The following is a guest post from Sam Broom of The Nude Investor. He talks about the first investment he ever made, and how it ended in disaster. He hopes his story will help you avoid losing money from hot stock tips and poor, speculative positions.
Hot stock tips – we’ve all been there. Your buddy’s been loading up on the “next big thing” and has been urging you to get on board. You know the the kind – “This stock is about to explode”, “It’s almost a guaranteed winner” and “she’s a sure thing, bro”.
I’ll almost guarantee that anyone with any investing experience has heard familiar phrases from friends or family at some stage. Whether it’s been a hot stock tip, real estate investing advice or your buddy regurgitating some washed up tip from a “gold guru” he’s been following – they all have the same message: get in now before the rocket launches into the metaphorical investment stratosphere.
I know this sounds like an oxymoron, but hot stock tips are the bane of any beginner investor – I would know because I lost $5,000, over 80% of my original investment, following a “hot stock tip” when I first started investing in the stock market.
Before I get to the juicy bank destroying details, I feel it’s important that I provide some background information to my story.
I came from a solidly lower-middle class family with parents who had always worked exceptionally hard, but had never themselves been overly fussed with material things. They instilled in me their belief in a solid work ethic – I’ll never forget my dad’s mantra: “If somethings worth doing, it’s worth doing properly”.
A combination of good genes and that instilled work ethic meant I achieved highly at school and ended up gaining acceptance to a reasonably exclusive college. The majority of my fellow students came from wealthy private high schools and it was here that my eyes were opened to the fact that contrary to popular belief, those that worked the hardest weren’t always the best rewarded (in a financial sense at least).
All my friends’ parents were driving around in fancy cars and taking extravagant overseas holidays, yet it seemed like all they did was wine and dine and manage their investments. Meanwhile my parents were slaving away at the same “nine to five” they’d been at for the past 35 years, scraping together enough to renovate that dingy bathroom or to save for their first overseas trip at the ripe old age of 55. I could see that to get ahead, unless you were one of the lucky ones with a big ol’ trust fund, you had to not only save, but put your money to work earning a return that would compound over time.
It’s here where my story really begins. After graduating from college with a degree in geology and a brief stint working for an engineering consultancy in New Zealand, I decided to move to Australia as a young, starry eyed, early 20-something in search of the bigger opportunities and even bigger pay packets on offer in the booming Australian mining industry. I landed my dream job and for the first time in my life was earning more money than I needed to cover expenses. I finally had disposable income that I had to decide what to do with. Being a naturally frugal person, I decided to save and invest a large chunk of this new found income.
The year was 2012 and the Australian mining industry had been booming for the better part of 10 years, fueled almost entirely by China’s insatiable thirst for natural resources. Stocks of just about everything even remotely mining related were going through the roof and subsequently “banter” regarding “the next big thing” was rife. I spent a lot of time out on mine sites and found that here, conversation regarding hot stock tips was at it’s most fervent.
Just about everyone from the mine manager right through to the toilet cleaners were talking stocks. You see, throughout the mining boom there had been numerous instances where average punters had managed to turn a chunk of change into a life changing fortune, almost overnight. How did they do this you may wonder – by “investing” (*cough*, gambling) in highly speculative mining shares.
The classic example is that of speculative mining explorer Sirius Resources, who in 2012 discovered a massive copper deposit which launched it’s share price from a pre-discovery level of sub 5 cents through to a peak of over $5 a share. That would have meant those who’d invested at the low could have turned a measly $5,000 investment into over $500,000 in the space of a few months.
It’s therefore no surprise that the vast majority of stocks on discussion were highly speculative. The problem was, these “hot stock tips” were rarely pitched as such and were more often than not accompanied by phrases such as “it’s almost a sure thing”. Someone always knew someone, who knew someone else who had the inside running – a driller out on the rig somewhere or the geologist who was sitting on the first batch of killer results.
I had zero experience in the markets so the people giving me these hot stock tips had, at the bare minimum, a little more experience than myself. They were generally people I knew well, so I had no reason to think the information coming my way was some kind of scam or rip off. I knew these people had good intentions and were genuinely giving me the “heads up”, so I naively believed most of what I was told.
After “umm-ing and ahh-ing” for a while I finally decided to take the plunge and make my very first investment. I decided to purchase some shares in a company called Argonaut Resources (ARE) which was, surprise surprise, a speculative mining explorer. ARE were exploring for copper in Zambia in a well known copper province, which hosted a number of very large copper deposits that were already being mined. Their drilling program was nearing completion and their share price had risen rapidly, fueling speculation that the drill had hit something special.
It’s almost embarrassing to admit my decision to invest in ARE was based almost entirely on a hot tip from from some of my closest friends and colleagues. There was no real research on my behalf, other than blindly reading a few recent company announcements and the validation provided by the fact that friends were all on board. No examination of the company finances, previous history of success (or in this case failure) or managements credentials.
I bought in at 7.8 cents in September 2012 and within two days of making my purchase, my shares were up nearly 20%. This fueled my initial delusion that everything I had been told was “fair dinkum” and I was onto a winner with my very first investment. I started to wonder if perhaps I had a knack for this whole investing thing and it was exhilarating watching the value of my shares rise and fall at the whim of the market.
The delusion didn’t last long. Within a week the share price had stalled and gravity was beginning to tighten its grip. We were all waiting on drilling results, which we were told by the company were due any day now.
They didn’t arrive and the market had begun to lose interest. Within a month, I was well under water and starting to panic, but I “knew” (hoped) that these drilling results were going to come through and the share price would be back on it’s merry way. I was in a frenzy, checking my brokerage account for said announcement multiple times a day. The announcement never eventuated and a series of delays meant results weren’t released for nearly six weeks. During this time my investment lost almost 40% of it’s value, at least on paper.
“You haven’t lost anything until you sell” I thought to myself, so I held on, waiting for these darn results to light a fire under the share price.
In a cruel twist of fate, the results were finally released on a day when I was working out on a mine site away from any kind of mobile reception. I completely missed the release and the ensuing sharp rise in the share price. The pump was short lived though and by the end of the week the share price was almost back where it started.
Even though the announcement-related pump did move the share price back up above my buy in, I doubt I would have sold, even if I’d had access to my account on the day. You see I was blinded by my conviction that this stock was “the business” and I had completely bought into all of the hype. I’m pretty sure I wouldn’t have done anything differently had I been watching the pump and dump play out – such was my financial naivety.
I should have seen that the announcement was heavily sold into by the “smart money” who wanted to get out – I should have done the same. I didn’t and held on with my continued hope that something would change and things would come right. They never did of course and watching my portfolio dwindle in value day by day became a regular occurrence.
It got to the point that my investment had lost so much that I no longer cared. My shares were now sitting in the “bottom drawer” where capital goes to wither and die. I hoped that one day things might turn around and I might recoup some of my losses, but things only continued to get worse and worse.
After a long and arduous 18 months watching my very first investment fail miserably, I eventually decided that I had to get out. The decision to finally sell was based on the fact that, at long last, I had started picking some winners. I had come to the realization that the bottom drawer approach offered very little chance of ever bearing fruit and decided that I might as well pool together all the dregs from my investing graveyard (ARE was far from my only mistake) and put them into something that was winning.
It did, however, mean I had to actually “realize” and lock in a massive loss – something that can be extremely painful to a beginner investor. I had to admit that I was half living in denial and admit that I had got things very wrong – that I had lost a lot of money (at least for a beginner).
I finally sold out after holding my ARE shares for over two years. During this time I ended up losing over 80% of my initial investment, or almost $5,000.The experience itself was extremely painful, both to my bank balance and to my mental state, but I wouldn’t change a thing if I could do it all again.
The experience was invaluable and I learned there’s something about the inbuilt human psyche that is addicted to instant success. People love to pursue quick fixes and “get rich quick” schemes even if they seem (and most likely are) too good to be true.
Almost a year on, it turns out the decision to finally sell was a good one as ARE has since gone down a further 50% from my sell price. Hindsight is 20/20 and I wish I’d cut my losses far earlier than I did, but my final decision to sell was a good one. The mining sector as a whole continues to decline on mass and there is little sign of a significant up turn any time in the near future.
If there was one “take home” message I hope beginner investors learn from my story is that following hot stock tips about highly speculative shares is fraught with danger and should be either avoided or treated with extreme caution. Unless you really know what you are doing and are prepared to lose all of your investment, I’d suggest ignoring them altogether. There are plenty of better, less risky options out there for beginner investors looking to get their feet wet in the stock market.
Sam Broom has been investing in the stock market since 2012. He started The Nude Investor to provide a real life account of what it’s like to be a beginner starting out in the stock market. In his blog he shares honest stories about his big wins, gut wrenching losses and vital investing lessons he’s learnt along the way.