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Home Investing Horror Stories
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Written by Administrator   
Wednesday, 25 March 2009 03:18

Investing disasters - when bad investments go even more bad!

 

Most of the time when you read about investing in the stock market all you hear is the good side. We're often told: "As long as you invest in good companies you'll do fine over time". This may be true in a very general sense, but people usually don't want to talk about the bad side of investing, when lots of money is invested and then lost. Sure, you might occassionally hear about the latest scandal or high profile fraud in the news (i.e. Enron), but individual stories are not always easy to find.

So, I decided to create this section with my own story. Not just so people can learn from my mistakes, but also so they can see that even if you have a bad (or horrible) experience in the stock market... you can still turn things around and make money. There's always money to be made, it's just a matter of finding the right opportunities at the right time!

Before I start, I just want to put out this call to others as well - if you have a story you would like to share, please This e-mail address is being protected from spambots. You need JavaScript enabled to view it and I may publish it in this section it for others to read, and learn from.

 

Dot Com Boom. Then Bust.

By John

So here's my story. It was the fall of 1999, and was working for a high tech startup company in Silicon Valley. Things were looking great - the economy was roaring along, the stock market seemed to hit new highs almost daily and I was working at a startup company where I had pre-IPO stock options. I, as well as many of my co-workers, were having visions of Ferrari's and Palo Alto mansions dancing in our heads. It was a great time to be in the high tech industry.

Prior to this time, I didn't have much experience with investing other than what I put in my 401k with my previous employer. And I actually didn't do all that bad, for the previous 4 years I had my money split between high tech mutual funds and international growth funds, so I did get some experience that way. But, when it came to investing in individual stocks I was clueless. I didn't know how to pick stocks, nor did I know how to buy them. I really didn't even know that much about the stock market, other than I thought that the NASDAQ had run so far for so long that it seemed bound to fall at some point. So for a long time I never had any desire to invest on my own. This all changed as the year 1999 passed and turned into 2000.

As the stock market ran up, several people I knew had opened online broker accounts and were investing in tech stocks. And some of them were making a lot of money - fast. Almost daily I heard stories of people buying a stock and within just a few weeks they would have already doubled their money. But, because of my belief that this was going to end sooner or later, I never was tempted to open a trading account. Not that I couldn't have, I actually had a nice nest egg sitting safely in a money market account, which I had been saving as a downpayment on a house for the previous several years. But there was no way I was going to risk any of that money in the stock market, I had worked too hard for it.

Commerce One goes to $500 a share

Then one day in early 2000, a co-worker of mine, Mike, mentioned to me that a particular stock, Commerce One, had just crossed the $500 a share mark. I was shocked at this, because this company had just gone public within the previous three months, and the stock was trading around $80 at the time. So in just that short time, the stock had gone up over 500%! I couldn't believe it!! To add insult to injury, the reason I knew of this company was that I had a friend who worked there. And he had mentioned to me right before they went public that I should consider buying some stock. Of course I didn't take his advice, and I missed out on this HUGE gain. I blew it big time! At the same time, another co-worker, Josh, had mentioned to me that a stock he was in had just crossed $100 a share and he was making a killing. Well this was all it took for me to decide I had had it. I was tired of hearing all my friends tell me how they were getting rich while I earned a paltry money market interest rate on my savings. And this is where things start to get ugly.

In late February, 2000, I decided to open an online broker account and move all my house downpayment money into the stock market. I really wasn't even trying to get rich, all I wanted to do was beat the return I was making in my money market account. So on March 1, 2000, roughly 1 week before the NASDAQ hit it's dot com bubble high of 5132, I was informed by my broker that my money had been received and my account was ready for me to use. I was really nervous, but at the same time I was very excited.... all I could think about was how great it would be if I could make a really good amount of money.

My first stock picks

So I set out to pick some stocks, which I didn't have any idea how to do. The first mistake I made was I only picked 3 stocks. This was my idea of "diversification". Second mistake, I picked stocks based on their charts (which actually wouldn't have been a bad idea if I knew how to read them!). My reasoning was that if they had gone up over the last few months, but not enough to double, I figured it was only a matter of time before they would double or maybe even triple. I didn't really know anything about these companies financially, although none of them were profitable at the time. But it didn't even seem to matter, in fact it almost seemed like the more money a company was losing, the higher the stocks would go. It didn't make any sense to me, but I decided not to question it, just go with it. I was so clueless, it's almost sad.

At this point I had my 3 stocks, and I was ready to roll. I made one more mistake however, that I didn't mention. I also had margin on my broker account, and I decided to use most of that to buy more stock than I could have bought with the cash I had. (for those who don't know what margin is, it's basically just like a line of credit which is equal to the amount of cash you have in your account - if you have $5,000 in cash, you'll have $5,000 in margin so you can buy up to $10,000 in stocks). So, as you can see, I was really a disaster in the making.

Anyway the one thing I do remember is that from the first day I bought these stocks, they had already started their bubble downtrend. Basically, many of the smaller stocks like the ones I owned were going down even though the market as a whole was still going up. (I found out later that this was a classic sign of a market top...most stocks are going down even though the index itself was still positive and going up). So, from the first day I had put my money in, I was losing money. I never even got to enjoy ONE day of profit from these investments. Talk about a black eye! Although I wasn't getting off to a good start, I didn't get too upset because I figured in time these stocks would start going up again. Why wouldn't they?

So I decided I was going to stay my ground and not let a day of losses scare me. But then one day of losses turned into two days of losses. And two days of losses turned into three. Then three into four, and so on.

The market meltdown begins

Over the next couple of weeks something really scary started happening - in addition to my stocks going down, the market as a whole was going down. And it was going down huge! One day (i'll never forgot it), I went to lunch and when I came back the Dow was down 777 points, and the NASDAQ was down almost 500 points! And yes, my stocks were down big too. This was the day I realized I was starting to rack up some substantial losses. Not only had I lost about 25% of my capital, but I had also lost 25% of what I borrowed on margin, so in effect I had doubled my losses to 50%! Needless to say, when I realized this I think I was actually on the verge of having a panic attack.

All I could think of was that if everything continued to fall, I could actually lose all my money (or even worse I could OWE money!) because of the margin I was using. My heart was racing. I couldn't breathe. My head was spinning. Was I going to pass out here at work? What was I going to do!? All I could think of was to run outside and smoke a cigarette (good choice John, lol!) so I could try and get a grip. I tried to process all of this information as quickly as possible, since I had to come up some kind of a plan.

Should I sell some of my stock? Should I sell all of them and just get out of the market? Should I not do anything and wait to see if they came back? Why is this happening to me? Why did I ever take my money out of my money market account? Why, why, WHY?? I told myself to calm down.....of all times to lose it, this was not it! I had to be cool calm and collected if I was going to be able to focus. So I went back to my desk, and decided that since the market had already closed for the day, there was nothing I could do. So I would wait and hope the market went back up the next day. And actually it did go up the next day. And even for a couple of days. And my stocks even stopped falling. But not for long.

Over the next few days the market held it's ground so I didn't sell any of my stocks. Many people I spoke with and tried to get advice from assured me that you only really lose money when you sell your stock and actually take a loss. I was advised just to "sit tight" and eventually the market would stabilize and we would be off to the races again and on to new highs. I was rather skeptical at this point, and with my losses teetering between 40%-50% I already had a very bad taste in my mouth from all this. But I decided that I had already lost so much I might as well stick it out. What choice did I have other than to sell everything and admit I lost half my money? I just wasn't ready to throw in the towel just yet. Needless to say, I was about to learn an expensive lesson.





Margin call!

To make a long story short, days turned to weeks, and weeks turned to months, and the market continued to fall. And somewhere in there during that timeframe I got a "margin call". A margin call is what happens when your losses get so steep that your account equity is getting dangrously close to not being able to cover the amount you borrowed on margin and you are required to deposit more cash in your account. But I didn't have any cash! What was I going to do? At that point I realized the end had come... I had no choice but to sell all my stocks and liquidate my account so I could pay the margin off. When all was said and done, after paying the margin I had lost almost 90% of my downpayment money for a house. I couldn't believe it, how could I have been so stupid?

At this point it was clear I wasn't going to be buying a house anytime soon, since I no longer had a downpayment. So I decided that the money that remained in my broker account I would just try and day trade it for awhile to see if I could make even a small portion of my money back. I did this for a few months not really making any money. During this time however my company had gone public. The stock performed terrible, but since I did have some really cheap stock options I did make a little money.

Losses continue

Eventually I decided to cash some of this out and put it in my broker account to try and trade it. Needless to say, over the next several months, I lost all this money too. I had to admit, I was a terrible trader! But why was I so bad? I wanted to find out, so I went back and looked at all the trades I had made over the previous year to try and see if I could make any sense of it. I realized that in looking at these trades I had definitely made some bad stock picks, because I still really didn't know what I was buying. I wasn't doing any research, I was just buying things blindly and hoping they would go up. However, I did notice that in all that mess of trades, I did make a couple of really spectacular ones.

One stock I bought went up over 400% in just a couple of weeks, and another one I bought doubled in about 4 days. These stocks I bought based on the chart, so it seemed I might have some ability with what is called "swing trading". Unfortunately though I only had small amounts of money in these trades so even though the percentage gains where huge, in actual dollars I didn't make much. But what if I could spot more stocks like this and then allocate more capital to those trades, and less capital to trades that I wasn't as sure of? So I decided to get some more money together, put it in my broker account and give it another shot.

A turnaround?

Believe it or not, my strategy started to work. I was starting to make more profitable trades, but my problem was I was still picking other stocks that I was buying on the pretense of "buy and hold" but were fundamentally in terrible shape. ("fundamentals" - meaning the company's earnings, business, growth prospects, etc.) Some of these companies had no profits, others with declining earnings or negative growth, and by this time the economy was going into a recession....around 2002, so it was not the best environment to be buying stocks. So those stocks were falling and I was losing money, offsetting gains I made on stocks that were more for "trading". It took awhile but eventually I started looking at fundamentals and things like earnings. Those things did start to matter again after all the unprofitable dot com's were flushed out of the system. When things really started to work was when I brought together the fundamental reasons to buy a stock with the technical reasons (technicals refer to the price movement of a stock, based on the chart). what if you had a company with really great earnings and other fundamentals, and also the chart showed the stock was in an uptrend (or beginning one) and there was lots of buying interest? That seemed to be a forumula for making some money. And it was!





Ka Ching!

In the end, it took me about 3 years, but I made back all of my losses and got all my house downpayment money back. But I didn't stop there, I then went on to triple that money. So it seems I found a strategy that worked for me. I buy good profitable high growth companies that are supported by the chart and good technicals. I also learned to be very disciplined in a couple of key areas: I always have a plan ahead of time. when I buy a stock I have some idea of where I will sell once I have a profit, but I also have a plan in case the stock goes against me and goes down instead of up. I have no problem getting out of a stock and taking a loss if it starts to go down and I feel it's better to move on to another stock. The reality is that you can do all the homework in the world and pick the best stocks out there, yet the stock goes down. Sometimes there's no apparent reason for this, it just happens. But I don't feel bad about cutting my losses quickly and moving on to different stocks.... because the odds are i'll pick winning stocks more often than i'll pick losers, and i'll make money more than I lose. So far this philosophy has worked!

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Last Updated on Saturday, 19 June 2010 14:44