Everybody Makes Huge and Reckless Financial Mistakes

I dreaded looking at my annual taxable brokerage statements for years. In my Roth IRA, where I follow a rather strict buy-and-keep buying-and-hold-forever trading strategy, I’ve done exemplary since I started investing at the age of 20 in January of 2006 (As of May 18th, 2015, I’ve had an annualized total return of 15.1% vs. the S&P’s 7.8%). Alas, this regret over broker statements is surrounding my taxable “Trading” account. You know… that account where I go to frivolously gamble as if I know more than the next guy. Call it trading, call it speculation, call it “playing with some puts and calls,” call it whatever, but I’ve badly trailed the S&P, and achieved negative returns for several bull years in that account. I would have literally been better off just shoving it under a mattress. Thankfully, for the past few years, I’ve changed that account strategy to invest in only high-yield fixed income (municipal and corporate debt), so the bleeding has long-since stopped. However, I had one pretty dark tragedy that I’ve been paying for for a long time.

It started, I suppose, with a very ill-advised purchase of Gushan Environmental Energy (Ticker: GU, since delisted) in 2008. Even to this day I’m still allocating capital losses from that trade. It started as a smallish position of about $2,000, only to rise almost 30% a week or so after buying. I fell in love, buying more and more even as the price collapsed from the mid-teens to well below $3/share. This single stock eventually became more than 70% of that “trading” portfolio.

“It can’t go down any more! It’s trading at like one-fifth of book value!” I would say to myself and my wife. Sadly, though, it could (and did) go down more. This micro-cap Chinese waste-oils biodiesel company defied any of my own logic and plunged and plunged. Finally, a fateful conversation with my wife (then my girlfriend) in a CVS parking lot brought me to a state of rationality. She simply kept saying “why can’t it keep going down?” I gave her the usual about book value, impending return to profitability, yadda yadda yadda. But, she was right. I must have had lost $25,000 on Gushan at that point (basically a year’s salary of my Staff Sergeant pay), with another $15,000 on the line. With her encouragement, I reluctantly sold out at something like $3.50/share. That was a great decision. Firstly, it was in incredible relief on my psyche—no more watching a single busted stock each day eat away at my savings. Second, and more practically, it was a prudent financial decision. Gushan was eventually sold to a holding company that was owned by Gushan’s Chairman for about $0.33/share (split adjusted). In hindsight, that conversation with my wife saved me another loss of about $13,000. In normal business, if a stock trades for such an extreme discount to book value, usually you’ll get an activist shareholder involved that tries to sell the company or liquidate assets. However, given the opacity of this company, and the fact that it was based in China, a white knight never came.

But, unfortunately, that’s just one of my many huge financial mistakes I’ve made. It’s my hope that putting these down on paper (blog?) for public derision and amusement will both serve the masses to not commit some of the same errors as I have and do better wealth management, and also to put myself to task to not commit any of these again.

Trading: As I said, since Gushan I’ve gotten much more conservative with my “trading” money, but have still caught myself selling companies I strongly believed in far too early: 700 shares of Apple (via options) sold at $74.00, 100 shares of FB at $25.00, or 200 shares of NXPI at $30.00, to name a few. Worse yet, I was often caught holding the bag with options. I must have net lost well over $5k trying to time Apple’s descent from $700 to $380/sh in 2012-2013. I also tried my hat at market timing. I went long maybe $3,000 on some triple-leverage bearish (Ticker: FAZ) options in late March 2009, only to watch them all close within a rounding error of $0. Couple these experiences with careless purchases of IPOs and your occasional penny stock, and you’ve got a lifetime of investing (if you can even call it “investing”) errors packed into a short eight years. On the whole, my market investing has been overwhelmingly positive (in a financial sense), but I paid some costly lessons throughout. I can only take heart that I learned those lessons while the amount of money on the line was still in the low five-digit range. Lesson: Options are a fool’s game except in very limited circumstances, such as writing covered calls. “Trading” should be avoided outright. If you want to purchase individual stocks, buy them for a specific reason, and sell them only when that reason changes or something else material changes. With regard to penny stocks—leave them alone, and hit up the roulette wheel instead. And with IPOs, wait a few days to let the hype settle down. Great companies do IPO, but you will have your chance to get in after the buzz wears off and they have at least reported a quarter or two.

Co-Signing: I once co-signed for a very financially-irresponsible roommate for her to purchase a Kirby vacuum cleaner from a door-to-door salesman. She made the $90 monthly payment for about three months (out of twelve), only to start Welshing soon thereafter. She then completely disappeared. I harassed her for a while until her phone number was disconnected. Rather than have a huge hit to my perfect credit, I just started making the payments until the balance was closed. Lesson: Never co-sign, ever. There’s a reason creditors want a co-signer: they don’t think the signer is good for it. If you don’t qualify for an unsecured personal loan, consider applying for a fast cash las vegas and get approved within 24 hours.

Nice Cars: This is what happens when you make snap decisions. My wife has, for her whole life, wanted a Little Red Corvette (yes, just like the song). For her birthday two years ago, I made her dream a reality. I researched the car for about a week, found a low-mileage used one for about 70% off its MSRP (still quite expensive), and parked it in the driveway on her birthday. She was elated, and I felt good to do something so nice for her. We could afford it, but we certainly didn’t need it sitting next to my own Mercedes in the garage. We didn’t need two premium gas, low MPG luxury vehicles depreciating on a one-income family. God chimed in to echo this hasty decision by blessing us with our first baby just a few weeks after she got the keys. It has been driven maybe 1,000 miles on our watch—or roughly $5.50 per mile when you account for depreciation, insurance, gasoline and loan interest. Now, the loan is just a burden on our finances, and I’ll be a happy man when I sell it later this summer. My wife deserves that car, but being that we won’t be driving it for many years, it makes more sense to leave it in somebody else’s more capable hands until we have a use for it. Lesson: Cars are a means from going from A to B. We don’t live in them, they depreciate like they’re going out of style (which they are) at about 15% per year, and the more expensive the car, the more frequent and costly the repairs. I’d much rather have a car with more spare time to drive it rather than a have a car where my time is spent working to pay for it.

Lifestyle: I’ll call this one as just a series of lifestyle mistakes that has built up into one monumental mistake over my adult life. Cable television hasn’t materially bettered my life over the last ten years, but I sure do believe having $10k today would feel pretty decent. I’m not sure why Sprint was any better than Ting (same network) or many other MVNOs (although, my experience so far with RingPlus has been pretty dreadful), so I question why I paid $140/mo. for years for a service I can now get for $50. Scuba equipment and lessons—hmmm, yah that’s a failed experiment–$500, see ya. Commuting rather than carpooling for three years, a wasted $200/mo. And, of course, our recently-exited predicament—moving to and renting an apartment in Manhattan on a lower salary and insane expenses (To the tune of a total direct cost plus opportunity cost of about $50k). And the list goes on…but those are the biggies. Lesson: Thankfully we’ve come to recognize and optimize most of these decisions over the years. Our move to one income has heightened our awareness toward needless expenses and waste. We’ve cut out the gold-plated phone plans, cable TV, and the commute costs. We’re looking to sell both vehicles and downsize, we’ve subletted our apartment at a premium to our owed rent, and got a better paying job back where the house is.

Conclusion

So what’s the moral of this sad story? Well, I astound myself with writing this down. Even in the face of all this waste I’m still well on my way to retiring in four-and-a-half years. How is this possible? Couple reasons. First, the beautiful thing about mistakes is that most of them are temporary and recoverable (except for the Four Horsemen). Second, and most importantly, this reminds me a little of The Shawshank Redemption (third greatest movie of all time*). Over the course of 20 years, all sorts of awfulness happened to Andy Dufresne. But, through thick and thin, on his daily walks around the exercise yard, he continued to drop a handful of concrete that he carved from the prison walls. This slow, determined approach eventually made his escape possible. My analogy to Shawshank is that throughout all of these mistakes, no matter my station in life, I always maxed out my 401(k) and IRA. Even in New York, where every dollar was a struggle, I pushed every red cent I could into tax-deferred accounts–minimizing my taxes and cementing the possibility of early retirement.

Mistakes are inevitable and unavoidable. But, persistent investing will more than make up for them.

Thanks for reading!

(Related: If you need information regarding easy business loans, click this to find more information)

Eric

*Note: Not that you asked, but here are my ten favorite movies of all time:

1. A Few Good Men
2. The Karate Kid (The Ralph Macchio Version)
3. The Shawshank Redemption
4. Titanic
5. Rules of Engagement
6. Inglorious Basterds
7. Love Actually
8. Dear Zachary
9. Cloudy with a Chance of Meatballs (1 & 2)
10. Miracle