Losing someone else's money is far worse than losing your own money. If you lose someone else's money, you will have this tremendous psychological burden that will be hard to shake.
For a brief moment in time, I wanted to be a money manager. The idea of managing other people's money was alluring. After all, I had an intese interest in the markets and generally invested with positive returns and minimum blowups. My track record was all of three years.
Of course I was still in college at the time, trying to figure out what I wanted to do with my life. I hadn't gone through enough ups and downs in the market to really feel the emotions of investing. All I remember was making $500 bucks in one day after going to class. Books a Million (ticker symbol BAMM) so happened to announce it was being acquired a couple hours after I invested $1,000. At the time, I thought I was a genius.
The worst thing a novice investor can experience is immediate success. With immediate success comes a feeling of invincibility. I thought I could do no wrong as I whipped around the several thousand dollars I had online. I gave advice to friends and mentioned to girls I wanted to woo about my fortuity. I was an arrogant bastard. The irony is, people listened and girls accepted my invitations. Damn, how I miss college!
Losing Someone Else's Money Is A Sorrow I Cannot Bear
Everything was going well when I decided to aggressively pitch a company called TDFX junior year. TDFX was a graphics card company which I thought was on the cusp of launching a fantastic new product for all the hardcore gamers to devour. I got my parents and friends into the name right at the peak. The company missed their quarterly earnings results the following month and decided to delay their latest graphics card by at least six months. TDFX's share price fell 30%.
I was embarrassed and ashamed. My heart dropped like a company going out of business. I remember thinking to myself, I would be willing to lose all my money if my parents and friends could lose no money. I was willing to sacrifice everything I had to make them whole on their TDFX investment.
When I offerred to cover their losses, they all declined. They told me that at the end of the day, nobody forced them to invest and it was their responsibility alone. I apologized and told them that all I wanted was for them to win. They understood, but their graciousness actually made me feel worse!
From this indelible moment, I told myself to be quiet about any stock wins. Only if people asked for my advice would I begrudgingly give it with a large caveat that I can lose money as quickly as I can make money.
I ONLY KNOW WHAT I THINK I KNOW
Let's be clear. If I was a brilliant stock picker, I'd be a mega-millionaire wonder boy running a multi-billion dollar hedge fund with my own G5 jet. Alas, I'm just a regular person who is looking to navigate through the landmines, trying to eek out a return greater than the risk-free rate.
I only know what I think I know, some of which are written in my predictions and macroeconomic related posts. Readers are free to pick apart my arguments all they want.
The “something” far worse than losing money is losing other people's money. I can't take the guilt, sorrow, and embarrassment for losing other people's livelihoods. I write this post to remind myself that I am a mediocre stock picker who should always remember his place.
A blind squirrel finds a nut once in a while. I'm content with just rebalancing my portfolios several times a year and leaving the stock picking to professionals who can't even outperform most of the time!
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My parents are going through something like this right now. They have been completely screwed over by my uncle in the family business and are now really strapped for cash. They plan totally changed except my parents weren’t informed. I feel really bad for them and I am pissed at my uncle. The good thing is we can stick together as a family and help them out.
“If I was a brilliant stock picker, I’d be a mega-millionaire wonder boy running a multi-billion dollar hedge fund with my own G5 jet”
Exactly why I HATE those newsletters and stock pick emails. I always think to myself if you have all the winners why are you bothering to tell me LOL
Pump and dump pays big bucks! Especially microcap stocks.
As a retired professional money manager, you now know what it feels like when you lose someone else’s money. – but the point is that the client is the ultimate decider on what to do- you provide the best options for what they want to do and it usually has very little to do with individual investments- but rather what goals they want to achieve with what risk, and within what timeframe and according to their personal tax bracket.
Not so easy…
Fern Alix LaRocca CFP EA
I think I knew 15 years ago no?
Hey Sam,
I can almost feel your pain through the words! That would have been rough for me, too. Offering to reimburse was an honorable gesture on your part!
Whatever I believe personally, I prefer to let people follow their own path and simply show them the way. We all gotta be responsible for our own decisions.
Thanks Kevin. Yes, it was a very gut wrenching and embarrassing situation. If you can feel the pain in my words, then my writing objective is complete!
Wow that sucks that you lost money for your friends and family. Fear of that happening has cause me to only tell my parents of my investing decisions and not really push them into making the same. My stocks are mostly risky so I didn’t push them too hard on it. The most I had them do is buy my stocks picks for me.
Definitely give it time. Unfortunately, everybody gets burned eventually! I thought I was the king of the world after making a 50 bagger in one stock in 2000. Then the crash came and I lost about 20% of it in a week and got out.
The other issue is, how much are you actually investing? Are we talking $500, $5,000, $50,000, $100,000 positions in single stocks? Can you live off your investments and investment returns yet? Once you can, it is a different ball game b/c although you might think it’s easy to investment $50,000 in a single stock and stick it out, it’s not if you are used to investing with much lower amounts.
Risk profile changes the more you have and I don’t think having 30-35% of my net worth in stocks is giving up.
BTW, you think I should take my 30% ($7K) in profits and run now that FB is at $32? Do you still think it’s only worth $20 a share?
I never liked facebook. I finally joined out of pressure from family and friends but I never use it.
Cool. Why not short it if you think there is 35% downside?
How about the opposite – advising someone to get out of an investment?
My mother had the ATT computer company (I forget the name) as part of her profit sharing plan. It had been going up more than 100% a year. She asked me whether she should sell this or sell of her cash portion of the profit sharing plan to purchase a new car.
I told her that I did not want to give her advice because I did not want to hear from her if the stock kept going up. Even though I said I was not giving her any advice I did say that the stock may go down and that she should “consider” selling it.
What did she do – she took the money from the cash portion of the profit sharing plan. The stock it went for somewhere in the $30 a share range to $1-$2!!!!
I guess I should have recommended that she sell the stock and keep the cash!!!
Wait, you advised her to get out, and she did by taking cash instead of stock and it went down. Isn’t that a good thing, saving her from losing 90%?
She took the money from her profit sharing plan. However, she took it from the cash fund that was in the plan. That is, she did not take it from the stock portion – which ended up going down 90%.
Thus, I definately did NOT save her from losing 90%!
So you’re part of the reason why there are so many software bugs!
Whateva! J/k.
I started investing in late 2006, at the tail end of the last bull market which ended in October of 2007. When investors find themselves in a bull market it is very hard to make bad investments. Most investments in solid companies trend upwards and you can easily believe that investing is simple.
I will be the first to admit in 2006 when I began buying individual stocks I thought, “Wow, all my investments are going up so fast! I should quit my day job and do this full time!”. Then, as we all know, the housing bubble burst and we found ourselves in a deep recession. My portfolio tanked.
However, you can’t win unless you play the game so I stayed invested and kept adding money to my stocks. Many investors were too scared to invest when things looked the bleakest between November 21, 2008 and March 6, 2009, yet it turned out to be the greatest time to invest in my lifetime. A little money invested then would have produced great gains.
Mr. Everyday Dollar
It’s always easy in hindsight aint it? Back then, it was all about capital preservation!
I invest in individual stocks with some fun money, but 90%+ of my investments are in index funds. And I am pretty mediocre at it also. When inexperienced people ask me about picking stocks, I tell them what Jim Cramer says: that after their initial research of listening to conference calls, reviewing financials and reading research reports, they should spend 1 hr per week, per stock, every week, in follow up research. That pretty much always scares them away from individual stock picking.
I have a similar balance as you with fun money in my Etrade account. It’s fun… until I lose money! ha
I’ve been on the other side: trying to convince a significant other that trading with JPM/GS/etc. is not something with which a novice can make easy boatloads of money without huge risks >_<
hahahaha – Amen
I once had exactly the opposite experience: somebody wanted advice on how to invest 30.000 and I gave my advice with all the usual caveats. What i proposed was a pretty standard, dividend oriented, and somewhat diversified portfolio of 5 positions. Instead of following my advice the man bought a participation in a Teak company. That company went bust 2 years ago and the man is now the proud owner of a certificate giving him the rights to half a hectare of wood somewhere in Brazil, but how to get at this wood is totally unclear. These certificates can be bought for about 500 dollars. I checked what my proposal would have done: about a 50% increase in 6 years. Not brilliant, but very decent indeed in these times. And it would have given him a steady flow of a couple of thousand dollars of income each year for the rest of his life. I keep wondering if my caveats where to of putting, or if my advice was in fact never really wanted. It made me much more reluctant to give advice. The only advice I now tend to give is: read a lot about the topic and than read some more.
I’m assuming then you too are an owner of a certificate to land rights in Brazil?
Unfortunately, I lost a lot of my own money, my friends, and my family’s money investing in my employer. I was young at the time and the market was strong. I didn’t know what I didn’t know. It was a tough lesson that my wife reminds me of regularly.
The worst part is that I invested using leverage in a non-liquid security that went to zero. I will be paying off that debt for the next five years (ten years since the date of investment to debt payoff).
I would have been better off investing in the stock market which I have a better track record of doing more successfully.
Sorry to hear about this John. I really empathize and know the feeling.
I’ve been burned many times before, which is why I’ve invested 30% of my savings consistently in long term CDs. The absolute dollar is a lot to me, and I don’t want to lose everything.
“Something Far Worse Than Losing Money” is not losing other people’s money! In my opinion, there are a lot of things worse than losing money such as compromising my principles or integrity. I would add losing the respect of loved ones could equally, if not worse.
I feel this way because I can always refrain from giving advice, but I am tested often on principles or integrity. In fact, I never give investment advice because of many of the reasons you stated. I could not handle the fall out, if it blew up!
What’s worse from a financial sense though….
I guess if I recommended Bernie Madoff’s investments! Suggesting a scam is worst thanibad advice. One of the many reasons, I do not give investment advice.
Sam, I have also let my friends down some years ago, I remember recommending a company called Go to Net (GNET) which is no longer around…this was back in the dot.com era. I have learned so much since then…I have learned how to read a balance sheet pretty good and I have read books upon books about investing, now when my friends ask me for some advice, I ALWAYS tell them that they can lose money rather quickly if things do not work out…believe it or not, I have still given them some bad picks (on a short term basis–oh only if they held!), but they have learned so many valuable lessons and have become decent investors on their own. Sam, I always tell them to read the great ones and begin small and to learn from their mistakes….Happy Investing!
Joe
Gotcha. Well, you definitely weren’t alone in losing money during the dot com era! Good lessons learned. Gotta get burned early, to reduce the chance of getting burned later.
I do not invest, but I would like to learn. I think it’s hard when you’re successful at something new NOT to brag.
True… it was very hard not to brag then. It is still a little hard not to tout some successes now. At least on the blog, the predictions and stuff are laid out for all to witness, whether they are right or wrong.
Short answer: yes. My parents convinced me to invest in a friend’s company, and the share price went to a whopping 5 cents after a few years. Money down the drain. My policy is similar to yours–don’t ask don’t tell.
At least it’s from your parents and not you losing money for your parents! That’s the thesis of my article.
I don’t invest in individual stocks because I don’t spend the time to find the deals. I would absolutely feel so guilty if I lost someone else’s money but I would also male sure they knew of the risks.
You can spend all the time in the world researching individual stocks and still get them wrong. Look at the professionals on CNBC every single day.