I’ve made many mistakes in my life. Who hasn’t? But, the important thing is that we learn from our mistakes. In the past few weeks, (along with your founder of Brick by Brick Investing) I have been accepted as a member of the Yakezie community. As part of my initiation, I wrote my Yakezie member post, where I really dissected some failures in my life. However, one comment reminded me of a very important point:
We shouldn’t just learn from our own failures, but also from the failures of others.
After all, it’s got to be better to learn to avoid a mistake before making it ourselves hasn’t it. Therefore, I’m offering you all a free gift. I’m going to share with you the story of my first share purchase, which can only really be described as a #EPICFAIL !
My mistakes can basically be broken down into five areas.
1) Not being sufficiently educated before taking the dive
I had been saving hard. I’d saved up my first £1,000 ready to invest in the market. I’d done my research, so I knew that I didn’t want to invest £100 in a stock. This would have been dumb! The fees would take out a big chunk of my returns. Paying £10 fees on a £100 purchase would be 10% off my returns. £10 fees on a £1,000 would only take 1% off my returns. I’d done my research – my Mum would have been proud!!
However, this is where my research in this area stopped.
I’d heard of “diversification”, but didn’t really think that would apply to me. I’d heard of dollar cost averaging, but I was investing in England, so I wouldn’t need to “dollar” anything. Right?
(This is already embarrassing to admit, but let’s go on).
2) Listening to others
I now knew that I needed to buy a stock for £1,000. It was time to start researching the next big thing. If I could just find the next Netflix, Google, Apple, etc, then I’d be rich in no time at all.
So, I did some searches on google finance, played around with a few stock screeners and found some stocks I liked the look of. Then, I went onto an investing website in the UK called Investor Interactive (iii.co.uk).
I went on looking to find some supporting opinion on British Petroleum (BP) and I wanted to know what people thought about its potential. It was a big chip company, I knew what they did. I knew that they were profitable. I’d even taken the time to look at their history of dividend payments and their key investing ratios.
I was about ready. Then I read the BP page forum. One individual had said that there was no future in BP and all smart money was in another share. It was a gold mine: quite literally. It was a gold mining company. This company was, and I quote, “ready to pop”.
I was intrigued. I clicked over to the board. The company was trading at 4.5p per share. 2 months before, it had shot up from 2p to 8p and then traced back to this level. Just a blip in the road to millions, I thought. I started reading the comments. They confirmed my suspicions: “get your money in here before it’s too late”, “this has got to be a takeover target for X and Y”, “the real value here is £2 per share”, “it’s only going one way”.
I’m ashamed to say, based on these comments alone; I was the proud owner of £1,000 worth of shares just 10 minutes later.
3) Not doing any fundamental analysis
As you can guess, I didn’t spend those 10 minutes performing a detailed analysis of the P&L statement, revenue growth, profit margins, the levels of debt or any other fundamental analysis of the company. In fact, I’m saddened to say that I didn’t do any of this until the end of this story.
Had I spent even 5 minutes doing this, I would have quickly seen that the company had a history of missing targets, the debt repayments were unserviceable and the company was indeed only going one way. Unfortunately, that was one under.
To make this failure worst, I am a chartered accountant by trade. I only needed to spend 10 minutes effectively doing my own job on my investment. But, for some reason or another, I didn’t.
However, the pain isn’t over yet.
4) Not reading the writing on the wall
I bought the share with what objective? To get rich, of course. What was my stop loss? Well, I could have told you if I knew at the time was a stop loss was. What was my target price? Well, they are only for brokers to try to get people to buy their stocks aren’t they?
So, what did I do when the price fell from 4.5p down to 4p, down to 3.5p, down to 3p? I went back to the comments, of course. “Wow, I can’t believe this fall, what an amazing buying opportunity”, “I’ve topped up, you should too”. You’re right, uneducated stranger, I absolutely should top-up. It’ll bring my average down and I’ll make even more when the price rockets. Another £500 going in!!
5) Not realizing my mistake (being in denial)
It carried on falling. Down to 2.5p, down to 1.5p, but still I didn’t bother to work out why. All I knew is that my fellow investors on the forum were sure that this was a good thing. 10 months later, the company inevitably entered administration and the investors, including me, lost everything.
The result of my very first investment: -100% in just over a year.
Luckily, after this horrible experience, I researched those original accounts from a year before, and I could see exactly where I went wrong.
So, I encourage you all to learn from my experience and stick to two rules:
- Don’t even read investing forums. 99% of the comments are from people who haven’t done any research and are desperately hoping to change the fortunes of the company to help their own investment. Discuss investments with others, read information, but never listen to any one thing you read, unless…
- …that one thing are the company’s financial statements. If you don’t already know, you should learn how to interpret a set of financial statements. You should understand the key financial ratios and work them out for yourself. You should form your own opinion on the company.
Hopefully, all of you have already learned this without making the epic fail that I did. However, for any of you who haven’t, please take note and save yourself the 100% loss and the embarrassment of having to write this article!!
This post is written by Graham Clark from moneystepper.com, where you will find regular posts covering every aspect of money, investing and saving; helping you increase your net wealth in the short, medium and long term. Check out his recent post on investing in dividend vs non-dividend stocks.