I Made This Huge Money Mistake in College -- and Have Regretted It for Over 20 Years

Making this mistake cost me over $5 million.

I invested in my first stock in high school and I was hooked. From 1995 to 2000, the stock market grew five-fold. I felt the stock market would continue to grow and I didn’t want to miss out. I had heard stories of people becoming millionaires overnight. As the dot.com mania grew in my early college years, I decided to go all in with my life savings. It wasn’t much, but back in 1999, $5,000 was all I had.

After doing extensive research, I narrowed down my choices between two stocks, PSINet and NVIDIA. Guess which one I chose? It wouldn’t make much for an article given the title if I had invested it in NVIDIA. NVIDIA went public in 1999 near the height of the dot-com boom. As the inventor of the graphics processing unit (GPU), it has now become one of the top tech companies in the world. If I had invested my life savings in NVIDIA and assuming I had left it there, the amount would be well over $5 million today. 

Instead, I chose to invest my life savings in PSINet. PSINet was one of the first commercial internet service providers. I distinctly remember in 1999, PSINet paid $100 million for the naming rights of the Baltimore Ravens' new stadium. At that time, I thought a company whose logo was plastered on a stadium meant the stock could only continue going up. Well, I was wrong.

PSINet was a popular stock during most of the dot-com boom but by 2000, PSINet had made some costly mistakes. That year, PSINet ended up losing over $5 billion and the stock price fell by 99% in the span of one year. After the price dropped from a high of $60 a share to just $0.18 a year later, the shares were delisted from the NASDAQ stock exchange. The company, like many other dot.com companies, went bankrupt in 2001 leaving all shareholders with nothing. With the euphoria of the dot.com bubble popped, I took time to reflect on what had happened. Here are two lessons I learned from that experience.

Diversify

I had violated one of the cardinal principles of investing. I had put all of my eggs in one basket, and by doing so, if PSINet failed, I was left with no other alternatives. Diversification is about managing your risk well. The primary goal is to lower and spread out your risk in order to optimize returns. 

The success of my investment portfolio then hinged on a single company. Even if I had decided to split half my money in each stock, I would have been significantly better off. Diversification is about investing across a broad range of industries, countries, and market caps. You can even diversify across different assets such as cash, bonds, real estate, and crypto. 

These various assets work together to reduce volatility so you are not too exposed to one investment. Ultimately, if I had diversified, it would have significantly reduced the risk of losing all of what I had invested. By owning various assets that performed differently, I would have reduced the overall risk in my portfolio, so that no single investment could hurt me. 

Cut your losses

I watched every day as PSINet share prices collapsed. There were plenty of opportunities for me to sell and get out, but I fell into the common trap of hoping I could recoup what I had put in. We often sell our winners and hold our losers, hoping the stock will come back up. It is much better to hold on to your winners and cut your losers. 

As I continued to see the stock drop, I told myself that if the price went back up to a certain price, I would sell it then. Unfortunately, it continued to go down. It was emotionally difficult for me to admit the loss and just take it. I didn’t understand the concept of cutting my losses. The goal is to sell a stock after it drops 7% to 8% or a certain amount and use the money to invest in other opportunities. If you hold onto your losers for too long, the chances of getting back to even is much harder. 

If a stock drops by 25%, to get even you would need a 33% gain. A 50% loss would require a 100% gain. By cutting my losses earlier in a disciplined manner, it is much easier to recover. Remember, 50% of something is better than 100% of nothing. Even if I had sold PSINet at a 50% loss, I would have some capital to look for the next potential winner. Cutting your losses requires leaving your emotions behind. 

By diversifying my portfolio and cutting my losses earlier, I would have been more likely to get the results I wanted over time. I instead put all of my eggs in one basket (the wrong basket), and watched as the stock price plummeted, hoping it would go back up. Because there are so many variables that can impact a company, it is very difficult to only choose winners. This is why diversifying and being disciplined is key to investment success.