This is a guest post by Troy enjoy!
When I was a kid, I had (and still do have) great parents who talked about a lot of interesting things, especially around the dinner table. Driving to school with dad was a real treat, as he’d teach me about all sorts of things, such as What is the Difference Between Protestants and Puritans in Elizabethan times and How is Standard Deviation Calculated. At the dinner table, my parents would often talk about their finances to my siblings and I. Thus, at a young age I came to know a little bit about finance and investing.
I opened my brokerage account as soon as I legally could – the day I turned 18. For others, 18 signified important things – the rite of passage into being adult, the ability to sign your own papers, etc. For me, it meant (finally) the ability to invest my own money. In that first year, I made 4 deadly mistakes that effectively painted me as a Newbie. In reality,I made a lot more than just 4 mistakes – the ones listed below are just the most financially painful errors. At least I didn’t make the mistake of using a simulation trading account.
I was too giddy
Like most just-turned-18 adults, patience wasn’t exactly one of my best virtues. I was so excited about opening my brokerage account that I wanted to invest as soon as possible. Within 2 days, I read a couple of financial articles and placed my first buy order for Nike stock (I’m a big fan of sports). Within 9 months, that stock had fallen more than 50%. I was crushed, both financially and emotionally.
The lesson to all you new investors out there – don’t invest ASAP. Learn as much as you can before you start to invest – had I read books about investing and learned as much as I could from great investors like Warren Buffett, I could have avoided a seriously painful financial mistake. Only patient investors can be successful investors.
My stupid broker
Back in the day when full time brokers could still find employment, I had what many would call a “churn ’em and burn ’em” broker. Actually, he wasn’t really a bad broker, and nor was he a bad guy. He was just doing his job, which is what all brokers do to make a living – generate commissions. Within days of opening my account, my broker dialed me up and gave me a recommendation to buy a certain stock whose name I don’t even remember. He presented me with some financial “research” that he had done, and gave me one of the standard lines all brokers employ. “This is a sure thing. The secret to making money in today’s market is to buy….” Although at the time I didn’t have a degree in anything, I sure had a PhD in Ignorance. Being stupid and inexperienced, I followed my broker’s recommendation. Needless to say, I wasn’t too happy by the time he called me a week later with another stock recommendation.
The message to all new investors here – never, ever trust your broker. I had to learn this the hard way. Brokers have a conflict of interest with their investors – investors want to make money, while brokers just want to make commissions. Thus, brokers often recommend buys and sells that make absolutely no sense for investors – they’re purely for the sake of generating commissions. Brokers will pressure you into buying and selling as much as possible. Oppositely, Warren Buffett said that he made the most money by “being right and sitting tight”, which is the Devil’s Creed for brokers.
Sure enough, I soon transitioned into a “self service” online brokerage. Cheaper commissions, and no annoying brokers calling me up at 1 a.m. with the “next big thing”. Even if I lost money, at least I could get a good night’s sleep.
I spent a lot of money
Despite being raised in a frugal family, my introduction to investing was anything but frugal. I spent thousands on investment DVD’s, seminars, and became the marketer’s dream “customer” (more like victim) for “trading models that will generate 80% per year!” On the other hand, I did subscribe newsletters that were written by some serious analysts and thinkers, some of which I still keep today. Now you’re probably wondering, what’s the problem with that?
Out of the approximately $4000 that I spent, only $300 of that was actually useful. Some of the knowledge that I bought was just pure BS, but a lot of it was actually good information. Unfortunately, a lot of the information didn’t work for me, the same way I cannot teach you my investment style because YOU are not ME. What worked for a lot of these other successful investors whose seminars I attended didn’t work for me (although it sure worked for them). In other words, I had lost $3700 before I had even placed my first investment order!
The lesson here – don’t start investing with a lot of overhead. When you first start investing, you haven’t a clue as to who you are, what you can do, and what investment style fits you. Instead of wasting thousands of dollars on things that won’t be of any use to you anyways, read investment articles online! It’s free!
I was discretionary
When I first started investing, I was a pure discretionary investor. I’d read some financial reports, take a look at the stock’s price pattern, do a bit of mental math and then decide to buy or sell the stock. In other words, I didn’t have rigorous analysis and most of my investment decisions were based purely upon gut feeling. As I’ve already mentioned, my first year investing wasn’t very profitable.
Case in point – as a serious investor, you must have a rigorous, step by step, methodological approach to making investment decisions. Otherwise, you’re just making gut decisions, which based on my personal experience has a less than 50% accuracy rate.
Ha, ha. what you describe sounds like our dinner table; I remember once explaining the dynamics of social norms to the boys and John talk about statistics…a lot. As to the investment mistakes – yep, but these seem to have served you well.
Nice!
I totally agree that you have to educate yourself and not rely on a broker. However, I still think most people don’t have very good rigorous criteria for choosing investments regardless of their investment experience. I would say a great tip for early investors is to get comfortable with investing by investing in index funds or ETF’s that track index funds with low expense ratios. This gets you through the basics of investing and diversifying.
Excellent points Troy! I think that these are some of the same traps that most of us fall into. Educating yourself is of huge importance. Personally, I will never invest my money into a company or a product that I don’t understand. One of the great things about mutual funds is that the fund managers help me do that. All I have to do is find the right funds.
I think you need to have a few bad experiences early on to prepare you for investing with larger amount of money and knowing how easy it can be to lose it if you don’t know what you are doing.
Even when you think you know what you are doing you can still easily lose your money.
As for brokers – most of them are scum. I normally just tell them to bugger off and leave me do my own thing. Although every once in a while there will be a new account manager and they will call me up and I will have to reeducate them…
I was way WAY too emotional when I started investing. I actually took out a bank loan (!) so that I could invest in the stock market. I saw stars in my eyes and I couldn’t get the thought out of my head that I’d be part of the 1% who got the fabulous success instead of the great majority of folks who didn’t do much at all. Thanks for the blast to my past!
When was this, the 90s?
Between 1998 and 2002 – I was financially stable enough to think that I could branch out into investment, but not stable enough to really pull it off. I just found out that I wasn’t supposed to be the one to play the stock market. 🙂
No matter how well informed you are, all investing is just guessing, really. Because financial analysis is just part of the issue. The other part is the other billion investors out there. Gut reactions weren’t getting you more than a 50% success rate? Professional investors struggle to beat the market consistently!
I wouldn’t say that it’s all just guessing.
Yes it is. You can make an educated guess, but it is still just a guess. If it was a science then everyone would always win.
I’m sure everybody makes mistakes when they first start investing. Otherwise, you’d never learn! It’s all a learning experience and the fact that you can recognize that those were mistakes means you aren’t making them anymore.
I think a lot of fall into these traps, actually I know that they do because I have spoken with many who’re still in some of these traps. Education is key so you can have a better grasp of what your money is doing and the market as a whole. In regards to full service brokers, I agree with you a certain extent…though they’re not ALL bad. There are some good ones out there, you just have to find one that’s fee based and not compensated by pushing products on you. That said, “you” are the only one who cares about your money 100% of the time.
That’s amazing that you started investing at age 18. I barely knew what the stock market was back then, but we didn’t exactly discuss financial topics at my house. By starting so young, you have lots of time to recover from mistakes. I think many people wait too long and then can’t recoup losses.
Yea I’m really thankful for my parents.
Everyone makes mistakes! It’s just bound to happen. We don’t invest as much as we would like right now, mainly because we are so focused on debt. However, in the next couple of months, we will be getting into investing very heavily.
Better to have made these mistakes when you are young and have time to recover from it, than when you are older and you are really in a bind. I also like to think of my investment mistakes more as “learning opportunities.”
Glad you made the point about not trusting brokers, it’s not the first time I’ve heard it either. I’ve headed down the discount brokerage path and doubt I will ever go to a full service, I like doing my own research anyways.
I can’t blame you for spending so much on investment seminars and other products that people push. I feel like most people who are just starting investing feel like if they just have the right information they can make a lot of money. Naturally if you are just starting out, you are going to try to get as much info as possible so you can become educated. Unfortunately, like you said, there are a lot of people who make money off of this line of thinking.
Actually, I don’t put the blame on their shoulders. Had I not been so gullible, I couldn’t have been a victim.
I started my children investing when they were (13 y.o) teenagers. I created joint accounts and helped them experiment with smaller trades. Eventually using their savings to buy their first car. I think they learned a lot from the expereience.
Wow that’s a lot of money. I went conservative and invested in USAA mutual funds. I had no idea what I was doing at 18.
Thanks for posting this Pauline! It will definitely help when I try to start investing later this year.
The only investments we have right now are kiddo’s educational savings which is in a portfolio. We’re too focused on debt right now but when we do start I will be doing my homework first!
It’s interesting how many of us have different experiences. For me, it was a matter of being way too conservative.
I recall having $2,000 from summer jobs, etc – and being very interested in using that to make more money. However, I didn’t want to invest as I felt that I was too young and probably didn’t know what I was doing. This was probably true actually, but the few companies I was looking at (pre-tech boom) would have given me incredible rates of return. I could have been lucky, but wasn’t to be – which is fine with me. No lost sleep over it.
Great post Troy!! You wanted a brokerage account at 18 I wanted my own house and I did just that a few years later. There are mistakes I can think of that I did with that as well. I don’t do my own investing yet because I’m learning before I make silly mistakes. Thanks for your mistakes. Cheers
Nice! I’m still renting…
Thanks for sharing. I made a lot of mistakes too when I first started out as an investor. The key is to be disciplined and adhere to the right rules.
Guess we’re in the same boat!
Problems with brokers can be alleviated if you are interested in a direct stock purchase plan and corresponding DRIP. I talk about them extensively on my blog if you are interested in reading. They can really bypass all of the junk involved with a lot of brokers. The drawback is though it is usually used in a buy and hold or long term strategy.
As for another account I have, I keep with TD Ameritrade, I only buy commission-free ETFs through them. I have been doing so for a long time that I never get bothered with opportunities, tips or anything else like that. They know, I’m going for the free stuff!
I remember my first stock investment like yesterday, hot IPO of a telecomms company, the hype and all, I bought into it, financed by the bank ofcourse which stood to gain in an upswing. Within a month, the stock had tanked – serious tanking and I was left holding the debt bag! Not the best experience, but it underlies the need for some financial literacy, education and research by all newbie investors. Don’t rush, take your time.
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