Introspection about our less-than-perfect decisions might be painful, but it's almost always less of a pain than making the same mistake multiple times. That's why it's important, especially in the context of investing, to take a moment to reflect on the mistakes that other people made -- so that you can avoid making them yourself and paying a steep tuition in the process.
So without further ado, I present to you a trio of my worst investing mistakes. I highly suggest that you read on and learn these lessons the easy way, rather than the way I did!
1. Doubling down on a losing position
In the timeless and stupefyingly simple words of famous investor Paul Tudor Jones, "Losers average losers." By that, Jones meant that it's often a folly to buy more and more shares of a stock as it goes further and further down over time in the name of lowering your average share price paid.
The short-term psychological relief of seeing your cost basis drop with each new purchase comes at a steep price, as it entails larger losses overall. Jones thought this lesson was so critically important that he literally wrote the three words in large text on a piece of paper that he has kept behind his desk at work.
Why is Jones' immortal dictum relevant to me? Because I didn't keep his advice in mind while investing in InMode (INMD -1.62%) shares over the last few years, of course! After starting my position in early 2021, I was thrilled to see my shares explode in value.
I kept buying more and more as the stock climbed, stirred to action by a steady drumbeat of solid earnings reports, sunny projections about its attempts to penetrate major international markets like China, and conviction about the usefulness of its collection of minimally invasive medical aesthetics technologies.
After InMode stock started to lose value, I rationalized it as a phenomenon linked to the broader bear market that was starting to bite at the time, and kept buying occasionally through mid-2023, even as its growth outlook worsened again and again. Now, my losses over the last three years are around 48%, despite the stock itself shrinking by only 6%.
Its valuation likely played a role in making my losses steeper. When I purchased InMode, its price-to-earnings (P/E) multiple was near 40, which I justified as being appropriate for a high-growth stock. In hindsight, the high valuation should have encouraged me to be even more hesitant to start buying more shares as the stock fell.
Remember: Losers average losers. Think carefully before committing more capital to your underwater positions.
2. Getting caught up in a speculative frenzy
Irrational exuberance in the stock market comes in many forms, and as shown in 2021, the cryptocurrency sector definitely has what it takes to be a prime example of a market bubble. A couple of years ago, in late 2021, I got my own slice of the action when I bought Shiba Inu (SHIB 1.84%) precisely as its price was well on its way to the Moon. It's now worth a small fraction of what I paid for it, and while it might recover, I'm not holding my breath.
The fundamental problem with my investment is that Shiba Inu is a silly dog coin intended for making memes and joking around. It isn't a long-term wealth-builder. It isn't even a useful commodity for any real purpose. What's more, I knew all this at the time of my purchase. Unfortunately, greed carried the day, and it led to bad decision-making.
The lesson here isn't that cryptocurrency is a bad category of assets. It's that in a speculative frenzy, the fear of missing out on big gains becomes especially tantalizing. The issue is that by the time you hear of people making money, there's a good chance that the party is closer to ending than escalating. So be mindful that what rises quickly may well fall even faster when there's little other than hype driving an investment's price.
3. Selling a winner way too soon
After buying shares of AbbVie (ABBV -0.66%) in 2020, my roadmap was relatively straightforward. I'd hold my shares for no more than three years, opting to sell them once it was clear that the market had priced in the successful first phase of the company's strategic plan.
Under that plan, its blockbuster drug Humira would lose its manufacturing exclusivity protections in 2023, causing its revenue to be quickly eroded by generic medicines. The specter of that upcoming loss meant that in 2020, the stock's valuation was low, with a P/E near 19.
But, per the plan, due to the onboarding of a pair of new medicines called Rinvoq and Skyrizi targeting most of the same markets as Humira, the overall top line effect of losing Humira would be mostly felt in 2023, with growth returning shortly thereafter, and eventually accelerating.
In late 2021, it was simply too early to tell if management's plan was working. The main obstacle, Humira going generic, hadn't even materialized yet despite being inevitable. But quarterly revenue was rising, as the two replacements for Humira were finding traction in their market. And in regions outside the U.S. where generics got the green light earlier, revenue erosion seemed to be occurring so quickly as to be mostly over.
When paired with the company's rising stock price, I assumed this meant that the market was interpreting AbbVie's rotation into newer revenue sources to be successful. So I sold my shares, pocketing a modest gain of about 30%. If I'd held on, I'd now be up by more than 100%.
The lesson here is to let your winners run for as long as they can, unless you have a really good reason not to do so. Everything went according to my vision for the investment, but I should have allowed myself to dream bigger once it was clear that things were working as intended on the company's side.
