The Cost of Overconfidence

“Price is what you pay. Value is what you get.” – Warren Buffett.

My intelligence was validated by my very first investment success (Check it out here). I certainly was on fire. I went off on finding my next mission. Yes, this time I am making a big bet (keep in mind this is a broke student talking).  

              One of my good habits is reading and one of my bad habits is reading the wrong book. I came across a book on investing (titled, I think, “How to be a millionaire”). Perhaps it was written for me. Here is the summary of the book – buy the cheapest penny stock out there and if it goes up a dollar, you are a millionaire. At that time, the only thing debatable to me was whether I was going to buy a boat or a house with that money.

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              I sold my car, the only asset I had, for three grand. My rifle was loaded and I went on penny-stock hunting. Thanks to the Merrill Edge, they required an access code to trade penny stocks. For this, you needed an electronic device which they will send by mail. I was not ready to wait for a few days. I wanted to be a millionaire the next day. So I decided to buy Urban One Inc Class D (NASDAQ: UONEK), the closest thing to a penny stock. It was selling for around a dollar per share. Till this day, I do not know what that company does nor their financial situations. The only criteria I had was its listing price and I picked the first one from the bottom.

              Contrary to my expectation, the stock price started its journey towards the bottom. Towards pennies. I was restless. Sound sleep was a thing of the past for me. I borrowed six thousand from the credit card promotional offer and bought more of it hoping that I will recover the loss from my earlier trade. The sliding of the price continued.

              I checked my investment every few minutes and I am not even exaggerating. I did not like the red color. My loss aversion side of the human aspect kicked in and I sold all of it. I lost one-third of my total investment. Amount wise, it was three thousand dollars. This sounds trivial to Wall Street. We have no shortage of people and institutions losing millions and billions in bad investment.

              More than the actual amount, my biggest loss was the opportunity cost. I had the opportunity to earn a handsome amount but all I did was lost my borrowed money.

              I was an expert on buying high and selling low. Had I waited a year or so I could have more than quadrupled my investment. My regret of not holding it a little longer continue till this day, not to mention buying it in the first place.    

              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 I was a citizen of the United States, which I wasn’t at that time, and created an investment account in Merrill Edge. 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 Edge 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 they also make 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 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 on 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.

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