Lessons Learned: A Trio of Investing Mistakes to Avoid

Reflecting on the Costly Errors of Others to Safeguard Your Investment Journey

Investing can be a treacherous journey, fraught with potential pitfalls and costly mistakes. However, by learning from the missteps of others, we can navigate this financial landscape with greater clarity and avoid the same pitfalls. In this article, we delve into three investing mistakes that offer valuable lessons for all investors. From doubling down on losing positions to succumbing to speculative frenzies and selling winners too soon, these cautionary tales shed light on the importance of careful decision-making and long-term vision in the world of investing.

Doubling down on a losing position

Paul Tudor Jones, a renowned investor, once said, “Losers average losers.” This timeless wisdom cautions against the futile practice of buying more shares of a declining stock in an attempt to lower the average share price paid. Unfortunately, this is a lesson I learned the hard way with my investment in InMode (INMD -0.24%).

Initially, my investment in InMode seemed promising, with the stock’s value soaring. However, as the stock began to decline, I made the mistake of doubling down on my position, driven by positive earnings reports and optimism about the company’s expansion into international markets. Despite the stock’s decline and worsening growth outlook, I continued to invest, resulting in significant losses of around 48% over the past three years.

The high valuation of InMode at the time of my initial purchase should have served as a warning sign. With a price-to-earnings (P/E) multiple near 40, I justified the investment as appropriate for a high-growth stock. However, in hindsight, the inflated valuation should have made me more cautious about investing further as the stock continued to decline. The key takeaway here is to remember that “losers average losers” and carefully evaluate before committing more capital to underperforming positions.

Getting caught up in a speculative frenzy

The allure of quick gains in speculative markets can be enticing, but it often leads to irrational decision-making. This was evident in my investment in Shiba Inu (SHIB -8.68%) during the cryptocurrency frenzy of 2021. As the price of Shiba Inu skyrocketed, I succumbed to greed and purchased the cryptocurrency, hoping to ride the wave of its meteoric rise.

However, I failed to consider the fundamental value of Shiba Inu. It was merely a meme coin with no long-term potential or utility. Despite being aware of this fact at the time of purchase, I allowed the fear of missing out on significant gains to cloud my judgment. As a result, I now hold a fraction of the value I initially invested, with little hope of a substantial recovery.

The lesson here is not to dismiss cryptocurrency as a whole but to exercise caution in speculative markets. When the fear of missing out drives an investment’s price, it is often a sign that the bubble is nearing its peak. Be mindful of the underlying value and purpose of an investment, as what rises quickly may fall even faster.

Selling a winner way too soon

Timing is crucial in investing, and selling a winning stock too soon can result in missed opportunities for substantial gains. This lesson became apparent in my investment in AbbVie (ABBV 0.42%) in 2020. With a clear plan in mind, I intended to sell my shares within three years, anticipating the impact of Humira’s loss of exclusivity in 2023.

AbbVie’s strategic plan involved replacing Humira’s declining revenue with new drugs like Rinvoq and Skyrizi. While it was still early to assess the success of this transition, positive quarterly revenue growth and the erosion of revenue in regions where generics were already approved indicated a promising future.

However, I sold my shares prematurely, pocketing a modest gain of around 30%. Had I held on, I would have enjoyed a gain of over 100%. The lesson here is to allow winners to run their course unless there is a compelling reason to sell. When the investment aligns with your vision and shows signs of success, it is essential to have the patience to let it flourish.

Conclusion:

Reflecting on the investing mistakes of others provides invaluable lessons for all investors. From avoiding the temptation to double down on losing positions to steering clear of speculative frenzies and holding onto winners, these cautionary tales emphasize the importance of careful decision-making, long-term vision, and patience in the world of investing. By learning from these experiences, we can navigate the financial landscape with greater wisdom and increase our chances of success. So, take heed and learn these lessons the easy way, rather than the way I did!