My biggest investment mistake cost me in the region of £80,000. Yes you read that right, the cost of a small house at the time. It wasn't simply one mistake but a catalogue of errors which seasoned investors will be well aware of, but even though I thought I knew what I was doing, I was sucked in for the ride and lost my shirt! You might think me stupid for getting sucked in as you read this, but let me tell you, it's very easy to make the same mistakes when you see your account balance doubling and then doubling again.
There were 3 primary companies that cost me a lot of money, all listed on the UK AIM (Alternative Investment Market) which allows small cap (penny stocks) to be listed with less regulation. That in itself should have been a red flag.
- Company 1 – Arian Silver AGQ
- Company 2 – Red Rock Resources RRR
- Company 3 – Condor Gold CNR
Although invested in the same sector (Gold and Silver) I thought that I was a bit diversified, but I wasn't. I did have a number of other investments elsewhere that saved me from completely going bust but I was still invested in a very narrow sector (Precious metal small cap exploration).
At the end of 2011 all three companies were in the top 10 best performers in the entire AIM market. I had made tens of thousands in profit and I thought I was an investing hero. I continued to plough available funds into these and other similar companies.
At some point in 2011 my holdings had an approximate value as follows:
- AGQ - £40,000
- RRR - £20,000
- CNR - £20,000
I haven't bothered selling out because as you will see, it's hardly worth the sale cost, so the current value of these holdings is as follows (at the moment I consider it a dead loss): - AGQ - £180 (Disaster)
- RRR - £42 (Oh dear!)
- CNR - £2000 (Could be worse only a 90% drop!!)
Look at that lovely then horrible chart for AGQ
I continue to hold in the event that I may recover a little bit of my lost funds and I don't really need the cash right now. As for CNR, apparently it should receive a sale offer at some point, although I'm not holding my breath.
In reality, I didn't 'lose' £80,000 because my original stake was somewhat smaller, but still not immaterial. It was tens of thousands of pounds. I could however have prevented losing all of my original stake had I stuck to some sound investing principles.
Here is how I got sucked in.
I spent a lot of time on bulletin boards, read some so called professional analyst reports (professional analysts are often pump and dump companies disguised as 'professionals' – I won't mention the name of the particular company here).
I put trust in the company management and believed what they were saying when I should have appreciated that directors can be liars and deceivers as much as any other person. I had a positive bias towards these companies and failed to see the warning signs such as CEO stock sales, repeated operational errors, financial and resource reporting discrepancies and other signs of bull shit.
I followed the charts every hour of the day on the way up and I didn't take any profits because I thought they were going a lot higher.
Greed and fear of missing out were the reasons I lost so much money in the end. Yes I felt pretty dumb, but I've put those lessons to good use and recovered more or less all of what I've lost by using a more disciplined and diversified strategy.
Lessons
- Don't get sucked in by the hype. Think for yourself. Most of the people ranting on about future prospects, no matter how articulate and detailed their analysis, are not to be trusted. Many pumper and dumpers are professionals and are able to sell their case very convincingly. DYOR means Do Your Own Research. I cannot emphasise this enough.
- Take at least some profits off the table. If you are invested in a high risk, high reward sector, consider taking 10-20% every time you double up and placing it into a lower risk solid return sector.
- Don't ever think you are an investing hero. You are not as good as your last trade, you are basically making an educated gamble in high risk markets. Getting out at the right time is a bit like playing poker with the charts, even more so with small cap penny shares, so leave your ego at the door and maintain humble vigilance.
- As easy as it is to imagine your dream home, a Lamborghini on the drive and holidays on the French Riviera, don't get sucked in by greed. Keep it real, focus on good investing principles and forget the Lamborghini until you've sold out and crystallised your gains. The problem with associating life goals with investments is that you will be reluctant to sell out until you've reached your life goals, regardless of whether it is a good time to sell or not.
- If you are an investor rather than a trader, don't price watch every hour of the day. While it's fun to watch the charts rocket up, it's also depressing to see them fall right back down again. Use the charts to do your analysis, stick to your principles and let the market do the rest. Price checking a few times a week should be enough, or more often if you are waiting for entry / exit points.
- When price goes against you don't despair. There will be other opportunities. Keep trying, learning and improving your game.
A note on Crypto's
I'm seeing the same euphoria and rhetoric around the Crypto market that we saw in junior resource stocks in 2011. If you have made money in Crypto's be sure to take 10% or 20% off the table and diversify into something solid. Gold and Silver might be a good choice right now but remember - DYOR!
Image sources: www.pexels.com and www.iii.co.uk