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Debt Management Covers up a lot of Investing Mistakes

Posted by admin on September 17, 2007 in Investment Advice

I was looking at my financial account statements on Friday to see what my asset allocation is and I started tracking back to much older statements. I went back to the 90′s and things looked quite ugly. Hindsight being 20/20, I must have made almost every investing mistake you could make. Thankfully, I made them while I was still young and with modest amounts of money and to paraphrase a business quote- make your mistakes young, fast and cheap (the actual quote is “fail often, fast and cheap” by Jim Estill but I want to avoid failing often). This applies as well to personal finance (which is really the business of “Me Inc.”). If you are a younger reader or simply like to read some carnage, I would rank these as my top 5 investing mistakes (in no particular order):

1. Not buying in volume or enroll in a share subscription plan: I use to buy stock in small allotments which is extremely inefficient from a cost-perspective given you have to pay a sales commission each time you buy (this was in the mid-90′s when on-line trading was more expensive than now). This raised the break-even point on my stock; this was especially painful since I had a penny stock phase and your cost could be as much as 5-10% of your purchase price  in penny stocks. To paraphrase Buffet, buy in volume to minimize your cost of purchase or, if you cannot, enroll in a share subscription plan. A share subscription plan is not available for all stock but, where available, it allows you to purchase stock on a monthly payment plan for a small fee; most banks and insurance companies will offer share subscription plans. Most companies who offer a share subscription plan will state this on their website.
2. Not watching the cost of an investment. This is related to the first point. Like most people, I first started investing in mutual funds. Mutual funds can be good investments depending on the person but I never thought much about the fees on mutual funds back then. Remember fees are paid regardless of whether the fund makes money or not and there are more than enough funds available that a fund you are interested in probably has a competitor with cheaper fees.
3. Too much activity. I got caught up in the day-trading trend. I use to think I needed to do something, anything every so often. What I learned the hard way is to buy, hold and stop looking at the stock market ticker 6 times a day. I noticed something curious when I was on vacation; I was so busy moving and taking time off that I didn’t really watch the subprime meltdown that closely and I didn’t press the panic button and sell or buy anything.
4. Not buying on quantitative analysis. I use to buy the “cool” companies and avoid the old stodgy institutions. There’s a reason why they are old and stodgy- they make a lot of money and they don’t need to rely on the coolness facgtor. I learned to read financial statements and now I don’t buy anything without reading two years of annual statements- no matter how cool the ad campaign is (I do not own Apple, Research in Motion or Lululemon- too over-priced, not enough pricing power going forward and not recession proof respectively).
5. No plan/no focus= no profit. The point of investing is to make money but how? I just did thing willy-nilly without looking at the larger picture. The larger picture may change from time to time but I never asked myself how this investment fit into my larger plan (I am on the Derek Foster plan btw).

But here’s my saving grace- my parents taught me a lot of useful things in life and one of them was don’t get into debt (as a general observation, ever notice how anyone who lived in a country that was invaded during a war has a real good grasp of money management?). Pay cash or don’t buy it. As a result, despite my many investment failings, I am fortunate to report I never dug myself into a hole I couldn’t get out of. What I have noticed is that some blogs have readers who have just graduated from school or started making decent money and they ask the blogger what they should do now- my answer would be manage debt before you starting investing. Its a boring answer but boring does pay the bills and helps me sleep at night.

As a programming note, I have two guest bloggers this week writing on the pros and cons of being a real estate investor. The pro camp will be posted tomorrow. Thanks.