“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.” The famous quote of Charles Dickens has beautifully summarized the era of pandemics. On one hand, shops have been closed, employees laid off or furloughed, and the economy tanked. On the other hand, we have witnessed epic eureka moments in the stock markets and vaccine developments. Who would’ve thought that the stock would have fallen more than 30% and bounced back up right away and posted a positive 16% gain over the year? Who would’ve thought the FED would have pulled the trigger so quickly when the market melted down in March and introduced the close-to-0 interest rate and bought all kinds of bonds including the garbage bonds? Who would’ve thought that the vaccine development, which usually takes more than several years, could be done within 1 year? All are miracles and we are living in a wonderland.
As an amateur investor, I have never seen such a dramatic swing of momentum in my 5 years of stock trading life. Millions of first-time stock traders have opened accounts and easily outperformed wall street. Individual traders from Reddit even rallied to short squeeze stocks, which caused the wall street hedge funds to lose billions of dollars. It has never been so easy to make money out of the stock market. As the good old saying goes, the stock market always goes up and the party must go on.
Until it doesn’t….
The market correction this February and March is a gentle reminder that the mood of the market could change overnight before we even realize it. The once-hot stocks were dumped like no tomorrow and the prices dropped more than 50% in one month. When you panic and sell stocks, they could bounce back in the blink of an eye, leaving you astonished and upset about the mistakes you have just made. YOU ARE NOT ALONE! The truth is we all make mistakes and mistakes are there to help us grow. We learn from our mistakes and make better decisions next time. More importantly, we share our experiences with others, and collectively, we become more and more sophisticated and intelligent. As an amateur investor, I have my own shares of miracles and mistakes in stock trading. Some of them are great investment decisions and others are stupid speculations. Below are the 3 biggest mistakes that I have made and would like to share with you:
- Panicking sells in response to bad news.
I started trading stocks in 2014. The Chinese e-commerce company Alibaba (BABA) went public with a historical $25 billion IPO in that year. This company had done extremely well in China and was the equivalent of Amazon in China. It had a very brilliant future given the size of the Chinese market and the emergence of a huge population of the middle working class with growing buying powers. In our earlier blog, we have shown an example of how people could have earned a 120,000% return had they invested $100 in Amazon stock when it went public in 1997. Therefore, I bought $2000 of BABA stocks when the price was $90.
However, the bad news kept flooding in afterward and the stock prices started to decline. It was accused of selling counterfeit products on its websites and infringing on trademarks. A class lawsuit was filed against the company that year for it had concealed a regulatory warning about its ability to stop counterfeiting before it went public. Many articles from the news websites started to paint a dim picture of BABA's future and predicted the stock would keep going down. As an amateur, I started to panic and sold all the shares at the price of $60 which was almost the bottom of the stock. The stock did not go bust and instead, it doubled the price at the end of 2018 and kept climbing up to $300 at the end of 2020. Instead of raking in 275% profit, I lost 36% of my investment. Even worse, I never put a dime in this stock ever since.
As human beings, we tend to make a response to the stimulus (e.g., news). It has been built into our genes as part of survival skills in the “fight or flight” mode. Sometimes, it helps us to make a quick adjustment to avoid further loss. Most of the time, however, the initial responses are irrational and baseless. In the stock market, so much news is generated every second. Some of them are accurate while many of them are made by people to manipulate the market. As individual investors, we oftentimes are the last person to get to the true and valuable information. We are, however, the main target of fake news. If we take an instant response to the market news without studying the source and accuracy of the news, we will constantly drop into the trap set by institutional investors. That is the main reason why most individual investors lose money in the market while only a small fraction of individual investors who have a high degree of self-discipline could win in this game.
What did I learn from this experience? I have learned to be patient and make decisions based on research. Last year, I started to buy in the Draftkings. It has been a very popular platform for sports betting, which is a booming industry in the USA with more and more states legalizing online sports betting. However, in October 2020, when it hit the historical high of $63.78, some institutional investors downgraded the outlook of the company simply because they believed it had been overvalued at the current price. This had triggered a landslide of the stock price. After studying it closely, I realized that the fundamentals of the company were very positive, and more positive catalyst events were coming (e.g., legalization of online sports betting). This might be simply another trap that institutions set up so that they could buy back the stock at a lower price. Therefore, I kept buying at the dips as the stock price dropped to $35 and eventually it bounced back and hit another historical peak at $72 dollar in March 2021.
The lesson here is not to make a panicking move when bad news breaks out. Do your own research and study the fundamentals of the business behind the stock? Are those companies financially healthy? Are their management teams stable? Are they making the right decisions? Answering these questions is way more important than reading the news.
2.Speculative sells and buys in waves
Another big mistake I made was speculation even when I was long on a stock. I have been a bullish believer in the Crisper technology since it was invented. It is magic that we could cut, modify, or change the gene at will. Given the fact that many diseases are due to simple mutations of genes, Crisper is a major technology breakthrough to provide a solution to these diseases and save millions of lives.
At the time around 2016, there were 3 major crisper companies: Crispr Therapeutics AG (CRSP), Editas Medicine Inc(EDIT), and Intellia Therapeutics Inc(NTLA). They were founded by the inventors of Crisper technology: Emmanuelle Charpentier, Feng Zhang, and Jennifer Doudna. I started to buy CRSP when it was priced at $50. However, it had fluctuated between $40 and $68 for most of 2018. Seeing it as a speculative opportunity, I kept buying at the low prices and selling at the high prices, which made me a couple of thousand dollars. Fast forward to 2020 when the pandemic hit, every stock had dropped and so did the CRSP. I started to buy the stock again at $37 and sold them at the price of $50 as I was expecting another downturn in the stock market. However, it did not turn back. The stock went north for the whole year. At the end of the year, as the big news broke out that two inventors, Charpentier and Doudna, earned the Nobel prize for their work in crisper technology, the stock price jumped quickly all the way up to $200 dollars in the following months. I have lost the opportunity to rake in bigger profit.
As amateur investors, we could not time the market. Even the professionals could not time the market every time. Speculation may make us some money in the short term. The risk is to lose the opportunity to make a bigger profit in the long term. As Warren Buffett said, if you are not going to hold the stock for 5 years, you should not buy it in the first place. Speculation is our enemy. The lesson for me is to stick to our judgments and focus on long-term investment rather than short-term speculation.
3.Ignoring index funds
It is boring to buy index funds. Index funds such as SPY500, DIJ, and NASDAQ are not sexy. In the first couple of years of my stock trading, I completely ignored the index funds. I trusted my judgments and believed that I could beat the market. I was obsessed with picking unicorn stocks (such as TSLA, AMZN, and APPL) and becoming rich overnight. The reality has given me harsh blows. Instead of making money, I had been losing money until the year 2020 (yes, when the market made a V-shape return). What has happened to index funds in this time span? SPY500 has increased from 1878 in 2014 to 4100 as of April 2021; DIJ has also gone up from 16452 to 3400; NASDAQ from 4500 to 14000. Suddenly, these index funds are more appealing to me. More than half of the professional investment funds underperform index funds. Only a handful of companies, such as Warren Buffett’s Berkshire Hathaway, could beat the market consistently over decades. In fact, in the book “Random walks in the wall street”, the author, Princeton University professor Burton Malkiel, even claimed that “A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.” So, are we better than these experts who have plenty of resources, time, and money to study the market?
The lesson is not that we shall drop the stock-picking all together but rather to allocate our money wisely. Most of us have a regular job and a very small amount of money to invest. As Peter Lynch pointed out, we tend to be better off when we invest in things that we are familiar with. Our jobs oftentimes provide us inside information about the industries and thus edges and confidence over other people in terms of investment in the said industries. Hence, we could study these companies and choose stocks wisely. However, even in this case, we shall not invest more than 10% of your investment money in individual stocks as we do not have all the information to predict the future market. Rather, we shall invest the majority of money in the index funds and allow them to grow slowly. The average return of index funds is roughly 7–10% annually. It does not seem to be a lot compared to stocks that could jump over 200% or even 1000% over a year. However, the investment in index funds is much easier and more predictable than trying to identify the next Apple, tesla, or amazon stocks. Even at the 7% return, the investment yield will be 200% in 10 years. This is the magic of the compound interest.
Final Thoughts
I love mistakes. Mistakes enable us to detect the blind spots of our lives. Learning from our own and other people’s mistakes will guide us through the complex landscape of stock investment. With more wisdom and knowledge, we could reach financial independence eventually.
Disclaimer: This is not financial investment advice. It is for information use only. Not all information will be accurate. Please consult professional consultants before making any major investment decisions.