Things sure felt great at the top of the market in 2007. Stocks were on fire. Real estate could do no wrong. Turning 30 was only slightly depressing for several days. I even remember being surprised at how little then President George Bush was making vs. a third year VP in finance. Then the bottom fell out of in 2008 as Bear Sterns and Lehman Brothers went buh-bye. Friends were getting fired left and right and all of a sudden nobody wanted to spend money anymore.
Things got so bad that I finally stopped feeling sorry for myself as my net worth took a plunge and started Financial Samurai in the summer of 2009. I had been putting it off for a couple years since work was so busy. Writing was a cathartic way of easing the financial pain. Reaching out to others online helped me put things in perspective that the world was still turning despite what the media constantly reported. Eventually the worst passed and we began to recover.
The events of 2008-2009 serve to remind me how incredibly naive and stupid I was to think the good times would last forever. Up until 2008, nothing noticeably bad had happened to me. I got into a decent college, miraculously passed seven rounds of 55 interviews to land my first job, was able to get a promotion to a new firm in SF two years later, made VP in 2005, and finished up my MBA the very next year. What could go wrong but everything.
Remembering poor financial decisions is a great way to counteract frivolous spending as well as minimize greed when it comes to investing. The method I use is called “Financial Mean Reversion,” which states that in order to justify spending unnecessary money, I’ve got to first make up for my spending errors.
SOME DUMB FINANCIAL MISTAKES OVER THE PAST 10 YEARS
1) Stubbornly averaged down on stocks well below a 20% stop limit. When I was 28, I lost over $30,000 in one stock named Gastar (GST) because I was sure gas prices would rebound. They never did in my 6 month holding period and I was taken to the cleaners.
2) Going way outside my risk tolerance by buying stocks on margin and not being able to hold on long enough due to margin calls. Online investing makes it so easy to leverage up on margin, be careful! I would frequently trade up to 3X exposure on my equity balance.
3) Not being able to walk away from poker games up, leading to losing everything due to overconfidence. One time I was up over $2,000 but started playing reckless because I kept thinking it was “the house’s money.” I should have just quit and come again another day with $200 as a starting limit.
4) Bought a vacation property for a 13% discount to the previous purchase price only to see prices go down another 25%! Getting a property for $100,000 cheaper than what the previous owner bought it for was a thrill until it went down another $200,000 thanks to foreclosures. I don’t plan to ever sell the place, but it sure would have been smart to have waited a couple more years until purchase. If you’re interested in renting out a condo in Lake Tahoe during the summer or winter, you can check out the post with all the property’s amenities.
5) Purchased a $78,000 automobile at the age of 25 only to sell the car back to the dealer for $59,000 a year later because it wouldn’t fit in the garage of a property I wanted to purchase. I should have just stuck with a $20,000-$30,000 car and invested the remaining ~$50,000 in the market or in real estate that would have gained conservatively 50%-100% in a 12 year time period. That’s a negative $45,000 to negative $75,000 loss.
Collectively, these spending errors probably amount to roughly $350,000 in lost wealth. Hence, in order for me to justify spending any more money, I’ve got to make $350,000 in positive wealth decisions to get back to even.
The idea is akin to my mental to physical connection for a healthier lifestyle where I exercise a set amount after a certain amount of time working in front of the computer. This way, I should never get too out of shape no matter how much I work. Being a big blogger is nice, but not in the physical way!
HARD TO COME EASY TO GO
If you lose 50% of your money, it takes a 100% gain to get back to even. Always remember this simple math whenever asset classes are going nuts. When you realize your money has gone *POOF*, it’s one of the worst feelings ever. But instead of ignoring this feeling I sometimes masochistically try to re-live it every time I’m about to spend an unusually large amount of money on anything, including investing.
With my Financial Mean Reversion thought process, I’ve managed to curb my spending habits on things such as:
* Cars. I still drive my 13 year old truck I bought eights years ago for $8,000. Moose has 121,000 miles on it and runs just fine. I used to go through a new or used car every single year for eight years. As a result, I wasted a lot of time going to the DMV and paid a lot of taxes and registration fees. At least I became an expert at understanding everything about auto insurance because I had to keep on adjusting the policy!
* Electronics. I haven’t bought any electronic devices in five years except for an iPhone 5 as a business expense in 2012 – no iPad, no new laptop, no nothing. By delaying gratification, I’m able to maximize the use of my electronics, pay a discount, and not have to be the guinea pig for all sorts of bugs that go along with new product launches.
* Vacation properties. One or no vacation property is enough. Vacation properties are an absolute luxury expenditure that hurts wealth creation more than it helps. Unless you plan to spend at least 30 days a year at your vacation property and have gobs of money oozing out of your ears, it’s more economical to just stay at hotels or rent villas. Time shares are probably even worse. I thought my income was going to just keep on going up in 2007, and if 2008-2009 didn’t happen I probably would have kept buying random properties to my financial and mental demise. Instead of overloading on property, I spent my energy developing the X Factor portion of my net worth, which is my online business.
* Clothing. Designer clothing and accessories have the highest margins of any product. As soon as you study the financial statements of designer brands such as LVMH, you will never buy anything designer again! Furthermore, the main reason why designer clothing looks good is because the people modeling their clothing are fit and look good. Instead of spending money on expensive clothes, I just go simple and try and stay as fit as possible instead. Luckily, I cut out my desire for things expensive clothes by the 10th grade.
* Stocks. After being burned one too many times, I’ve adapted a long-term investment style that’s not on margin. I set aside at least 35% of every dollar earned into an index or mutual fund in good times and bad times. I’m no longer wigged out by short term movements, which has significantly reduced stress associated with investing. I will still chase unicorns with a small portion of my wealth because taking risks is in my blood, especially since I spent my entire career investing in the markets.
RECOVERING FROM LOSS
Have I recovered from the $350,000 in bad decisions I’ve made over the past 10 years? I think so given the recovery in the stock market and housing market as well as some profitable new investments since. By following the 1/10th rule of car buying, I’ve been able to invest the extra money which has grown in value. By minimizing spending on clothing and electronics, I’ve learned to better appreciate what I have and simplify my belongings. By focusing on rental properties to build wealth instead of vacation properties, cash flow has drastically improved. Finally, by staying committed to this site I’ve surprised myself with a revenue stream that is both viable and life changing.
So long as we keep our losses and mistakes in the front of our mind, I strongly believe we will minimize poor financial decisions. We will do more in-depth analysis before making an investment. We’ll think twice about borrowing money to buy something we don’t necessarily need. Most of all, we won’t let ourselves get so delusional into thinking we are the second coming of Warren Buffett.
I do fear there is currently a major disconnect with where some of our younger friends are thinking about wealth given all they’ve ever experienced is a bull market. A large correction may not come this year, or even next year. But trust me, it will come one day. And when it does, just remember that everybody takes it on the chin if they invest long enough. The hope is that you will learn from your mistakes and get better all the time.
* Manage Your Finances In One Place: The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts on their Dashboard so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to track my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going. You also get your net worth amount sent to your inbox weekly.
One of their best tools is the 401K Fee Analyzer which has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. You just click on the Investment Tab and run your portfolio through their fee analyzer with one click of the button. Their Investment Checkup tool is also great because it graphically shows whether your investment portfolios are property allocated based on your risk profile. There is no better free online tool that has helped me stay on top of my finances more than Personal Capital. It’s important to aggregate all your accounts to get an entire view of your net worth profile. It only takes a minute to sign up.
About the Author: Sam began investing his own money ever since he opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $150,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
Updated for 2016 and beyond.