If you’ve been investing in anything for a reasonable period of time, you’ve undoubtedly lost money somewhere along the line. I know I have. So at the risk of embarrassing myself, I thought I’d lead us on a little trip down memory lane, where I recount some of my failures and see if I learned anything along the way.
My parents were frugal, bordering on cheap. Predictably, I turned out frugal. Not cheap, just frugal. I never really enjoyed frugality, and I still don’t, but the habits are ingrained.
Since I was raised in a frugal/cheap household, I would instinctively feel bad when spending money. That bad feeling enabled me to live cheap, save money, and not go into consumer debt – all good things.
Unfortunately, I was never really educated by my parents or school system about how to actually manage finances or invest my money. And here are the seeds for what comes next.
Being the reasonably intelligent person that I am, it didn’t take long in the real world for me to figure out that I probably need to be investing my money, not just letting it pile up in a savings account. But what exactly was investing anyway – how about buying stocks, that seems to be in vogue, let’s do that. And hey, it’s a bull market, everyone’s making money. I need to get in on some of that action.
Lesson 1) In a bull market, everyone makes money. The same cannot be said for a bear market or a flat one.
Then came graduate school, where I had to spend years living on a meager stipend. No problem, I’m frugal, this is entirely doable. And since I’m so frugal, it’s not like little luxuries such as a Grande Mocha are really going make a dent in my budget.
Except that I didn’t actually have a budget. That’s right, I had no idea where my money was going. And since my income was so small at the time, even tiny expenses added up really fast. Predictably, my savings were slowly draining away.
Lesson 2) A budget is essential. I need to know what the hell is going on with my money.
Then came the Great Recession. Something like 30% of my investments evaporated. So I did what everyone else did. I panicked and pulled the rest of my money of the table. I also realized that I didn’t have a clue about personal finance or investing. Nor did I have any real goal beyond some nebulous concept of “make money.”
Lesson 3) Financial education is important and so is having an actual investment plan.
After spending several months immersing myself in the worlds of personal finance and investing, I decided to go the traditional route. I opened up an IRA and bought an index fund. When I became eligible for a 401(k) plan I got one of those and shoveled money in there – also in index funds.
Eventually, I stumbled across the idea of financial independence, and the even more remarkable idea that it’s possible to achieve it earlier than age 65. Now this was a goal that I could really get behind.
Lesson 4) If you want to achieve early financial independence, you aren’t going to do it with your money locked away in retirement accounts.
Sometime during my time as a post-doc ,I came across dividend growth investing. This was an investment style that really meshed well with my world view and my goals. It was an investment style that rewarded you for saving. The more you invested, the higher the dividend income became. So let’s get to it! Invest some money, full speed ahead!
One of my biggest blunders was during my first foray into dividend growth investing, during 2010. I bought BP during the initial price drop after the Deepwater Horizon accident. Big mistake. I underestimated the severity of the accident and thought I was being clever by buying on the dip. I wound up with a dividend growth stock that stopped it’s dividend and declined in price even further. Capital loss and dividend loss – fail on both fronts.
I sat on the stock because I didn’t want to lock in any more losses. BP resumed it’s dividend the next year. And even increased it’s dividend the year after that. The stock price is still down compared to what I paid for it. Lesson learned.
Lesson 5) There is always another stock. If you are considering buying on a dip caused by a serious problem with the company, rather than just speculatory idiocy, don’t do it. Just move on.
Later, in 2011, I initiated the high yield investment segment of my portfolio. The idea being that by allocating about 10% of my funds to riskier stocks with higher yields, I could rapidly increase the amount of invest-able cash at my disposal.
I purchased some stock in a company called Telefonica (TEF), which had a nice fat yield. It also had a lot of debt and a big exposure to a rather financially troubled Europe. TEF reduced it’s dividend. This particular company was a gamble that didn’t pay off. Fine. That’s why I had it labeled as a risky stock from the beginning. My mistake was hanging onto it after the cut. Eventually the cut became a total dividend elimination. I still hung onto it. “Maybe next year, TEF will bring back it’s dividend” I thought. Eventually, I wised up and just dropped this position all together.
Along a similar vein was my experience with Inergy (NRGY), a high yielding MLP. What seemed like a good buy at first turned into a dividend cut. I should have dropped Inergy then and there. Instead, I hung on and witnessed first hand that the management of Inergy had no real idea what the hell they were doing. Then there was another dividend cut, some company reorganization and I wound up with 3 (yes, three) shares of Suburban Propane Partners (SPH) when Inergy divested itself of it’s holdings of SPH. To be fair to SPH, I think it’s actually a descent company.
Lesson 6) Dump losers as soon as possible. If you wait, they just turn into bigger losers.
Hopefully you learned something from reading this memoir, I certainly learned a lot living it. Don’t worry, I’m sure I’ll make some more mistakes in the future. We all will, it’s just part of investing.
Disclaimer: I am long BP and SPH.
Readers: What were your biggest money management, personal finance, or investing mistakes? How did you recover? Did those mistakes have any fundamental effect on your financial or investment outlook, philosophy, or strategy?