“To err is human” as Alexander Pope once wrote. No one is perfect, and we all make mistakes. It’s in our nature. For individuals that are more hardy and honest, difficult experiences can provide some of the best learning opportunities. Here are two of my past investing transgressions, the lessons learned, and how they have helped guide me to a more sound strategy.
Owning Employer Stock (By Choice)
For a little over 18 months I traded in and out of my employers stock in my 401(k). My first two trades–buying an initial position and then completely selling out of it–netted me a return of -36.5%. Ouch! I was able to make some money back through some subsequent trades, but I still lost money, and endured a lot of stress in the process. My overall internal rate of return on all of my transactions ended up at -1.67%. Meanwhile the Vanguard 500 Index was up 11.1% over the same period. Double Ouch!
Why own stock in the company that employs me? As an engineer that helped design and make the products my company sold I felt that I had some impact. The implication being that I had a level of control over my company’s resulting financial performance. This is true, but only to a certain extent. As an engineer I may have control over the design of certain widgets, but I have little say with regards to the actions of the executive office. More importantly their actions ultimately determine where the company will go both in the short-term and the long-term. Here’s what my company looks like over the very long-term
|Stock Performance Sep 1976-Dec 2015|
|Vanguard 500 Index
|Volatility (Std Dev)||14.9%||30.2%|
Those numbers are not misprints. What we have here is an equity holding that has generated a lower return than the market at a much higher level of volatility. A scary proposition indeed. Does an asset such as this have a place in a portfolio? Perhaps. Numbers aside, there’s a much bigger element of risk at work. I already depend on my employer for major needs like income and health insurance. It’s downright foolish to depend on them for growth of my retirement portfolio as well.
Unfortunately this very situation has manifested itself in several instances over the past few decades with some ugly outcomes. Former employees of Enron, WorldCom and Lehman Brothers know this situation all too well. Trading in and out of a single stock on pure emotion without doing any diligence is beyond foolish–it’s downright stupid. Betting on your own company to provide for your retirement is an even riskier proposition.
Speculating With Gold (Using GLD)
To set the stage for my next “investment” we need to revisit the tumultuous year that was 2011. Only a few months in and the US Government was flirting with a potential shutdown. A last minute deal saved the day, but there was a tremendous amount of political drama in the process. As if to make things worse, the Federal Government nearly hit the debt ceiling just a few months later. The script played out the same: drama, debate, more drama, more debate, even more drama… last minute deal!
In the background markets were see-sawing back and forth, and fear of the absolute worst possible outcome drove the price of gold sky-high. The London P.M. Gold Fixing Price reached a high of $1895 on September 5. A gain of roughly 36% over the first 8 months of the year. Listening to the pundits at the time I bought into the idea that it was only going to go higher.
Admittedly I caught the gold bug and ended up purchasing shares in the SPDR Gold Trust ETF in early March 2012. This was a purely emotional choice at the time. I held on to those shares for about a year before I finally came to my senses. I had absolutely no fact based reason to own this asset and sold my position. After fees my return was -8.6%. Fortunately it was a very small portion of my portfolio, so I never really felt the impact of this poorly made decision. I was also fortunate to get out before the price fell off a cliff. To that point I fully admit there was no skill involved, just a little bit of luck.
There are pros and cons to owning gold as an investment (another article perhaps) but generally I’m not a big fan. In a 2012 article for Fortune Buffett made a fairly rational argument against owning the yellow stuff. He outlines three major categories of investments: currency denominated assets, nonproductive assets and productive assets. Productive assets such as farmland continue to produce valuable food that is sold at a profit and consumed on a daily basis. Well managed businesses continue to provide value through the products they make, generating profits and paying dividends in the process. On the other hand unproductive assets such as gold will remain unchanged. A bar of gold today will be a bar of gold tomorrow–it produces nothing, earns nothing and pays no dividends. It’s price is based purely on what others are willing to pay for it. 
The common theme in the above two scenarios was that I was acting emotionally instead of investing systematically. I had no plan and no evidence based structure that I was working from, and it came back to bite me. However, I did gain the valuable knowledge of learning what not to do. On that note, I’m reminded of a quote from Edwin Lefèvre’s Reminiscences of a Stock Operator
“Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee. A man has to have experience and he has to pay for it.” 
1. Buffett, Warren. Warren Buffett: Why stocks beat gold and bonds. Fortune. February 9, 2012. http://fortune.com/2012/02/09/warren-buffett-why-stocks-beat-gold-and-bonds/
2. Lefèvre, Edwin. Reminiscences of a Stock Operator. John Wiley & Sons, Inc. 1994. p. 168.
What I’m Reading
Americans Can’t Help Themselves From Borrowing More on Credit Cards (Bloomberg)
Why Investors Are so Bad at Picking Alternatives (Sam Lee)
The NFL’s Donté Stallworth on what it’s like to manage millions as an athlete (Vox)