My Investing Mistakes: Misadventures in Stock Picking and Tax Loss Harvesting

I haven’t been particularly excited to share my investing mistakes with you, but I’ve made a couple of them in the not-too-distant past, and I believe I’ve learned something from them and may have actually benefitted from them. I hope you’ll learn something useful from my blunders, too.

I don’t normally buy individual stocks. In recent years, the only one in my portfolio was the zero-dividend stock from Warren Buffet, Berkshire Hathaway.

Our new semi-retired life gave me a reason to covet a few other individual stocks. Cruise line stocks offer perks like extra onboard credit to their shareholders, and we once had some lengthy cruises lined up for 2020 and 2021!

As you know, 2020 also offered up some opportunities for some serious tax loss harvesting. I harvested plenty of paper losses this year, but I also made a serious unforced error in one of my TLH efforts, a mistake that ultimately led to me making some alternative investments that I might not have considered otherwise.

 

This may not be classic “stock picking” behavior, as I chose them not based on any chart, analysis, or belief about their future, but rather for a specific shareholder perk that these particular stocks offered.

The mistake most make when choosing individual stocks is believing they can outperform the market in a risk adjusted manner, something few professionals with every advantage can do consistently. While many investors have done quite well, more have failed, and the role of luck of uncompensated risk is rarely acknowledged.

 

My Stock Picks

 

Travel was expected to be a big part of my early retirement, and cruising is a nifty way to get from one part of the world to another when you’ve got the time. In fact, we were scheduled to be disembarking in Shanghai after a 30-day Princess repositioning cruise on the day this post is published (November 24th, 2020).

The parent companies of the major cruise lines offer additional onboard credit as a perk to their shareholders, so I had been watching the ticker symbols for a while. There are three major cruise line stocks: Carnival Cruise Lines (CCL), Royal Caribbean Cruise Lines (RCL), and Norwegian Cruise Lines (NCLH). I now own all three.

 

Cruise Line Shareholder Benefits

 

Carnival Corporation

Carnival includes the namesake Carnival Cruise Line (the fun ship!), and a number of others you may have heard of, including Holland America, Costa, Cunard, P&O, and Seabourn.

Owning 100 shares of Carnival entitles cruisers to onboard credit per stateroom of:

• $250 for sailings of 14+ days
• $100 for sailings of 7 to 13 days
• $50 for sailings of 6 days or less

 

See Carnival for details and fine print.

 

Royal Caribbean Cruises

In addition to their namesake Royal Caribbean cruises, RCL also owns the brands Celebrity, Silversea, and Azamura. Their shareholder benefits are identical to those of Carnival.

Owning 100 shares of Royal Caribbean entitles cruisers to onboard credit per stateroom of:

• $250 for sailings of 14+ days
• $100 for sailings of 7 to 13 days
• $50 for sailings of 6 days or less

 

Details on the credit and how to redeem can be found on the Royal Caribbean website.

 

Norwegian Cruise Line Holdings

Norwegian’s holdings includes Norwegian Cruise Line plus the Oceania and Regent Seven Seas cruise lines. Their onboard credit is nearly identical to the others. The only exception is for a cruise of exactly 14 days, which only gets you $100 with NCLH shares, whereas you’d receive $250 in onboard credit with the other lines.

• $250 for sailings of 15+ days
• $100 for sailings of 7 to 14 days
• $50 for sailings of 6 days or less

 

Navigate to Norwegian’s site for all the info.

 

My Individual Stock Misadventures

 

Carnival, which owns Princess Cruise Line, had been hovering in the $50 to $60 range for several years before dipping to $40, at which my limit order for 100 shares was executed on October 8, 2019.

By Christmas, it was back up to $50, a 25% return on my investment in under 3 months — that’s better than 100% annualized, and that figure doesn’t even factor in the $250 onboard credit (~6% of my investment) that I expected to receive the next fall! Cue the “I am the Smartest Man Alive” clip from Billy Madison.

 

 

My brilliance knew no bounds. I almost picked up some RCL (Royal Caribbean) at $100 but it didn’t drop below about $101 in the fall of 2019 while spending much of the time in the $120 to $130 range.

My chance would come, though! A novel coronavirus had popped up in the far east, and the forward-thinking market started to price in a resulting reduction in travel.

Lucky me was able to snag 100 shares not at $100, but at $98 apiece on 2/24/2020! That would give me some serious piña colada money on our scheduled cruise from Tokyo to Vancouver on Celebrity Cruise in the spring of 2021!

You know that phrase about catching a falling knife? I know it now better than I ever did.

I doubled down on my rapidly-falling cruise line stocks when they were worth half what I initally paid, buying 200 shares each of CCL and RCL at $19.50 and $49, respectively.

I didn’t have anything booked on Norwegian Cruise Line or their holdings, but figuring it would happen at some point in our future, I picked up 300 shares of NCLH at $15 a share to match the 300 shares I had of CCL and RCL.

With 300 shares of each, I figured we had 100 shares of each major cruise line company that we could one day gift to each of our kids while still hanging on to 100 shares for ourselves. That would give us all shareholder benefits for life.

I wasn’t quite done. In the summer of 2020, I figured if I was willing to buy CCL at $40 and $19.50, I might as well pick some up at $15, and I used some of my June dividends from the index funds in my portfolio to pick up another 200 shares.

For perspective, let’s zoom out a bit on the “I bought here” chart of Carnival’s stock performance.

 

 

My Final Tally of Cruise Line Stocks

 

I am now the proud owner of the following:

• 500 shares of CCL
• 300 shares of RCL
• 300 shares of NCLH

 

 

While I would have much preferred to have purchased all of my shares in March when CCL and NCLH were briefly trading below $9 and RCL was under $25, as of September 2021, my shares have recovered enough to put me back in the black, to the tune of about an $8,400 gain on a total investment of $36,500.

To be honest, when 2 of the 3 stocks were in the single digits, there was a real risk they could become penny stocks before going bankrupt. I’m just happy to have not lost my Hawaiian shirt on these.

And this is why I should not deal in individual stocks. It’s a lot to go endure to score a few piña coladas on the starboard deck!

 

 

My Tax Loss Harvesting Fail

 

In the depths of the madness that was late winter of 2020, a roughly month-long stretch in which most stock markets worldwide lost 30% of 40% of their value, I was swapping index funds to book some paper losses.

The idea behind tax loss harvesting (TLH) is that you can take a capital loss while remaining invested in the same asset class by selling one asset and buying another similar, but not “substantially identical” asset. You can learn more about tax loss harvesting and see an example here.

When trading mutual funds at Vanguard, which is how I usually do it, an exchange takes place at the end of the trading day. You enter the trade at any time during the trading day before the closing bell rings, and Vanguard will sell one fund at the closing price while simultaneously using that money to purchase another fund at it’s same-day, same-time closing price.

There are only so many exchanges that make sense when trading mutual funds, especially in a niche asset class like emerging or developed markets. Luckily, the exchange traded fund (ETF) can be used, instead.

There’s a caveat, though. You cannot simply swap one for another at the end of the day like you can with mutual funds. In some cases, depending on the brokerage you use and the rules they have set up, you might have to wait for your funds to “settle” to be available to purchase another asset.

In other cases, the money might be available in a matter of minutes, but in a highly volatile market, you might find yourself waiting for your next asset’s price to come down from a quick spike before pulling the trigger on the “buy” button. If the fund you plan to buy increases in value while you wait, the price difference can more than wipe out the benefit you got from booking a loss on the fund you sold.

The “instant” between one evening’s market close and the next day’s open can result in a drastic price swing, and that’s where I got tripped up.

Through the first three weeks of March, I had racked up about $150,000 in paper losses while remaining invested, in some cases, getting a bit lucky as an ETF price dropped overnight after I got out of one fund and before I could get into the next.

My Developed Markets lots, including ones I had purchased a few days earlier as I traded out of other international stock funds, were all in the red. I decided to take another $20,000 in losses by trading out of that mutual fund with the plan to buy into an international stock ETF when the funds were available the following morning.

I sold $554,000 worth of VTMGX at the end of the March 23rd trading day.

When the markets opened on March 24th, every international fund was trading at least 5% higher than the previous day’s close. I wasn’t going to let this be a $30,000 mistake; I would wait for prices to return to where they were when I sold.

Later that week, the markets were up 15% from the 3/23 close, and they haven’t come close to testing those lows since. There’s a decent chance they never will.

I was sitting on a big pile of cash, and that wasn’t as comfortable as you might think.

 

Making Lemonade from Lemons?

 

A Real Estate Fund

The point of tax loss harvesting is to make lemonade from lemons. Use the falling asset prices to offset some ordinary income and future capital gains taxes.

With that trade, I didn’t make lemonade, but rotten lemons, it seemed.

However, as you might reckon, there are some things you can do with a half-million dollars in cash that are more difficult to do without it.

I had been considering an investment in a real estate fund that had a $100,000 minimum, but the 2% investment fee would be cut to 1% with a $250,000 investment.

In the summer of 2020, I invested $250,000 into the Origin IncomePlus fund. It’s a buy-and-hold real estate fund that invests in a range of equity, preferred equity, and debt deals with the goal of delivering approximately 6% in tax-neutral distributions with anticipated appreciation in the 3% to 5% range for a total return of 9% to 11%.

 

A Startup Investment

Early in 2020, I invested about $10,000 in a high-end condominium via Compound, a startup that became Republic Real Estate when Compound was acquired by Republic.co.

Having established a good relationship with the folks at Compound, I was introduced to Republic’s CEO, Ken Nguyen. I was impressed with his efforts in helping fund dozens of woman-led and minority-founded businesses and his vision for democratizing startup investing.

I also took note of the fact that Republic’s 800,000+ members tend to get a lot more from their investments on the Republic platform as compared to a place like Kickstarter, like actual equity in the company if it’s acquired or goes public.

They’ve also got an arm of the company that specializes in more mature startups, some of which are household name brands that have not yet gone public via IPO. Physician investors, in particular, have been drawn to Republic Capital. Unlike the offerings at Republic.co, these investments are only open to accredited investors, and I’ve made several investments with them in 2021.

The most recent addition to the Republic family is NextSeed, a platform that offers investments in vetted “Main Street” small businesses throughout the U.S.A. Past offerings from Nextseed include now-funded investments that offered unique perks, like free beer for life! That sounds a lot like an investment I’ve made (and recently cashed in on again with a 3-keg, 8-crowler pickup — thank you, Nick!).

As discussed in How My Investing Has Changed After Financial Independence, I am open to taking risks that I might not have made if we weren’t somewhere beyond FI.

When I was offered an opportunity to invest in Republic as a strategic partner, I sat on it for a bit. Ultimately, I decided it was a leap worth taking, as they’ve got a mission I can easily get behind. A force for positive change like Republic.co was the perfect place to put my money in a year like 2020.

Having made a major gaffe with my TLH efforts left me with more than enough cash to purchase the full allotment of shares made available to me in the form of a SAFE note in the summer of 2020.

These are not referral links, and I’m not compensated in a direct manner for any promotion. However, in this case, I do now own a sliver of the company, and do have a vested interest in their success.

If Republic continues to flourish like I believe it will, I will have made some exceedingly sweet lemonade from those lemons.

 

 

What investing mistakes have you made? Did you learn any valuable lessons or make any lemonade from your lemons?