How I Lost $200,000

When you lose hundreds of thousands of dollars, primarily because of your own stupidity, there isn't much solace to be found. Believe me on this: I'm someone who lost that much (and more -- but I don't want to make this any more painful, so let's just say $200,000). Still, I think I'll feel better about it if I can prevent a few people from making some of the same mistakes I did.

So let me back up a bit. The year was 1999, and, along with Prince, I was doing a lot of partying (in my head) every time I looked at my portfolio. And that was often every few hours! When your portfolio skyrockets over a very short period, it does things to you. You get a little giddy. You keep checking your portfolio's value -- partly to reassure yourself that your good fortune is real, and partly to see by how many more thousands of dollars your wealth has grown while you were in an hour-long meeting.

What I did
In mid-1998, I'd bought roughly $6,000 worth of stock in Amazon.com. In just 18 months, it had increased in value tenfold (and then some). My brokerage statement from November 1999 shows that my 900 shares (thanks to numerous stock splits) were priced at $93 each, totaling more than $83,000! That's all from a $6,000 investment.

Then there's Sun Microsystems. My 1999 statement shows 200 shares at $136 each, for a total value of $27,000. I had paid $4,000 for them a mere two years earlier.

These are just some examples from my portfolio. My biggest holding at the time was AOL (now Time Warner), and I once watched that one increase from a $3,000 stake to more than $200,000!

The mistakes I made
I don't need to tell you what happened to these holdings in short order. Within a year, my Amazon shares were below $30, and my $83,000 had become $27,000. My Sun shares held their value and even increased for a while, but within three years, they'd fallen by some 87%. My AOL shares fell from close to $100 per share to about $13 in three years.

How did I get into this mess? Well, here are some of my mistakes:

  • I bought many stocks without really understanding much about their business. I was fairly familiar with AOL and Amazon because I was an avid customer. But I couldn't tell you much about Avid Technology (Nasdaq: AVID  ) , Western Digital (NYSE: WDC  ) or Tellabs (Nasdaq: TLAB  ) . Over the past decade, these former holdings of mine sport average annual gains, respectively, of -0.8%, 4.5% and -12.5%.
  • I was following the herd. I saw others making money on this or that stock, so I piled on; I didn't want to be left out.
  • I didn't focus on valuation much at all. When these companies became wildly overvalued, I didn't notice -- or maybe I didn't want to know. I don't really remember. (Actually, I may have noticed but hung on out of greed, hoping to eke out a bigger profit before selling.)
  • I succumbed to emotions and inertia instead of being rational. My stubborn streak led me to want to emerge victorious, eventually proving myself right for hanging on. My lazy side rationalized that what goes down will probably come back up again. (That's often true, but at what cost, and did I really want to wait many years to regain what I lost?)
  • I actually sold a few good companies too soon. I bought Capital One Financial back in mid-1997, for example, but sold soon after. If I'd held for 10 years, I'd have nearly tripled my investment. I sold Oracle too soon, as well. It's been a five-bagger over the past decade, despite much volatility. Sigh.

That's just some of my wrong-headed thinking.

The bright side
Fortunately, this isn't purely a tragedy. For one thing, I learned lots of valuable lessons. I no longer hold Sun Microsystems (and others), because I still don't really have a good grasp of its business. I do still hold a little Time Warner (though I've sold off most of the shares over time, for a down payment on a house, among other things).

I've also still made money, even after these stocks' slides. My few remaining Time Warner shares have grown nearly 20-fold since I bought them (though they were once nearly 100-baggers!). My Amazon shares are up almost fivefold from their purchase price back in 1998. Even though in total I lost more than $200,000, I can't complain too much. Many others lost much more than that.

I also did some things right during all this. I'd come to greatly respect Warren Buffett (even though I wasn't heeding his investing advice, to my detriment), so I bought a few shares of Berkshire Hathaway in 1998 for about $1,800 each, and hung on. At today's price of $4,600, they've more than doubled for me.

How I invest now
So how am I investing now that the bubble has burst and I learned a few lessons? Well, one more thing I learned was that I just didn't want to spend loads of time studying stocks and their valuations. I'd rather let those who love it do it for me. This is kind of what Berkshire Hathaway is all about -- there, none other than Warren Buffett and his cohorts are investing money for me. My capital invested in Berkshire was preserved during the market drop, too.

I've also got a lot of my money in mutual funds now, a bunch of which I found through our own Motley Fool Champion Funds newsletter. With good mutual funds I get instant diversification, which helps me avoid wild swings -- and the smart managers often find lots of promising companies that I may know nothing about.

One of my holdings, which is typical of the kind we've recommended, is the Dodge & Cox Stock Fund (DODGX). Top holdings of the fund recently include Hewlett-Packard (NYSE: HPQ  ) , American International Group (NYSE: AIG  ) , and Sprint-Nextel (NYSE: S  ) . Although the fund is closed to new investors, it's the type of fund you should be looking for. Its average annual return over the past five years is 14.3% (well above the market's average), its expense ratio of 0.52% is very low, and most of the management team has been on board for more than 10 years.

If you'd like to see which funds have gotten our blessing, I invite you to test-drive our newsletter -- for free and with no obligation -- for a full month. You'll have full access to all past issues, so you can read about each recommendation in depth. On average, our picks are handily beating their benchmarks.

Here's hoping my lessons can teach you some of what they've taught me!

This article was originally published on Feb. 23, 2007. It has been updated.

Longtime contributor Selena Maranjian owns shares of Time Warner, Berkshire Hathaway, and McDonald's. Berkshire, Amazon, and Time Warner are Motley Fool Stock Advisor recommendations. Berkshire and Sprint Nextel are Motley Fool Inside Value recommendations. The Motley Fool owns shares of Berkshire Hathaway and isFools writing for Fools.


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