This investment mistake cost me $80,000

Read time: 8 minutes

“Come on! Sell sell sell sell!”

It’s February 5th, 2020, and I’m furiously refreshing my phone, checking to see if the order to sell my Tesla stock has gone through.

I have been a shareholder of Tesla for years. 

As a mechanical engineer, the electric cars they are designing make me drool in broad daylight.

Zero to sixty in 2.3 seconds. Self-driving technology. One-piece solid frames.

This is the future.  I am bought in.

But lately the stock has been acting strangely…

After years of doing nothing, in the last month the stock has increased by 50%, despite no major changes at the company.

“Is this a bubble? Should I sell?”

I have never made money so quickly in my life, and I don’t want to get stuck holding the bag if the stock is going to come crashing down again.

I’m uneasy.

Then out of nowhere, things become even crazier. Over a few days, the stock doubles. 

Every time I refresh my screen, the stock is trading higher.

Up and up it marches as I watch in awe.

$700 per share. Now $800. Eventually hitting $969 per share.

This feels weird. Stocks don’t act like this. My bubble radar is on high alert.

I go to bed happy but nervous on Tuesday night and check my phone as soon as I wake up.

Tesla stock is in a freefall.

The bubble is popping and I’ve missed it.

Immediately I spring into action. 

Sell it. All of it. Sell it all.

My heart pounds as the stock price drops like a rock. Every minute that passes costs me hundreds of dollars.

Furiously I type in the order.

Nothing happens.

I try again.

Still nothing.

Time and money are flying out the window.

Then my phone vibrates.

Success! Your trade has executed at $765.98.

FINALLY. Relief washes over me like a flood.

I was out. And I had just tripled my initial investment.

As the days go on the stock price continues to struggle.

$600. 

$500. 

$400.

I feel like a genius. A stock market rockstar. I had noticed the bubble and, aside from a few technical errors, timed it perfectly.

And I knew something these other fools didn’t. 

While others were scared about the company going bankrupt, I was confident in their technology. Tesla would bounce back.

I just had to pick the perfect time to buy back in.

“Once the stock hits $300 I’ll make my move.” 

The stock keeps dropping.

More bad news comes out. I smile.

It drops some more.

All the way to $350.

Then it turns around.

“Eh. I’ve seen this before. The stock isn’t worth that much yet. It will come back.”

But it doesn’t come back. 

Steadily it keeps climbing. 

$500.

$600.

$700.

Eventually it passes the price I had sold it at. 

And it doesn’t stop.

The stock climbs higher and higher, mocking me as I struggle to understand how this could be possible.

“Bubble! Bubble!” I keep telling myself.

But the stock doesn’t care. It keeps climbing anyway.

At its peak, the stock will trade at over $6000 per share.

Almost 25X what I had bought it for.

Except I didn’t make that. I had sold too early.

In today’s issue:

• The stock investing mistakes I made and how you can avoid them

• Why picking stocks is a sucker’s bet

• My new strategy that helps me save time, sleep better, and make greater returns

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Let’s cut to the chase. What was I doing wrong?

1)  I had no concept of what Tesla ‘should’ be worth

My perception of the value of the company’s stock was based on what it had been trading for during my last 3 years of stock ownership.

Back through 2018-2020, Tesla flirted with bankruptcy several times.

Many smart investors wondered if they’d ever be able to sell a car profitably.

Those fears were baked into the stock price. 

When other investors suddenly and rapidly changed their opinions on the future of the company, the stock price jumped too.

Because my opinion hadn’t changed (I was never really afraid of them going bankrupt), I didn’t suddenly value the company as less risky too.

In my mind, everything was still the same.

But I also hadn’t done my homework to decide what I thought the company should be worth.

The stock price of a company isn’t just some magic number pulled out of thin air. It’s the combined opinion of thousands of investors of how much money they believe the company will make in the future.

(In theory, at least. Investors can get crazy sometimes.)

My opinion of the value of Tesla was based on the price it was a few months before, not on what profit I thought they could make over the next 5-10 years.

When the stock price changed quickly, I didn’t have anything to check the price against other than a gut check that said “mmm, seems too high”.

In other words, I was guessing.

2) I wasn’t emotionally ready for large price swings

I thought stocks went up gradually. I was ready for that.

Turns out, they do not.

Especially when you’re buying individual stocks.

Surprise news headlines, a crazy tweet, new product launches, or even how many pairs of underwear men are buying can impact a company’s stock price.

And when news hits, investors act a lot like sheep, following each other to and fro, violently jerking the stock price all over the place.

Because of this, what a stock will do today, tomorrow, or even one year from now is impossible to predict. 

It moves up and down with almost no rhyme or reason.

But if you zoom out and take a longer-term view (5+ years), it becomes much easier to predict where a stock is headed.

It’s much easier to predict the direction of the tide than it is the height of a particular wave crashing on the beach.

When investing, there WILL be large price swings in your stocks. Don’t pay that any attention.

Successful investing comes from predicting the direction of the tide, not of the individual waves.

3) Stock picking is really, really, REALLY hard

There’s a funny thing about buying and selling stocks.

You don’t have to be right once. You have to be right twice.

First, you have to pick the right stock to buy at the right time when it’s underpriced.

Then, you have to decide when to sell.

Do you do what I did and sell when you triple your money?

Or do you hold on with nerves of steel hoping the stock goes up even more?

And what happens when the stock price drops instead? Do you sell? Or buy more at a cheaper price?

Quick! Plant-based meat is huge right now! Now it’s video conferencing! Now it’s AI!

Buy! Sell! Buy! Sell!

It’s very, VERY difficult.

It’s so difficult that 92% of professional fund managers fail to beat the average returns of the stock market.

Yes. You read that correctly.

Even the professionals with their PhDs in economics and supercomputers and insider tips are worse than your average cat.

So, what are we to do?

“Wow. Great article, Zach. Really shows us how hopeless it is to invest. Thanks a lot.”

Hold up just one minute.

Before you give up on ever getting ahead, walk as far into Canada as you can, build yourself a log cabin and live out your days as an arctic seal hunter, what if I told you there was a better way?

A way that takes zero time, zero brain power, and beats those fancy shmancy hedge fund managers six ways til Wednesday?

Behold - the index fund. (cue angelic music)

An index fund is just a fancy term for a whole bunch of stocks grouped together like a bouquet of flowers.

Usually hundreds of them, sometimes thousands.

And this bouquet of stocks makes investing less risky and much less wild.

Let me explain in an analogy.

Imagine I want to impress a girl.

I could guess that she loves roses, buy a whole mess of them, and give them to her.

If I’m right - score! I get her number!

But what if roses remind her of her weird Uncle Ed? Or even worse, she’s allergic to them?

Uh oh.

Mission failed.

Only giving her one type of flower means my chances of striking out are high.

So instead of giving her roses, I’ll buy her a mixed bouquet full of roses and daisies and sunflowers and lilies.

She might not love all of them, but as long as she likes a few, she’ll probably be pretty happy.

And the odds of me getting her number just went up.

Same thing with an index fund.

It’s really hard to figure out which stocks will do great and which won’t in a year.

Apple. Zoom. Tesla. AirBnb. Toyota. Delta Airlines. Amazon. Target.

Only one of those companies is trading higher than they were 2 years ago.

Can you guess which?

Did you guess Toyota?

If not, you’re lucky if you broke even, as most have lost value over that time frame.

In fact, a recent study showed that over the last 90 years, out of 26,000 stocks, HALF of all returns came from just 86 individual stocks.

Think you can pick the next one?

Meanwhile, the S&P500 (an index fund made up of the 500 largest companies in the US), has returned 13%.

Instead of picking one stock or even a few dozen, I can buy 500 of the finest companies in America with one purchase. 

(There are plenty of other index funds out there too, this is just one example and not personal advice).

If Apple goes bankrupt because a report is leaked that they secretly are run by a colony of super-intelligent naked mole rats, I sleep fine - they’re just a small part of my bouquet anyway.

And if Tesla stock explodes upwards another 25X, I can smile, because there’s a sprig of Tesla sitting in my bouquet too.

In short, by holding every stock, I basically guarantee that I’ll own the winners.

Yes, I’ll also own the losers too, but the winners more than cover the losses of the bad stocks.

A stock can only go down 100%. It can go up an unlimited amount. 500%, 1,000%, 4,000%…

So by owning every company, if the economy does well, I do well, and it hardly matters which companies are the winners and losers.

And instead of spending my nights sweating over what to do with my Tesla stock, I can spend them learning new skills to improve my value to others, increasing my earning potential.

If I do that for a few years, I’ll get much further than whatever edge I thought I had picking individual stocks.

These days, my investing looks pretty boring.

I check my portfolio every few months just to make sure it’s still there, but otherwise, I don’t think about it.

I sleep great, my portfolio is growing, and my blood pressure is low.

And when I want an adrenaline rush, I just go to Six Flags.

Keep growing,

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