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.
[PoF: You can Download this & other calculators by subscribing here.]
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 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?
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.
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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?]