When people look for investment advice, they typically want to know what actions they should follow. They want to know what to do. For example, they might ask "Should I buy Nvidia?" or "Should I sell my international stocks?" or something else. They want a prescriptive solution for how to invest their money.
But some of the best investment advice doesn't tell you what to do. It tells you what not to do. Charles Ellis popularized this line of thinking in his 1998 book Winning the Loser's Game. His idea was that to "win" in the game of investing, you didn't have to find the next big thing, you just had to avoid making costly mistakes. In other words, instead of hitting more home runs, strike out less often.
When you think about the nature of markets and investing, this kind of anti-advice makes perfect sense. As the phrase goes,"stocks take the stairs up, but the elevator down." Since you can lose a lot of money quickly in investing, you can see why focusing on what not to do can be far more powerful than it would be in other domains.
And today, Barry Ritholtz builds on this idea in his new book How Not to Invest, a comprehensive guide on what not to do in investing. From curbing bad behavior to spotting misleading data (and more), How Not to Invest is a tome of common investment mistakes and how to avoid them. Barry covers just about every investment bias and mistake you've ever heard of (and many that you probably haven't).
My favorite part of the book was titled "Avoidable Mistakes," which looks at how even wealthy people can run into pitfalls with their money. One story highlights how a billionaire family managed to invest in Enron, Bernie Madoff, and FTX. Can you name a worse hat trick of investment fraud? Or how about the pair of advisors that became billionaires by siphoning off excessive fees from their clients over years? All of this and more are covered in How Not to Invest.
But this post isn't a book review. It's a reminder that we all make investment mistakes. With that being said, below are a few financial missteps I've made in recent years.
Invest in Your Friends' Companies
While you may recall my experience losing a few thousand dollars in altcoins or what happened when I owned individual stocks, these pale in comparison to how much I've likely lost in private investments. I say "likely" because all of the private companies I ever invested in are still around. However, as far as I know, all of them are worth less today than what they were valued at back in 2021 (when I first invested).
As you may recall, in 2021 everyone and their mother was investing in private companies, crypto, or anything else they could get their hands on. Well, so was I. I had a few friends of friends with startups that needed funding, and I just happened to have some extra cash.
As a result, I ended up investing in three private companies that I heard about through my network. Each of these was pitched to me as an exclusive deal that wasn't being made to the general public. While technically true, it was also true that the valuations of each of these companies were inflated. I just didn't know it at the time.
Since I made those investments, two of these three companies have taken a down round (i.e. raised cash at a lower valuation) and one of them has less than 9 months of runway (i.e. cash) before it goes under. Of course, it's possible that one of these companies ends up being sold for billions and I make all my money back and then some. But, if I had to judge them based on their performance since 2021, it's not looking good.
My only saving grace when making these private investments is that I only invested 5% of my total net worth at the time. Still, seeing 5% of your net worth go to zero isn't easy for anyone. That's why I don't do private investments anymore. I no longer invest in something because it came through my network. I'm not saying I will never do a private investment again, but, for now, I've learned my lesson.
Predict Future Tax Policy (and Trade on it)
Not all of my investment mistakes have been about what I've invested in. Some of them have involved the timing of my investment decisions. My most recent timing mistake was selling a bunch of equities in my brokerage account in anticipation of higher capital gains rates under a Kamala Harris presidency.
Of course I wasn't sure if she would win or lose the election, but, if she did win, I was quite sure that capital gains rates would rise. So, I took some gains in my brokerage account to hedge this possibility.
Looking back now, this was obviously a mistake. I likely paid a higher tax rate on some of my investments than I would've had I just held onto them.
In the grand scheme of things, this isn't that bad of a mistake, but the behavior underlying it was. I engaged in some minor market timing based on my prediction about future tax policy.
This isn't the first time I've done this either. But it highlights how difficult these decisions are to get right. If you had told me in 2015 that income tax rates would be lower in the future I would've said, "No way." I was wrong then and I was wrong last year about future capital gains rates too.
Don't make financial decisions based on the possibility of future tax policy changes. Once a policy change is confirmed, then make the best decision you can. You'll thank me later.
Be Lazy About Your Money
Despite writing about personal finance and investing every week, I can be surprisingly lazy about certain aspects of my money. One example was not finishing the setup for my TreasuryDirect account to get access to I bonds years ago. I bonds are bonds where the interest paid out changes every six months based on the rate of inflation.
I knew about I bonds back in 2022, but didn't finish setting up my TreasuryDirect account until rather recently. The problem was that, for some random reason, I got flagged to verify my identity through a separate process with TreasuryDirect. It seemed like a hassle so I decided to just not do it. I got lazy.
In retrospect, that decision wasn't great and I should've been earning more on my money as inflation raged over the past few years. Of all the mistakes listed here though, this is definitely the most minor. Nevertheless, it goes to show how even people who care about this stuff (aka me) can procrastinate about certain aspects of their finances.
Unfortunately, you only have the luxury of being lazy with your money after you've put the right processes in place. That's when you can spend less time thinking about it. But when big changes are happening in the economy (i.e. inflation, a market crash, etc.), that's not the time to get complacent. I did and I lost out on who knows how much as a result.
Thankfully, you don't have to go down the same road. You can learn from me (or anyone) when it comes to their mistakes.
The Bottom Line (You Can Learn from Anyone)
Making mistakes is a part of the investment process. Even successful investors have had their fair share of blunders. I don't know anyone who hasn't.
This is what makes investment mistakes valuable in a way that investment strengths aren't. They are universal and you can learn them from anyone. I mean that. You don't have to pick stocks like Warren Buffett to teach me about a misstep you had. You don't have to read a balance sheet like Aswath Damodaran to warn me about the dangers of a particular investment.
We are all equal when it comes to sharing our mistakes. There is a sense of beauty in that. It's a shared human experience. Whether you want to learn from those other experiences is up to you.
Happy investing and thank you for reading!
If you liked this post, consider signing up for my newsletter.
This is post 442. Any code I have related to this post can be found here with the same numbering: https://github.com/nmaggiulli/of-dollars-and-data