Why Investing for a Short-Term Result Is So Hard

When news and media outlets latch on to a story, it's sometimes easy to follow the story and let it dictate your investment decisions. But focusing on the short term can lead to disastrous consequences. Motley Fool contributors Jason Hall, Jon Quast, and Nicholas Rossolillo discuss the issue with investing this way (even though sometimes the trade might work out in the short term) in this Motley Fool Live segment from "The 5" recorded on Oct. 1.

Nicholas Rossolillo: Binary outcomes. Investing mistake tied to that. I'm going to call this an investing mistake, not because I didn't make money off of it, but because of what it did to me mentally. Remember when oil crashed in price, not this last time around during the pandemic but in 2015, 2016.

Jason Hall: Mid-2014, oil was just to set the stage. Crude oil was over $100 a barrel. Then it wasn't. [laughs]

Rossolillo: Then it wasn't. Actually, since we're sharing charts here, I've got pulled out. Right here, 2014, 2015 I just take. I remember getting.

Hall: I love this chart.

Rossolillo: It's a cool chart. I started buying some energy stocks and ETFs like down in here, not because I liked the industry, but because I'm [laughs] reading this analysts note at one point that a barrel of oil could be purchased for less than dinner for two at Olive Garden. I remember reading that analyst's note, "Oh, man. I'm going to buy some oil and energy," and it worked for a bit, I made some money. But I went from an investor to a swing trader, and I wasted so much time, so much mental and emotional energy on this. Then in a very short period of time it stopped working. Because, like the chart shows energy is not a long-term growing industry anymore. I had to constantly look for ways to like get out of it, and move it somewhere else. It wasn't an investment it was a trade. That's why I'm going to call that a mistake.

Hall: It was a complete misallocation of the resources that are you.

Rossolillo: Exactly. Jon was talking about the binary outcome. What I was glued to constantly during that time was OPEC, and now what we refer to as OPEC+ like Russia and even North American energy producers got involved to try to collude, to restrict supply to bring price back up. It was a terrible thing to happen to have to be glued to and worried about all the time in the hopes that the trade would pay off.

Hall: Yeah, and it's a reminder especially for something like commodity prices, unless you have specialized knowledge and the time to dedicate to it, it's a great place to turn a small sum of money into an even smaller sum of money. I've got a similar example that's from the energy industry, but it's from natural gas and it's a company called Ultra Petroleum.

I guess they're still around. Went through bankruptcy at least once, maybe twice. My thesis for owning this company for a couple of years really was, they've got really cheap gas assets, natural gas assets in Wyoming, and an area called the Pinedale that just were super-duper cheap to produce. The issue was, their balance sheet was all a mess. Gas prices continue to fall for an extended period of time. Their gas was orphan. There wasn't great infrastructure to get their gas to market. They could only get low volumes of it out. They couldn't get out enough to get out of their cash crunch position.

Here's the bananas thing about this one guys. Nick like you, because you're professional and you can dedicate the time to work through some of those opportunities to figure out a way to make money. Most people don't have the time. It became clear the company was going bankrupt. I had bought stock, I added to my position at two dollars a share, or maybe like a buck 75 a share, thinking they're not going to go bankrupt. Then word came I was like, "Yeah, they're going to go bankrupt." They hadn't officially announced it yet, but word got out, the stock crashed.

I'm like you know what? I'm not going to do anything. I've already lost my money. I'm just going to leave it in my portfolio as an object lesson. It just was going to go away. Then the company managed to get its lenders to agree to new terms in an emerged from bankruptcy and shareholders didn't get diluted. I was up like 70 percent on that stupid mistake of an investment because I got lucky. But luckily, I realized there was still a giant mistake. That I just got lucky and not that I was smart. Or not that I found some edge. I just got lucky as hell, and managed to make money on an investment that I should have lost 98 percent on. Again, it's knowing where you have an edge and knowing where you don't, was the big lesson that I learned there. It was really valuable. It just so happened that I made a little bit of money.

Jon Quast: That's really good Jason. I think that one of the most important psychology lessons you can have as an investor, it's to always remember you're not as smart as you think you are. [laughs] Because when you do think that you're as smart as you think you are, that's when you over-allocate, you put 50 percent of your portfolio and go broke, for example, and you take unnecessary risks that you shouldn't be taking. When you have that healthy dose of self-doubt, that this is what I think will happen, but I could be wrong, you approach your portfolio with a little bit more of a level head.

Hall: Exactly. It's one of the few things in life that you can have a terrible process that occasionally can lead to a great outcome. In fact, great outcome happens early. It sets you up for later failure. The bottom line is that if you're not good at basketball, if you're not a good athlete, Michael Jordan is going to destroy you every single time. You're never going to win. [laughs] With stocks, you could do something really dumb, and still come out and make money every so often.