Nothing but green.
After I made my first initial deposit into my Robinhood investing account, I saw nothing but green. I didn’t have much money in there, but it felt good to see the percentage increase day by day, and most importantly to see green.
Just seeing that color has a psychological pull on you. Watching your portfolio, in general, has a psychological pull on you. Some have said that companies like Robinhood are being manipulative because of the way they ‘gamify’ your portfolio to manipulate your emotions and make you gamble, erm, invest more, just like a Casino would. More on the lessons learned from this later.
Anyway, after seeing nothing but green, I decided it was time to take things up a notch. I deposited $10,o00 into my account and invested in an EFT that tracked the S&P 500 – a selection of 500 high qualities companies.
The date I deposited that $10,000? January 27th, 2020.
I’d always hesitated to invest because I never wanted to be the person that ‘bought the top.’ Buying the top means you invest money into the stock market right before it experiences a major crash.
Well, that’s more or less what happened. The stock market started to crash in mid-February when we found ourselves in the first inning of the coronavirus pandemic.
At the time, nobody knew how long the crash would last. Would it lead to a recession? A depression? How bad was this co-vid 19 thing? What should investors do?
I didn’t panic sell. I kept my money in the portfolio and kept investing small chunks into the market. The stock market would recover, but for a while, I just saw red. See, since I’d invested so much money at the top, it took longer for my account to get positive returns.
Other investors would have entirely different experiences. Some people successfully timed the market and made their first deposits in late March or April like my brother. He knows nothing but green.
From the bottom in late March, the S&P 500 has risen 71.5 percent. And depending on where, when, and how you invested this year, you’d get a ton of different results. Investing is hard and counterintuitive. The ones who got lucky in 2020 simply postponed their hard-earned lessons.
Today, I want to share some of the personal lessons I’ve learned about investing from my own experience.
“Be fearful when others are greedy and be greedy when others are fearful.” – Warren Buffet
This pithy quote is popular and witty yet difficult to pull off. In fact, most people behave the exact opposite way. I know I did. I was greedy and added $10,000 to my account near all-time highs when everyone was greedy.
The S&P rose in the rally, but I only have a 15.8% return to date. Why? Because, even though I had the money to do it, I was scared to plunge a bunch more money into the market when there was blood in the streets.
After all, a 30 percent drop can and has easily turned into a 50 to 60 percent drop. Investors who timed the market in late March or April could’ve ended up ‘catching a falling knife’ instead of successfully ‘buying the dip.’
“Stocks are the only things people don’t want to buy when they’re on sale.”
In theory, when the market drops and you have strong convictions about a stock, you should buy it because it’s on sale. Doing so is an entirely different story. I’d like to think that next time around I’ll have the conviction to go all-in when there’s blood in the streets.
Guess we will have to see.
“In theory, people should make investment decisions based on their goals and the characteristics of the investment options available to them at the time. But that’s not what people do.” – Morgan Housel
Your emotions will get the best of you when it comes to investing, period. Even though I’ve learned some lessons, I’m still getting yanked around by my emotions constantly.
I pick stocks when I know I probably shouldn’t. They’ve made me money, but the money I made has little to no basis in skill. Right now we’re in a bull market such that you can throw a dart at the wall and make money. Not a good environment to learn.
I’ve chased stocks based on FOMO several times. This is what most novice investors do. They see a stock go up and up and up. This agitates them because they feel like they’re missing out on the fun. So, this drives people to buy high in the hopes of selling higher. This can work, but you can also pay a nasty price for chasing FOMO.
When things are going extremely well, realize it’s not as good as you think. You are not invincible, and if you acknowledge that luck brought you success then you have to believe in luck’s cousin, risk, which can turn your story around just as quickly. – Morgan Again
You don’t always understand why the price is moving up. People buy and sell stocks for different reasons and use entirely different time horizons. In the future, I’m hoping to make better decisions based on a real strategy, a time horizon I consciously choose, and a strategy based more on true financial fundamentals instead of ‘guessing.’
But, I’m not going to lie. I’m making a bunch of money guessing right now. And that’s the tricky part about, not just investing, but life. You can logically know what to do but your underlying behavior and psychology will drive you to make different decisions.
Which leads to my ultimate lesson learned.
“In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.” – Peter Lynch
The vast majority of investors have no clue what they’re doing. Even the really smart ones.
Warren Buffet once made a bet that hedge fund managers wouldn’t beat the average of returns of the S&P 500 when their fees were also taken into account. He was right. Many actively managed funds — funds that pick stocks instead of picking the market — underperform the market. It’s hard to beat the market long-term, period.
I don’t know much about investing yet, but from what I’ve heard the current stock market is entirely divorced from traditional fundamentals. For example, the stock of the year, TSLA, is trading at 1,758 times the amount of money it earns. This seems outlandish, but this is the market. The bill might come due for those who don’t follow fundamentals, or traditional ‘value investors’ may continue to get killed for the next decade. Who knows? Not me.
Many talk about how the stock market is being propped up by the federal reverse bank and that the money printing scheme will eventually blow up in all of our faces. People have predicted a stock market crash this year. But others predicted a crash all throughout the prior decade and were wrong. Some say that the USD will be worthless and Bitcoin is the must-buy asset. Who knows? I certainly don’t.
The predictions about what will happen are usually bunk. The explanations from financial analysts about why stocks go up or down is BS. All forecasts are wrong. And few people know what they’re actually talking about.
So, how do you invest if you can’t predict the future? Well, you try to make bets on the most reliable information you have and try to manage your emotions along the way. Historically, the stock market has always gone up long-term.
There’s a great video from the compound showing how you’d still make money even if you bought stocks at all the worst times in history:
You probably shouldn’t get too greedy.
I learned my lesson from a few options trades gone horribly wrong. And, the ultimate moral of the story is that investing is a long-term game that works more often than not. I plan to stick to that game.
Watching my account suddenly drop yet recover overall taught me a valuable lesson about staying the course.
If you can manage to ride the up and down waves, be consistent, and wait a few years and decades, odds are, you’ll be wealthy. Easy to say, hard to do, but true nonetheless.