Posted by As a relatively new homeowner, there are a lot of things I don’t know. I’ve read ‘Homeowner 101’ type books to understand the maintenance and upkeep needed in a house. Unfortunately, reading does not replace hands-on experience. By experience, I mean making mistakes.
Over the past 2 weeks, we have had a water leak in our furnace room. It led to puddles of water leaking from the furnace room to the adjacent laundry room. We turned off every water source in the furnace room to find the problem. After lots of fiddling, the leaks stopped!
We thought “problem solved!”. (In retrospect, we were naive homeowners, hoping that all those knobs that we fiddled with had miraculously fixed the problem. Unlike electronics, “turning it off and on again” usually does not fix home maintenance issues.)
To no one’s surprise, the puddles of water returned the next day. After another hour of cleaning up the water, we finally pinpointed the issue to the humidifier attached to our furnace.
With some googling, we guessed our problem was a 1+ year old filter within the humidifier that had calcified. To an experienced homeowner, it would have been obvious the moment you looked at the filter. To a new homeowner like ourselves, it just looked liked a normal filter.
With a new filter in place, no new leaks had sprung. And because we made this newbie homeowner mistake, we will never forget to replace the humidifier filter every 6-9 months. I’m sure I read it in a book before, but experiencing the pains of mopping up the floor has made this an unforgettable lesson.
Just like making mistakes in home ownership, making mistakes (and losing money) in investing is the best way to learn.
Making investing mistakes is the best way to learn
For the past 5-6 years, I aim for 95% of my portfolio in diversified ETFs. The remainder is in individual stocks, with each holding no greater than 1.5%. The stocks are generally in blue chip dividend payers or large conglomerates with some historical staying power.
There are numerous articles and research that have proven that picking individual stocks usually underperform a diversified portfolio. With that knowledge, my portfolio targets are structured to keep me from making stupid investing mistakes.
Despite knowing this and setting these targets, I still fell into the trap of chasing hot stocks.
Buying into trends without research
In the summer of 2021, I was drawn into the hype of the Coinbase IPO. I’m a believer of the cryptocurrency market, even though I’m unsure which specific coins will win over the long term. With Coinbase as an exchange platform and earning fees, it would function like a bank or financial institution.
Coupled with a growing user base, what’s there not to like about the stock?
I wish I could say I did more research beyond that. However, that was the extent of my research and investment thesis before I plunged headfirst into a “buy” position.
Can’t stay the course when there was no investment thesis
Shortly after buying into the stock, it started its downward slide. Needless to say, I started getting antsy about the investment.
“Have people lost faith in the cryptocurrency market?”
“Are the user growth rates losing steam with new exchanges available at lower fees?”
“Am I going to be left holding the bag as an investor?”
Other than “crypto is great, so charging transactional fees is even better”, I didn’t have a true rationale or investment thesis for this stock. I also didn’t have an exit strategy. At what point should I sell my position?
Without setting these upfront, it became difficult to assess whether the stock continued to meet or started to miss expectations. This turned into an emotional game instead of rationale investing.
After a volatile couple weeks, I bailed and sold my position within 2 months of purchasing. I had locked in a 30% loss by selling. While the absolute dollar loss is not significant to my portfolio, the percentage loss was a blow to the ego.
Post Mortem: Mistakes were made in buying this stock
Looking back on the transaction, the issue wasn’t losing money or buying Coinbase specifically. I made a number of mistakes with my choices:
- Not following the investment plan and asset allocation targets: My portfolio was at 95% diversified ETFs and 5% individual stocks, which was right on target. By adding another individual stock to my portfolio, I had exceeded my target allocation for individual stocks. While updating investment plans is inevitable, my first step wasn’t updating my investment plan and then seeking stocks to meet those targets. I did the reverse and invested in stocks before considering why I wanted to increase my allocation to individual stocks.
- Not doing any research: I only had a basic understanding of the Coinbase business model. I didn’t even bother reading (or even scrolling) through their IPO documents to gain an understanding. I was acting on a gut reaction rather than a calculated investment decision. Buying individual stocks is different than buying broad-based ETFs. The gains (and losses) are all tied to the success of one company, so research is important to protect your investment.
- Not establishing an investment rationale: While I had a general rationale of “I believe in crypto exchange fees”, I didn’t consider the current and future prospects of the company. What’s my rationale for investing in this stock, as compared to buying cryptocurrencies directly? What’s my rationale for this company versus similar companies? Why am I buying in at this price and not another price?
- Not identifying an exit strategy: At what price point or what circumstance should I exit the position? Is there an upper or lower price bound? Is there any industry change (e.g., competitive environment, regulatory, etc.) that push me to exit? Without an exit strategy, I had no objective way to figure out whether to stay invested or bail.
It’s been a while since I’ve bought into individual stocks. It’s also been a long time since I last locked in losses at this magnitude.
Just like my leaky furnace room, making mistakes is the best way to learn. It was good to make these mistakes with a small dollar amount, so it didn’t sabotage the progress of the investment portfolio. What’s important is how I learn from these mistakes so I don’t make these mistakes again.