Posted by Ryan on March 19th, 2008 in Investment Strategy

I have a confession to make. I recently made one of my worst financial mistakes. As evident of the below, I broke some of my own money rules, and did an incredibly stupid thing at the end of 2007. Well, it wouldn’t have been such a bad move if I hadn’t become so greedy.

My Stock Investing Rules:

1. Don’t think “how much can I make,” but “how much can I lose”
2. Sick to an investment plan and do not deviate from it
3. Don’t let emotions influence investment decisions
4. Invest less than 3% in speculative investments
5. Ignore the day-day movements in the market
6. Don’t get caught up in media hype
7. Don’t try to time the market
8. Have a clear exit strategy
9. Don’t be greedy
10. Don’t lose

These are my rules of investing I firmly believe must be followed in order to be a successful investor. Unfortunately, I made an investment decision that broke almost every rule.

What Did I Do?

Basically, I spent too much time obsessing over the credit/mortgage crisis and how it was impacting the economy and the market. As a result, I got too involved with watching the news, CNBC in particular, and was fascinated with the big up and down swings we have been experiencing in the market. As a result, I fixated on watching my brokerage account balance fluctuate and started to think, “If I just bought on a down day and took profits on the up day. . .”

Then came the hype. The market was mostly going down, but technology stocks were soaring - particularly Google, Apple and Research in Motion. That’s about when I let my emotions get in the way and thought, “why did I pass on Google last year when I said it was too expensive. I would have made a fortune,” which lead to “maybe there is still time to hop in on the trend and make a quick buck.”

This was when Google broke $700 a share and the media was asking how soon it would go to $800. I got very excited and thought about how much money I could make with trading options if Google reached what seemed like the inevitable $800. I threw all my rules out the window and took a gamble.

The next three days Google shot up over $740 a share. My call option had more than doubled in value. I was brilliant and beat those Wall Street fools!

Sadly, I fell prey to greed and hesitated to take profits as I started to think, “what if Google hits $800?” Needless to say, I got what I deserved and watched Google slowly deteriorate from its new highs. I ignored my exit strategy to ride the short-term trend and get out quickly, and let emotions take over my ability to think logically.

To make matters worse, I made subsequent mistakes by not getting out while I still made a profit, still believing it would bounce back. Now I’m sitting on some options contract that has decreased over 90% in value and will expire soon. Now I’m the fool.

While I broke almost all of my rules, there is one important one that I held true to: Invest less than 3% in speculative investing. Unfortunately, that 3% at this point has almost deteriorated to a complete loss, which has a significant impact on my overall performance when the rest of my portfolio is suffering from the current market condition.

What are some of your worst financial mistakes?

Millionaire Money Habit: Having a clear set of investing rules is not enough to be a successful accumulator of wealth. It also requires the discipline to stick to the rules and mental aptitude to not let emotions influence your investment decisions. -RT
photo by bbaunach

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