Life Lessons from an Investor's $10,000 Mistake
- 2008 22 Feb
In the first seven months of my new career, I had earned $7,000. In an effort to make our $12,000 in savings go further, I came up with what seemed like a brilliant idea. I had watched as my clients were doing pretty well as the bull market continued to rage. I decided I would buy some internet stocks with the money we had saved. The funny thing is I wouldn’t allow my clients to invest in the types of stocks I was buying for myself. There was simply too much risk involved. I zeroed in on a company called Wordcruncher. Seriously, that’s what it was called. Notice I said “was.” I watched the stock like a hawk for about two weeks. I read the charts. I thought I had found a pattern. I dipped my toe into the Wordcruncher waters by purchasing 200 shares at $16. When the stock went to $8 in the first week, I thought this was chance to really make hay so I bought 400 shares. I now had $6,400 invested in this company. Then, the stock shot up to $30 per share. I was a genius! I thought they were going to write articles about me. I could see my name in the Forbes richest list: Gates, Buffet, Scalici. My $6,400 was now worth $18,000! Then, another stock came across my radar. It was (again “was”) a company called Tel-Save. It was a “can’t miss” investment. I took the rest of our savings and bought shares in Tel-Save.
This was so much fun! Then, the “tech bubble” hit. When my stocks first started losing ground, it didn’t phase me because I knew that all bull markets have hiccups. I told myself his was just a hiccup. That hiccup turned out to be a pretty obnoxious burp. By the time I wised up, I was down to $2,000. I had lost $10,000 of our hard saved money. But, the worst was yet to come. I had to tell my wife. You see, I failed to talk to my wife about these investments before making them. As a result, I attended a $10,000 life seminar. The good news is my foray taught me some valuable lessons about investing that I want to pass on to you:
1. Always consult with your spouse. This one’s actually for the men. Even if your spouse doesn’t “understand” investments, seek their counsel. Trust their judgment. It makes for a much happier marriage and you may end up making good investments (and avoiding bad ones).
2. Don’t risk money you can’t afford to lose. You have to understand that when you invest in anything, you are taking a risk. A general rule is that the greater the potential return, the greater the potential risk. I knew that, but still went through with it. I thought I could turn our small fortune into a big one which reminds me, do you know how to make a small fortune? Start with a big one.
3. Don’t try to get rich quick. This rarely works. For every success story, I can probably find 100 failures. I know I thought I could get rich quick. I learned the hard way that wasn’t how it is normally done. This is why Solomon wrote this in Proverbs 21:5 - Good planning and hard work lead to prosperity, but hasty shortcuts lead to poverty.
4. Don’t put all your eggs in one basket. In real estate it’s “location, location, location.” In investing, it’s “diversify, diversify, diversify.” In an ever changing economy no one can say with certainty what will be a good investment over the next 10 years and what will be a loser. Who would have imagined that in a country with 150 million drivers who own over 100 million automobiles that an investment in a major car company would go sour? While diversification doesn’t guarantee you won’t lose money, it can help avoid catastrophic losses.
Since my life seminar, I have counseled many people who have learned some of the same lessons and they all say the same thing: “I wish someone would have told me these things.” On behalf of me and all of those other investors who have made mistakes, heed this advice and you’ll be on your way to a much happier investment life.
Steve Scalici is the CEO of Treasure Coast Financial, a financial planning firm in Stuart, FL. He is co-host of God's Money which can be heard weekdays at