From Hubris to Humility – Dr. Segan’s Top 17 Investing Mistakes

PoF: You may recall Dr. Segan from his previous guest post on “failing” early retirement. Today, he details additional failures by sharing his top investing mistakes.

Douglas Segan, MD JD (yes, he is a doctor and a lawyer) is an expert on insurance and asset protection, having written on the topics in numerous guest posts at The White Coat Investor

Tell us where you went wrong, Dr. Segan. We’ll try not to repeat the same mistakes!


From Hubris to Humility – My Top Investing Mistakes

 

Both physicians and investors have a challenging time admitting and discussing their mistakes with others. It is tough to realize that we are human and that being fallible and learning from our errors is part of the human experience. It is very easy to judge both medical care and investing decisions in hindsight. I have reviewed many malpractice cases and each one  provides an opportunity for our colleagues to learn something that they will find useful in their care of patients.

It is in the spirit of trying to help my fellow physician investors avoid some of the costlier mistakes that I have made over the past few decades that I wish to share my most egregious investing blunders. I believe that financially secure docs make better physicians, so please profit from my errors. If you step on too many of these investing landmines, your path to financial serenity will be a long and difficult one and retirement at any age  will remain an elusive goal.

 

My  list of the worst financial  errors that I have made ( repeat these at your own risk):

1. Don’t start saving and investing when  you are young

 

It is tough to have a 40 year or longer time horizon when one is a teenager.

But it would have been wise if I had worked and saved some money as a young man. Albert Einstein allegedly said that “compound interest is the eighth wonder of the world.”  Decades ago, I certainly did not appreciate the power of compound interest to create serious wealth over a long time frame.

If you have any youthful relatives or mentees, try to persuade them to play with an online compound interest calculator that illustrates how  a small amount invested every month can grow into a  very respectable nest egg. For example, an investment of $100 a month at a 4% interest rate compounded annually will grow in 40 years to about $114,000.

 

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2. Buy actively managed funds with high expenses

 

I was  quite late in getting onboard the passive index very low cost mutual fund / ETF  train. But, now that I am on board, what  a sweet train ride it is!

Years ago, I wanted to believe that savvy fund managers could be better than average and that the higher expenses would give me some bang for my buck. 1.5% a year does not sound like a lot until you compare it with an index fund that has one tenth the expense ratio and you end up holding the fund for decades. Investment fees will cost you millions.

The evidence now is  crystal clear and overwhelming: the chance that you will pick an active fund manager who will beat a very low cost stock index fund over a long time period is very remote.

 

 3. Buy high and sell low

 

I have made this mistake all too often with individual stocks and with funds. Things always look great at the top. The good times feel like they will last forever. The market feels like it will keep going up and up and you will be convinced  this “this time it is different “ and  this market will never go down, so why not buy now because it will just keep going  up and you do not want to miss this gravy train.

The only thing tougher for me than not buying at the top of a rally is not selling at the bottom. When the market is in the doldrums it feels like it will never recover.  When there is “blood in the streets” and it is truly time to buy I have been chicken little and I was certain that the sky would  keep falling.

 

4. Act quickly on hot stock tips

 

I have no excuse for this amateur mistake that I have made one too many times. If you are foolish enough to buy an investment based on what a talking head on one of the financial pornography television shows recommends or what your friend or “advisor” tells you is a “ can’t miss” “act now’’ and “opportunity of a lifetime” investment, then you deserve the haircut that is sure to follow.  When it comes to financial advice (including mine) please be very skeptical and repeat my mantra: “nobody knows nothing!”

 

5.  Sell your winners very quickly

 

On those very rare occasions that I actually owned a stock that surprisingly went up,  I have too often sold it way too quickly.  I  was “smart”  enough to listen to my sister (see below) to buy Apple shares five  times in the past decade. Of course, I also sold it five  times in a rush to lock in (small) gains. The only Apple I now own is my iphone.

 

6. Enter into a financially mixed marriage

 

Divorce is costly on your wallet and soul. My first wife had many wonderful virtues and in numerous ways we were compatible, but we had very different ideas about money, spending, and saving.  Not just Venus and Mars type differences but different galaxy type differences.

Marry someone who is on your planet when it comes to  your financial philosophy. There is no right or wrong here but just a matter of knowing yourself, which I did not.

Thankfully, we had an amicable divorce. A wise divorce lawyer told us “someone is going to decide the financial and other details of this and it might as well be you two.”

If you really want to waste all of your  money, then compound everyone’s misery by having an adversarial divorce with legal fees that go on forever.

 

7. Ride a losing investment all the way down

 

This is another foolish mistake that I still make and shows that I have no business investing in individual stocks. I know that one must cut one’s losses (at 15% for example) to stay in this  game for the long term .

But, if you are like me and find this too hard to do, then we have no business holding individual stocks. I just do not have the temperament for it and it has taken me decades to admit this to myself.

One painful illustration:

I purchased some AIG stock for about the cost  of a car and  then  I rode it all the way down during the  great recession and sold it for about the cost of a nice lunch.  A painful lesson.

 

8. Waste a lot of time and energy checking the market and your investments multiple times a day

 

I am still making this mistake nearly every day. What a waste of time!

I am not a day trader and I am not going to do anything productive no matter what  the market news of the day entails  other than get upset and beat myself up with “woulda, coulda, and shoulda” when I hear what went up and what went down that day. I have taken one healthy baby step and I have stopped checking the Asian markets in the wee hours of the night, but I still have a lot of work to do in this area.

 

9 . Ignore obvious signs of a bubble

 

Bubbles feel so good while they are bubbling and feel so obvious in hindsight. In 2007, I had plenty of warning that we were in a crazy real estate bubble. My Dad was doing pro bono financial advising and telling me that his clients were  buying much more home than they could normally  afford in a healthy economy.

Reports of no money down and 110% per cent financing and amateur real estate speculators buying ten properties at a time were becoming well known. I vividly recall a visit to Florida pre-crash and gazing at a brand new upscale condo with hundreds of empty units and only a handful that had been sold. Seeing all of these red flags — that we were in a housing bubble that would cause great pain — what did I do to protect my nest egg?

 Absolutely nothing.

 

largest rubber duck

must be a bubble nearby

10. Believe that you are the next Warren Buffett

 

The Oracle of Omaha is often cited as proof that nice guys can study the market and can win at this game. But, you and I are not Warren!

He has a once in a generation gift that us  mortals have zero chance of replicating.   When it comes to buying  individual stocks, I must now admit that I am much more Alfred E. Neuman than Warren Buffet. This has taken me decades to finally accept and pretending otherwise has cost me plenty.

 

11. Be arrogant and don’t  settle for average

 

If you believe (as I did for decades)  that you  are a skillful stock picker and that you can beat the market averages, the odds are high that you are delusional about your skills.

Sorry, my  fellow individual investors, we are underperformers. Studies have shown that the average investor underperforms the indexes by 4% to 7%. Please just aim for average. Average, in investing, is beautiful.

 

12. Make yourself miserable during a correction or bear market

 

Your mental health is important. If you can’t stomach the inevitable corrections and bear markets and you may sell at the bottom, then you are currently overexposed to equities.

If you will lose sleep and be miserable during a nasty bear market, then you need to take some money out of the market.

Knowing your risk tolerance is essential to be in this game. I thought my risk tolerance was a lot higher than it turned out to be when things got very ugly around 2008.

Practicing medicine is stressful  enough and your mental health is way too important.  This is a case where you must know yourself before the next bear arrives. I do not know when it will occur,  but I promise you that the big ugly bear will return one day and the time to brutally and honestly face your risk tolerance and adjust your asset allocation is now.

 

13. Believing this time is different

 

When the market is hitting new highs, and you want to lose your shirt, believe the “experts” who will tell you that the days of recessions, corrections, and bear markets are behind us and that  this market is only going up.  I heard these expressions quite often before the real estate bubble burst and the great recession occurred.

 

14. Ignore your sister’s sage advice

 

If you want to be a lousy investor, listen to paid “experts” and ignore those who actually know something. For example, during the great recession, and for the past decade, my sister would share with me that every time she would go to a nearby mall the place looked like a ghost town, but the Apple store was packed.

Did I listen and take a big bite of Apple and hold on to it for the past decade? Of course not. I purchased a little and sold it too quickly. Five times.

 

15. Allow greed and fear to control your investment decisions

 

Greed has made me think that  I was smarter than the market and that I could beat the averages. Fear has led  me to sell my investments at the bottom.

 

16. Catch a falling knife

 

This is a variant of being arrogant. If you buy a stock at $20 and it falls to $15  them you must buy even more because you know way more than the market knows.

 

17. Buy this year’s hot stock or fund or sector

 

Things always look good on the way up. But, stocks and sectors and regions of the world always go in and out of favor. It feels good to buy the current lead horse but the odds are remote that that this year’s  darling will stay hot.  If you want to lose money like I did, chase after the current hot investments and ignore the general rule of reversion to the mean.

 

When it comes to investing I sometimes feel that we are our own  worst enemies.  I certainly am.  After making all of the above mistakes ( and many more) I hope that I am a  somewhat wiser investor. I am certainly now a humble investor.  I am just striving to achieve average and hoping that I do not buy too much at the top and sell too much at the bottom and trust that I will face my limitations and reduce my frequency of investing errors.

 

[PoF: That read like a who’s who of investing follies, but somehow the good doctor / lawyer managed to become financially independent prior to retirement age. He learned some very expensive lessons, and you — lucky you — get to learn them for free.

What’s the most costly investing mistake you’ve made?]

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35 comments

  • “Knowing your risk tolerance is essential to be in this game. I thought my risk tolerance was a lot higher than it turned out to be when things got very ugly around 2008.”

    Such an important point. Many of us over-estimate our ability to tolerate risk. It isn’t until everything looks like its falling apart until we really know what we can stand without performing an irrational action (like selling low).

  • hatton1

    I have made all the above mistakes except for two. I do not have a sister and I have held on to my Apple stock purchased in 2008. I only buy indexes now but I have too big of gain to ever sell the Apple. The other 15 mistakes I have also made. Investing has changed over your and my life for the better. I think we are similar ages. I used a commissioned broker for years because the internet did not really exist. Some things in life have become more complex but investing has really become easier to do yourself and much cheaper.

  • I like to think that as a woman, I’m less prone to some investing mistakes (selling winners quickly, acting on hot tips, etc). But that’s probably my hubris showing! 🙂 Mr. ThreeYear and I didn’t do near enough saving and investing when we were DINKS. We’re kicking ourselves now, but also talking to our boys about getting jobs when they’re in high school. We’re going to start funding IRAs for them as soon as they earn income. We’re also very fortunate to have found each other as life partners. Mr. ThreeYear is way more frugal than I am, luckily, but I’m more interested in investing and financial management, so we balance each other out well. Thanks for these thought-provoking mistakes, and for being so honest with us!

    • Doug Segan

      Thanks so much Laurie! I think the literature agrees with you that there are some gender differences in investing and in some key areas you XX folks have an edge. You and Mr. Three Year are lucky that your skills and talents compliment each other.

  • This is a fantastic article and I hope all the 20-somethings in the world have a chance to read this. Mistakes are going to happen but learning from them is key. So, why not learn from people who have already made the mistake?

    I think the biggest ones for me, as far as what I’m working on now, is to 1) invest while I’m young and 2) manage my fees.

    If I can continue to throw as much as possible into investments while I’m still in my 20’s, then I’ll set my future self up for success. And I’ve been reading a ton about fees and the impact they have on your portfolio over time, so keep them low is a priority for me as well!

    Thanks for sharing!

  • Wow – great list, and I’m sure we’ve all trifled with these at some point.

    Re: #16 – I think you could style that more accurately as “Chasing Losses”. Catching a falling knife may best describe when you, through your omniscience, know exactly the timing of a bottom (in the market or a stock) and enter at that point. Chasing losses is a gambling-like compulsion; catching a falling knife is your old adversary arrogance. And yes, I have firsthand experience with both 🙂

    • Doug Segan

      Thanks Paul for your astute comments. And yes, I have chased many a loser ( that kept going down) and I have tried to catch many a falling knife ( which usually kept falling).

  • It is always humbling to look at the mistakes we have made…for me it is sad too because it is opportunity lost. I wish I Could go back and tell 22 year old me to not spend so much money on going out…at the end of the day, some of it was fun, but not really any long term gain.

    • Doug Segan

      Thanks so much Dads Dollars Debts. We can not beat ourselves up for our past mistakes…we can just hope to learn from them and try to warn others to be wiser.

  • Dr NightFIRE

    Great article! Thanks for the honesty. I have made many of the mistakes on this list…bubble, what bubble???

    • Doug Segan

      Thanks Dr NightFIRE…in a past life, centuries ago, I was the fool buying tulips in Holland for the price of a home.

  • I recently wrote a blog post that details my embarrassingly many financial bloopers, so head over that way if you are interested in the full monty. I’ll call out a couple of the biggest here:

    1. Paid no attention to my finances till I turned 37. I had a _lot_ of money sitting in a savings account with BOA because I just couldn’t be bothered to learn the basics and put my money to work.

    2. Another side effect of ‘1’ was that I completely messed up my tax filing for years after I moved here because I paid no attention to how foreign assets need to be declared (I’m an immigrant, and I moved here when I was nearly 30 years old). That mistake caused me to have to grovel before the IRS and convince them that I was more stupid than sneaky, and I had to pay fines of over $10,000.

    • Doug Segan

      Thanks Mrs. BITA for not letting me sit alone on the financial mistake confession train. Hope others will profit from our errors.

  • Two for me:
    I blindly listened to my brother-in-law on a stock tip with no research on my own. Rode that down to lose $1000.

    I also underestimated Amazon a few years back. I was considering buying the stock but thought $600 per share was too high. Guess who’s kicking herself now?

  • John

    Nice article. Humility is a great asset to have as an investor, and clearly Dr. Segan possesses it in spades. Good for you! Take comfort in the fact that you are not alone. I’ve made nearly every mistake on your list at one time or another.

    I’m curious to know how you chose the actively managed funds? I realize I’m going against the grain to suggest a role for active management, but I do believe that active management is not dead and doomed. How specifically did you vet the active funds? And what criteria did you use to “fire” you active fund? Just curious.

    • Doug Segan

      Thanks so much John.
      Over the past few decades I would read about a “hot” fund manager in Money or Smart Money magazine or Barron’s or mentioned on a financial television show and I would be drooling to get in on a winner. Or on my own I sought out funds with 5 stars from Morningstar or the best fund over the past 5-10 years. The fund manager seemed to be gifted and had a great record for the past 5 – 10 years so I jumped in. Reversion to the mean and the excess fees of active management usually made the hot fund of the past become the dog investment after I invested my money. The odds that we will pick an active fund manager that will beat their benchmark index in the next decade is low.
      After a few years of under-performance I would “fire” that fund manager because they no longer had the midas touch and I would jump into the next hot fund.
      Everything I have read and my own experience has lead me to believe that most of my stock market exposure should be in passive index funds. Average is beautiful.

      • John

        Thanks Doug. I think another aspect of active management that is not appreciated is the psychological toll it takes on those of us who follow performance closely. This is particularly true of funds that have high “active share” meaning they are very different from the indexes they are measured again. But, studies have shown that it is the funds with high active share that are most likely to outperform index funds. Having an active fund lag the market significantly for a few years, sometimes even 5 years, is quite tough psychologically. At least when your index fund is down a lot, so is the market. But, when the market is up 10% and your fund is down 5-10%, it really starts playing mind games with you. Since we all experience more pain from our losses (e.g. underperformance) than we get pleasure from our gains (e.g. outperformance), I believe investing successfully in active funds is much harder from a behavioral standpoint than most realize. Thus, it makes the most sense for most people to invest in index funds.

        • Doug Segan

          Excellent points John. Thanks so much. And then there is all the wasted time trying to find the “best” fund!

  • “Did I listen and take a big bite of Apple and hold on to it for the past decade? Of course not. I purchased a little and sold it too quickly. Five times.”

    I know this was just an example but Apple is one of the most obvious stocks that anyone could have purchased a decade ago. I recently wrote a blog post about their 3Q earnings results and how it has paid to stick with them through good times and bad. Ignore the FUD from the talking heads and analysts!

    • Doug Segan

      Thanks Jeff -MaximumCents.com.
      You and my Sister saw a winner a decade ago and I missed it. My Bad!
      And I love and use their products and stores and customer service so I have no excuse.

  • john

    Yep, that is why I bought several thousand shares of it when it was around $57 presplit adjusted

  • YoungMD

    That was a really painful checklist for me. Vanguard indexes for the past 3 years have provided much needed analgesia ????

  • Dr Segan,
    Thanks for the reminder. It was painful to read this as with each section I could recall when I did that too. The good news is that even though I made most of those mistakes, I had enough base hits to retire from medicine at age 54. None of those mistakes need be fatal wounds. Consider them speed bumps in your investing journey. Lessons learned. But it would have been better if I learned those lessons from someone else instead of on my own. As long as you stay diversified, and keep on doing the right things, none of your mistakes will matter in the long run. They will just end up being good stories to tell your children.

  • Joe

    Guilty of almost everything here at one point or another. It seems like everyone is bound to go through these mistakes themselves. For me, the only lessons that stick are the one that are personally painful…
    Investing young is huge. You learn how to invest earlier and make your mistakes when you don’t have much money. #1 for sure.

    I still don’t trust Apple…

  • Thank you for exposing your mistakes and the lessons you’ve learned. This post contains the best warning signs I can give to investors, especially the newbies.

    This also got my attention and I have to agree with you: “”Marry someone who is on your planet when it comes to your financial philosophy.”

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