In the lead-up to Sept. 25's Worldwide Invest Better Day, The Motley Fool is reacquainting investors with the basic building blocks of investing.
We've already had an analysts' roundtable on the best investment advice they ever got. And one on the worst investing advice they ever got.
Today, it's time to make them a little uncomfortable. We asked them for their most embarrassing investing moment. Here's what they said.
Morgan Housel : In college, another investor introduced me to a small oil company with a big development project in South America. The bullish pitch made so much sense. You could tell the share price just wasn't reflecting the company's prospects. It was about to ink a massive deal, but the market just didn't seem to care.
I bought in. And not just the company's stock, but call options to juice my exposure. The company eventually signed the South American deal, and it was off to the races. The stock surged and my call options simply exploded, turning into (I'm not making this up) a 15-bagger in less than a year. This was unbelievable for a college kid. I felt invincible.
Well, easy come, easy go. The deal started looking questionable, the economy slowed, management fumbled, oil prices tanked, and so too did the company's stock. I rode my 15-bagger call options all the way down to ... zero. Literally, gone.
To go from feeling invincible to experiencing a wipeout in a matter of months was the most embarrassing moment I've had as an investor. But it was also the most instructive. I learned so much from the experience that in hindsight I'm actually glad it happened. There is no better way to learn about risk and leverage than to experience it firsthand.
John Reeves : I really blew it on Eastman Kodak. Just the recollection of how I handled that one is pretty embarrassing. I bought the stock back in 2003, figuring I was getting a solid, all-American company that paid a generous dividend. Sure, there seemed to be challenges with its business, but I just assumed the company would figure it all out.
Shortly after I purchased my shares, the company cut its annual dividend by 72%, while announcing a major shift in its strategy. Kodak intended to move away from its conventional film business, as it concentrated on digital initiatives. I decided to hold on to my shares, lazily thinking the company had the "DNA" to succeed in its new efforts.
I held on for several more years before selling for a loss of around one-third of my original investment. Ultimately, I failed to research this stock sufficiently, and it ended very badly for me. Now, whenever the subject of Kodak's inevitable decline comes up around the water cooler, I try to change the subject.
Buck Hartzell : I remember visiting HGSI (Human Genome Sciences) with a few other Fools. We spent all day meeting with their top scientists and even the CEO, William Haseltine, who apparently had postponed a meeting with the President of the United States to meet with us. Yes, I found that odd, too. It became very obvious to me that I had no business investing in this company. These people were so much smarter than I was and I wasn't convinced they knew what they were doing. I was humbled and embarrassed as we left their facilities. I took a loss on that investment and moved on to other pastures. The only part of that investment that lives on is a coffee mug. I tell each of our children not to break it because it cost us thousands of dollars. Someday I'll explain why that mug was so expensive.
Anders Bylund : This one's a toss-up between two huge errors. I got in on Marvel at $2 a share, way back in 2002. The stock doubled very quickly and I sold my shares, happy to collect a big payday. But that was a short-sighted mistake.
You can imagine how hard I was kicking myself as the stock just kept rising after that. By the time Walt Disney bought Marvel for about $50 per share, I was back in again -- but most of the gains were long gone.
The other black mark on my record comes from OmniVision Technologies
Last year, I told myself that I knew better than the worrywarts who thought Apple would get its iPhone camera sensors elsewhere. OmniVision's unique chip technology was surely untouchable, or so I thought. By the end of the year, I had been proven wildly wrong and penned a public apology for the mistake.
Matt Thalman : After American Airlines filed for bankruptcy protection and their stock price had already fallen way down, I made a thumbs-up CAPScall on the stock. I had looked through some filings and at how some of the other airlines had done since they went through bankruptcies in recent years. My thinking was that after American cut the fat and restructured some contracts, everything would be fine, and the stock price would rise in the coming years.
I posted a few comments on why I made the pick and then I was enlightened, or extremely embarrassed, you choose. Little did I know that when the majority of companies exit bankruptcy protection, they issue new stock, leaving old shares worthless. The pick is one of my worst, but I have left it active as a reminder of why I play CAPS and the importance of helping other investors.
Jacob Roche : I've had a lot of embarrassing moments as an investor. Like, a lot. But most of them don't make for interesting stories, so I'll tell you about the funniest one.
It was the Jamba
White never paused in his remarks, but everyone turned to look at me as I burst into the room and squeezed into the only seat left, where I had about two minutes to catch my breath before his presentation ended, and, after a few minutes of Q&A, the whole meeting was over.
Dan Caplinger
: The most embarrassing thing I ever did as an investor was to sell Starbucks
LouAnn Lofton : Years ago, when I was still figuring out this whole investment thing, still trying to get my bearings, still open to anything and everything from technical analysis to CANSLIM to even day trading, I met a father-son team of futures traders in Austin, Texas. Yes, futures. I can still picture their home office, the dad padding around in his sock feet after kicking off his expensive loafers. In addition to teaching me how to follow little red and green blips on a computer screen (don't ask me what they meant -- I didn't know then and I don't know now) these two offered me an "amazing" deal to get in on the "ground floor" of a company in Houston that would be going public and would "undoubtedly" double or triple or more. I just had to cut a check. So I did.
You know what happened next, right? I never saw that money again. Somehow, things got off track. The "sure thing" wasn't so sure anymore. When I asked for my money back, I was told they'd have to find another "investor" to buy my shares. Um hmm. I'd never even known what business the company was in. Didn't demand to see any financials. Didn't ask any hard questions at all. I just got greedy and saw "easy" dollar signs and jumped. Thankfully, I didn't sacrifice a significant amount of money, but I did learn a significant lesson: There's no such thing as a sure thing, especially when sold to you by a man in socks.
Molly McCluskey : Rolling over a 401(k) to a brokerage account, I was on the phone with a broker and asked a question so dumb that the line went silent. It was the sort of question that showed I had absolutely no idea what I was doing. I had two choices: I could play it off and potentially make some costly mistakes, or I could ask for help and learn. I chose the latter, and realized not only the importance of asking dumb questions, but of having a broker who, awkward silences aside, will never let on just how dumb the question was.
Anand Chokkavelu, CFA : I've got one past and one present.
In 2000, when I was stupidly gambling on stocks based on no more than a new-sounding name and a vague promise of technological domination, I took a job at a telecom start-up. As employee No. 64, I was offered either 10,000 options or an extra $3,000 in salary. I'd heard way too much about the newly minted AOL millionaires to choose the latter. We know how this story ends. At the very least, since we went bust six months later, my choice only cost me $1,500.
I'm not really embarrassed by my decision to take the options (I like feeling like an owner), but I am embarrassed about my general get-rich-quick mind-set and lack of due diligence on investing matters during that period.
Presently, I'm continually humbled by how hard it is to beat the market.
Tim Beyers
: I've made many bad calls in articles, no doubt. One of my worst has to be calling Terra Nitrogen a potentially dangerous dividend pick back in 2004. The stock has been a 17-bagger since. Not as bad as failing to buy Apple when I called it cheap in 2003, but still a HUGE miss on my part. Yet neither of these flubs is nearly so bad as buying Amazon.com
Go ahead and laugh. I was the worst kind of novice investor in those days. I'd compound the mistake two years later when I sold in the single digits, missing out on a multibagger recovery. Yet I sold for the right reason, I think: I put our retirement portfolio in cash and spent a full year studying valuation and business analysis, even going so far as to try calculating discounted cash flows on paper (please don't do this unless you want your eyes to bleed). Most of us needn't go to such extreme measures, of course, but embarrassment and an overpowering desire to retire comfortably pushed me to learn as much as I could, and I've been learning ever since.
Eric Volkman : I had just started work in a Czech investment bank and I was eager, really eager, to finally own my first shares. Any shares, it didn't matter. Still a few weeks shy of my first salary, I took a big chunk of my savings at the time -- probably around $100 -- and put in an order for an entire portfolio!
Well, that's if you count one to four shares each of three or four stocks -- I forget the exact numbers -- as a portfolio. I wrote out my order (you did that in 1990s Central Europe) and handed it to the back office girl. She shook her head in disbelief. I left the room and heard the traders spit laughter as they reviewed my measly request. I'm sure I was the running joke among them for the next few days. Ah, well. We all have to start somewhere, right? At least the experience was memorable. And yes, they did fill the order. ("Sweeeeeet! I have three shares of Trade Fairs Brno!")
Chris Baines : Buying Jones Soda for $10.00 at 100 times earnings and then selling it at $22.00 (about 220 times earnings). Yes, I more than doubled my money, but my involvement in the stock was (lowercase) foolish. I made money selling to a bigger idiot and not because of any business acumen. Hence why the stock is trading at $0.34 today.
The company embarked on a dumb strategy that I should have known better than to endorse (especially at 100 times earnings). After years of hard-won success in the niche skater market, they decided to challenge Coca-Cola and Pepsi in their own backyard: Wal-Mart. Bad idea. They also decided to challenge the twins in the sport stadium market, winning an exclusive contract with Seattle Seahawk's Qwest Stadium. An even worse idea.
What do you suppose happens, dear reader, when a (then) $300 million company decides to challenge Coke and Pepsi on their home turf? Envision a tank running over an ant and you get the picture. This whole experience instilled in me Bruce Greenwald's dictum that growth is meaningless without a durable competitive advantage. Lesson learned.
Alex Dumortier, CFA : My most embarrassing moment as an investor was buying shares at the flotation of Lastminute.com -- arguably Europe's highest-profile dot.com IPO -- in March 2000. I was planning on flipping the shares on the first day but ended up holding on to them (I don't think the shares were available in my account to trade on the first day, as I recall). I sold them much later at a significant loss in percentage terms, but the allocation was so small to begin with that I was beyond caring at that stage. On reflection, it was a useful lesson in humility and common sense. I had thought I was being clever, seizing the opportunity to make an easy profit; instead, I found myself the proverbial greatest fool buying over-hyped shares at the very top of a multiyear bubble. It was high time to look for a different approach to common stock ownership -- one that emphasized value instead of perpetual motion.
Tim Brugger : OK, this is a painful one, primarily because the wound has yet to heal.
I'm afraid I bought into Stephen Elop and his Nokia turnaround plan, and was more than happy to share my somewhat contrarian thoughts with readers. Though I still hold out hope he can make the transition to smartphones and tablets (I can be slow on the uptake) a successful one, looking back I needed a lot more objectivity, and a lot less subjectivity.
The article in question covered Nokia's new partnership with Microsoft and its smartphone OS; that was in February of this year. At the time, Nokia was on a downward trend (that would quickly become a downward spiral), and boasted what I thought was an "under-valued" stock price of $5.80 a share.
Ahem, sorry about that.
Dan Newman : My first exposure to the financial markets was in an elementary school stock picking game. We formed investing groups, were told we had $100,000 to invest, and selected stocks to see who could earn the most over the school year. Our group's method of stock selection? Opening up the newspaper and tossing a pencil onto it to see which stock it pointed to. Embarrassingly, this method performed the best in the class. While I'm sure other elementary school groups did little true analysis, the fact that we were so successful without any true work made me feel uneasy. This taught me early on that reward without effort is significantly less meaningful than reward with work and reason backing it up. Today, if an investment performs horribly, I'm not embarrassed if I did significant research and had a solid thesis behind choosing it.
Evan Niu, CFA : Jumping into options trading head first before I was fully educated on critically important and complex aspects like pricing. Trading large, short-term, long positions proved to be a terrible mistake, and one that I've only recently recovered fully from. It was an important learning experience, complete with a pricey tuition.
Andrew Marder : The investing world is full of interesting ways to shoot yourself in the gut. As a novice investor, I tried to grab a hold of every conceivable weapon, turn it on myself, and see what happened. For some reason I thought the barrel might spew money all over my chest -- it didn't.
The biggest error I ever made was misunderstanding warrants. It's like a game of chicken where, as time runs out, the car gets harder to steer. As a result, I crashed hard, and the short-term gain I was looking for disappeared. In classic Vegas fashion, I had been up, but I didn't walk away from the table with my chips.
That's a lot of metaphor to say something straightforward, I didn't understand what I was doing, and I was too proud to say so. In the end, it cost me a lot of money, and a lot more pride than I would have lost if I had simply walked away.
Keith Speights : I bought what I knew (or what I thought I knew), and never reexamined the company's business fundamentals. That company was Worldcom. My initial investment doubled -- for a while. When the stock began declining, I held on assuming that the company would continue to be successful as it had been in the past. Was I ever wrong on that one! The stock ended up being worthless. I lost the entire initial investment.
Sean Williams : The one constant about investing is you will undoubtedly make a fool out of yourself at some point. For investors like myself, one time would be an improvement. Take, for example, my optimistic call in 2010 that China-based stocks would vastly outperform U.S. equities over the next three years. I was so confident in this assessment that I created my very own tracking portfolio of 200 Chinese equities in CAPS called UltraChina. Today, UltraChina is the third-worst CAPS portfolio out of 180,000-plus members! Trust me, it takes skill to be that wrong (or so I'd like to think)!
My embarrassing, yet in plain sight, mistake was in assuming that China's corporate regulations would at least be similar to those which we have in the United States. Lo and behold, following a parade of fraud allegations I learned otherwise. I also came away learning and relearning those telltale lessons that if it's too good to be true, it probably is, and that it's rarely a good idea to chase past performance. I let that CAPS tracking portfolio be a constant reminder that there's much more to a company than just a few numbers on a balance sheet and one quarter's worth of earnings results.
Brian Orelli, Ph.D.
: I didn't think the likelihood of Dendreon's
But that isn't my most embarrassing moment.
My big mistake was flipping to the bull side of the equation. I figured with an approval in hand, Provenge would sell itself. It didn't.
Lesson learned: Drug approvals are necessary for revenue coming in, but they're not sufficient.
Chuck Saletta : Oh -- I've had so many embarrassing investing moments that it's hard to pick just one. Certainly among the top was owning stock in and dueling in favor of Washington Mutual during the subprime mortgage meltdown. I was so blinded by what looked like strong earnings potential and what appeared to be an easily covered dividend that I completely ignored the deteriorating quality of the assets that supposedly underpinned that earnings potential.
While I lost virtually my entire stake as that bank collapsed, I remain thankful that I held steadfast to the principle of diversification that kept me from buying more as the stock kept dropping. I would have sprung an incredible value trap -- and destroyed even more of my limited capital -- had I given into my initial temptation to buy more as it collapsed into its eventual oblivion.
We hope you enjoyed the roundtable and we hope you'll add your embarrassing moments to the comments section below. Also, click on the button below for more on Worldwide Invest Better Day.
