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The investing mistakes I’ve made and what you can learn from them

Reprinted courtesy of MarketWatch.com.

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This is a hard column to write. None of us is happy to look back at where we went wrong. Our brains are wired to give us much more pleasure and satisfaction from focusing on things that show off our intelligence.

Ahem.

But in the interest of full disclosure — and in the hope that this might help somebody from making the same mistakes — I’ll open up and reveal my miserable moves from when I was young.

Most of your friends and relatives won’t do this. They’re happy to let you know the things they did that went right. But you’ll rarely hear much about their screw ups.

I’m not proud of the fact that I’ve made lots of mistakes that cost me money, that cost my family money and sometimes even cost my clients money. However, a mistake is only a mistake in retrospect. If it works, your brain will tell you that you were smart. If it doesn’t work, your brain will encourage you to forget it.

Let’s get started

My first mistake was thinking I could get huge, quick returns. I now understand that the first two “investments” I ever made were really speculations. In the first case, I nearly doubled my money in a short time. So far, so good. Not a mistake, at least not right then.

But then I became convinced I had some special level of savvy instead of just dumb luck.

With my newfound confidence, I quickly made a very similar investment, and lost the works. This was definitely not what was supposed to be happening.

Looking back now, it’s easy to see that this was in fact exactly what was supposed to be happening, since I was making commodity trades.

These ill-fated moves involved what I now recognize as a second mistake: I relied on the advice of a stockbroker who knew I was “looking for action,” and (as most salespeople would do) he happily obliged. He got paid his commissions, and I never heard back from him again.

There’s a third mistake here. At the time, I was still in college and married with our first child on the way. The mistake was high-risk investing with money I could not afford to lose — money I almost certainly would be needing within the next year.

When mistakes beget mistakes

About 15 years later, I added a couple more memorable mistakes by investing in limited partnerships, which (in some circles, at least) were all the rage back in the 1970s and 80s.

My first mistake with partnerships was to focus on the tax advantages (an immediate reward that the emotional side of my brain liked), while I mostly ignored the (comparatively boring) long-term underlying economics involved. I got myself in deeper by justifying this investment in the belief that Jack Sikma, then a Seattle basketball hero, was doing the same thing. (Never mind that he was making buckets of money with which to recover any losses.)

In fact, I didn’t really know that Sikma was making this investment, and I still don’t know. Looking back, my mature self has to laugh at my younger self for making a major financial decision with so little real information.

Another thing I didn’t realize about this partnership (although with only a modest amount of effort I could have learned it) was its lack of liquidity. The salesman assured me I could sell this at any time, on the assumption (or the pretended assumption) that this was such a good deal there would always be lots of demand for it.

If I had thought seriously about this, I would have realized that should I decide to bail out, many of my fellow investment “partners” probably would have come to the same conclusion. When everybody wants out at the same time, what do you suppose happens to the price of the partnership units?

Duh. I didn’t let myself understand that, although other investors might step in and buy up some of these units, they would likely offer only pennies on the dollar.

Now, one of the important lessons I try to teach investors is to pay attention to liquidity — the ability to get your money back (at least most of it) when you want to. Giving up liquidity may be one of the worst mistakes investors make.

There are plenty more

Maybe at some level I realized when I was young that I would eventually have to write this column, and I’d need plenty of material. So I plunged ahead.

I loaned some money to friends. Big mistake. This is something I tell young people never to do. Often what happens is you lose the money and you lose the friendship as well.

Apparently still needing “material” for this article, I invested in penny stocks and provided venture capital to small, young businesses. One of these companies eventually made money, but that happened only after the business was within hours of declaring bankruptcy. You can imagine what this did to my financial serenity and that of my family.

I managed to make all these mistakes while I was in my 20s and 30s. Fortunately, they taught me to become a much more conservative and cautious investor. Unfortunately, I put that lesson into practice much earlier in my life than I should have. As a result, I gave up a lot of years when I could have made considerably better returns at acceptable levels of risk. In economics, this is known as opportunity cost.

Older people often suggest that young investors need to “learn the hard way.” It’s a nice sentiment, and that’s what I did. But I wish I had listened to the advice of seasoned investors — and there was plenty of it available — instead of being so cocky.

And that leads me to perhaps my biggest mistake: I never even considered engaging the services of an investment advisor who wasn’t a salesperson. Had I done that early on, most likely I would have avoided a lot of losses and a lot of anxiety. (However, this column probably would be much shorter and more boring.)

The payoff

I have learned from all this, and now I have an excellent financial advisor who makes sure that I stay on point.That was one of the two smartest moves I have made. The other is that at some point I decided to make my financial life 100% mechanical. I saved mechanically and methodically. Now that I’m retired, I withdraw money the same way. My investments are rebalanced methodically, too, all without any time or effort on my part.

All this service isn’t free, of course. But in a sense, the money I pay for the work I get from my advisor and the team that supports him is one of the best investments I have made.

One good result is that I can spend my time traveling, enjoying life, speaking and writing, in the hope that I can prevent some young people from needlessly repeating my mistakes.

In this week’s podcast, I discuss what I wish I had known 50 years ago: “How to select the best financial advisor.”

Richard Buck contributed to this article.