. Regret accomplishes nothing: I already accepted this loss and focused on rebuilding my retirement savings back in August. But writing about it was the last step to getting over it. Thank you, affordable blog therapy!
2. In the long run, it’s not a lot of money: Now, if I lost $5,200 every year and took lots chances with my retirement and didn’t learn anything, then that would be a lot of money lost over time. But I won’t make this mistake again. And I’m ambitious, driven and ready to focus. I won’t let this set me back.
3. Investing takes time and always has risk: Even though my friend’s strategy worked for me for two years, this loss made me realize that that wasn’t the right strategy to take. I think if you are going to invest actively, you have to develop your own strategy. You have to be able to understand what you’re getting into. And it’s a lot harder to follow Warren Buffet’s Rule #1 than you think.
4. Consider other investments before securities: Even though I am interested in the finance news and follow it daily, I have many other interests which could be developed into businesses. I love selling stuff on eBay. I have products I want to develop. I am researching investing in real estate after I purchase a place for myself. These are investments in my future as well. And being a small business owner is a challenge I definitely want to take on and one that I am much more interested in than just trading daily. I may get there someday, but I think paying off debt, buying a place and beginning a business are things I need to take care of first, before I try to get in over my head with securities trading.
Since I made my $5,200 mistake, I don’t worry about what I could be investing in and have focused all my energy on paying off debt and increasing my income.
What do you guys think? Should I bother to get back into investing or is it just too soon, with so much debt to pay off?