Trekking back through time to around 2009 / 2010 see’s Mr Z being qualified as an accountant for a year or two. Buoyed by his qualification and rise up from the minimum wage of a trainee accountant he has some funds to save each month.
Working in finance he decides to opt for a bit of share selection, how hard can it be?
Mr Z pours some cash into Weir Group, some time in the last quarter of 2009, lucking out as it is promoted into the FTSE100 and shows superb growth over the next 18 months or so. He sells out of this position at the end of 2010 to a nice profit.
He piles into BP after the oil spill crisis. He then gets out in Early January 2010. By pure chance, he times the market to near perfection, making a tidy profit. He was also completely unaware of the huge risk he took on during this time, his thinking was something along the lines of BP is to big to collapse.
Whilst all the success was going on Mr Z also invests in a few house-builders, banks and speculative oil exploration companies.
High on the successes of BP and Weir, he’s pretty sure he’s got the gift and can now look at the markets like a jigsaw meant for 5 year olds. He piles into two more select shares.
Mr Z takes a punt on HMV, chasing a high yield and a quick recovery, which went terribly.
Chasing a supposed high dividend payout really didn’t work well. We all know what happened to HMV.
Mr Z’s other speculative buy was in Quintain Estate & Developments, QED.
Another solid loss making investment from Mr Z and a perfect execution of panic trading.
I actually ended up selling all of these investments as I needed cashflow for something so insignificant that I forget what it was.
Now, we all make mistakes. This should have been a great learning experience for Mr Z, there were so many lessons on offer ;
- The benefits of diversification, despite two huge losses, overall I come out with a slight profit.
- Trying to time the market is as much down to chance, than anything else. The market can remain irrational longer than you remain solvent, and all that. I got lucky with BP and Weir, nothing more.
- I don’t have the bottle for active trading.
- Single shares can completely bottom out, see HMV.
- Panicking and selling can just crystallise losses, QED went on to recover just fine.
- I was disciplined enough to save each month, this should have carried on.
- Investing in equity is volatile and best suited to the long term.
- Don’t invest any money you might need for short term cashflow.
What should have been a short sharp period of learning just ended up rattling me. I stopped investing in equities (not including my pension) until summer 2014 when I discovered both Financial Independence and Index Investing.
Which is a shame, because we all fuck up along the way. And we should learn from these experiences, not shy away from them. In isolation my successes in BP and Weir really taught me nothing. The pain from losses on QED and HMV should have taught me loads. And they did, it just took a few years.
Loss aversion, where we place far more emphasis on negative experiences than the positives, scared me away from investing for too long. I missed being in the markets from 2011 to 2014 and the gains that went with it. Don’t shy away from your mistakes like I did, learn from them.
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