“The Stock market is a device for transfering money from the impatient to patient.” – Warren Buffett
After just a decade long experience in investing (well, I really mean trading), I have decided to share my costly learning to the rest of the world.
I must say that I am one of the world’s fortunate person to have my investing career kicked off right at the bottom of the housing crisis of 2008-2009. God did have a plan for this poor fellow. I was 23, soon graduating college and ready for a lucrative job. It can’t get any better than that.
In 2009, If I had randomly picked 10 companies from the DOWJones index to invest my capital, as trivial as it was, and went to sleep for 10 years, I would be much richer today. Perhaps beat the market as well. If not, at least I would sleep well at night and also get a satisfactory return. Well, you are right, I certainly didn’t do that! Despite the Godly advantage laid out to me, I lost my money (more to this – Click here)!
Nevertheless, my very first investment was a success. Yaay! Well, that is what I thought, but the math doesn’t agree with me. It was right before my graduation. No, I wasn’t broke! I had $200 cash (no zeros omitted) in my checking account; and, about $10,000 in credit card debt. Not to mention 21% APR interest on that outstanding amount. My awful financial situation did not stop me from making my very first investment, as ephemeral as it was.
Not quite sure that it was my first gain or first loss, but it definitely was my first lesson – Trade Less.
I bank with Bank of America and there was a link in their website to create an investment account. I lied in the application form saying that I was a citizen of the United States, which I wasn’t at that time, and created an investment account with Merrill Lynch. For tax purpose, I think, they require prospective investors to be a citizen or a permanent resident of the United States. I transferred $100 to my investment account from my checking account and off I go to my investing realm.
The only company I knew closely was Bank of America (BAC)! I am sure you have already guessed it. It was trading around $17 per share and I bought 5 shares of it. A few days later, I sold all of them for $19 and change. I believe I had made 12 bucks from that trade. I told you, I was a genius! The only problem was that I was expecting $112 in my account, but there was only $94. Merrill Lynch charged $9 per trade.
In general, this is what happens when you trade often.
- Transaction Costs
The broker not only charges you for every trade but also makes money on the spread between selling and buying price. So, whether you make money or not, the broker definitely does.
- Miss-out on future gains –
In the long run, the total stock market is always moving upwards. So, if you hold your position for a long time you are bound to make some return on your investment (Not always – Click here for my scintillating examples). Had I had a gut, which I certainly didn’t, to hold my BAC position until today, I would certainly make a good return. Not to mention dividends. (Check out the graph above.)
- Capital-gain tax –
At the end of the fiscal year, Uncle Sam is waiting for his share of your gain.
Don’t trade if you don’t need to.
Not quite sure that it was my first gain or first loss, but it definitely was my first lesson – Trade Less. The true cost of my brainless trade transcends beyond those financial losses to emotional pain. Don’t trade if you don’t need to (I wish I had traded some holding – more on this in my future posts). However, It took me almost a decade to finally comprehend my first lesson. I wish I was more open and receptive towards new and better ideas.
Disclaimer – No position. I wish I had bought some when Warren Buffett bought BAC when the price was at ~ $6 (somewhere at the bottom).
Some Good Reads.
- Say “NO” more often like Warren Buffett. (Medium)
- The wisdom of value superinvestor (MOI Global)
- The Futility of the market timing (Albert Bridge Capital)
4 Replys to “The Most Costly Of All Investing Mistakes.”