My $10 Million Mistake
“Experience is simply the name we give our mistakes.”
It was January 9, 2007, the beginning of a new year which was full of optimism. The stock market and economy were doing well. People were making money on real estate and buying up properties like they could never go down in value. Keep in mind that the stock market and real estate sector didn’t crash till 2008.
In San Francisco, Apple was holding their annual Macworld Conference. The year prior, Apple had introduced the iMac and MacBook Pro. I could see that the company was innovating and their products were getting some traction with consumers. And there was a lot of talk on Wall Street that something big was going to be announced this year.
As an investor, I was eager to see what new product they would launch. So I tuned in and watched Steve Jobs take the stage. After a masterful presentation, Steve introduced the world to the iPhone. It wasn’t the first smartphone, but I knew it was going to change everything. (Apple has sold over 2.3 billion iPhones since 2007)
Steve Jobs introduces the world to the first iPhone on January 9, 2007
I quickly jumped on my computer and started searching for Apple call options I could buy. Why buy the shares of Apple when I could control more shares via a stock option. If you’re not familiar with stock options, they are the right to buy a specific number of shares of company stock at a pre-set price, known as the exercise or strike price.
Basically I was buying contracts that controlled the shares of Apple, instead of buying the actual shares themselves. At that time, before the shares had multiple splits, it was trading around $92 a share. The options contracts were trading at a fraction of that price, so I decided to load up on them. (To be clear, this was my own personal account and I never have and never would trade like this in a client’s account.)
By the next day, I had made thousands of dollars in profits. Man, this was so easy! Like taking candy from a baby!! I bought and sold some more options on the 10th. It was like printing money! By this point I was starting to get cocky and not noticing that the hype from the event was starting to wear off. By the 12th, the prices of the options were starting to drop. I finally had to see one of the positions at a loss.
But maybe this was a fluke. After all, Apple just announced a revolutionary product. So I bought more options and then decided to buy even more. I tied up a huge part of the liquid cash I had available in my brokerage account.
By January 19th, my option contract was in the red and I wanted to sell whatever I could before it expired worthless. As you can see in the image below, that one trade cost me over $136,000.
Copy of my 2007 Tax Return
As much as losing $136,000 stings, it hurts even more when I sat down and calculated that had I used the $143,000 to buy actual shares of Apple (AAPL) on January 16, 2007 and held them to today, October 18, 2024, these shares would be worth over $10 million!!
Shares of Apple (AAPL) as of 10/18/2024
Talk about an expensive lesson. Even as a professional in the industry, I violated a number of investing principles that I am going to share with you today. I invested without a gameplan, I tried to time a stock, I made a concentrated investment, I took on too much risk and I let my emotions get the best of me.
The reason why I am not crying while I write this is because it’s easy to look back and say things like, “If I held on to this stock” or “had I bought XYZ years ago.” It’s always easy to look backwards. As the well-known proverb goes, hindsight is 20/20.
Also, life is not linear. It is unpredictable and full of twists and turns. It’s not a simple path from point A to point B. Since 2007, I bought a house, got divorced, bought businesses, got married, got backstabbed by a business partner, and on and on. My point is, there were a number of things that would’ve caused me to possibly sell part or liquidate my shares throughout my life.
As a financial planner, it’s easy to tell a client not to sell a good investment. I can show them charts and graphs all day long. While I am empathetic to the fact that financial matters can be emotionally charged, I acknowledge that there may be unavoidable circumstances in life that compel individuals to consider selling their assets as a last resort.
Action Items
Investing can be a great way to grow your wealth, but it's important to avoid common mistakes that could cost you money. Here are several mistakes to watch out for:
Investing without a plan: Before you start investing, it's essential to have a clear and well-defined investment plan. This plan should align with your financial goals, risk tolerance, and investment horizon. Without a plan, you may make impulsive decisions based on emotions or market noise, which can lead to poor investment choices.
Trying to time the market: Trying to predict the ups and downs of the stock market is a futile endeavor. Market timing is a losing game that often results in buying high and selling low. Instead of attempting to time the market, focus on investing for the long term and ride out market fluctuations.
Putting all your eggs in one basket: Diversification is a fundamental principle of investing. Don't concentrate your investments in a single stock, sector, or asset class. Over-concentration increases your risk exposure and makes your portfolio more vulnerable to market downturns.
Not rebalancing your portfolio: Your investment needs and goals change over time. As such, it's crucial to periodically rebalance your portfolio to ensure it remains aligned with your evolving circumstances. This process helps maintain your desired risk level and keeps your portfolio on track to meet your long-term objectives.
Panic selling: Avoid letting fear and emotions dictate investment decisions during stock market downturns. Instead, stay calm, focus on long-term goals, and resist impulsive selling to minimize losses.
Failing to do your own research: It's important to do your own research before investing in any particular stock, bond, or other investment product. Don't simply rely on the advice of others or chase hot tips, as they may not have your best interests in mind.
Ignoring fees and expenses: High fees and expenses can eat into your investment returns over time. It's important to be aware of the fees associated with different investment products and choose low-cost options whenever possible.
Investing with borrowed money: Investing with borrowed money, such as margin loans or credit cards, can be extremely risky. If the value of your investments declines, you could end up owing more money than you originally invested.
Chasing performance: Past performance is not indicative of future results. Chasing investments that have performed well in the past can be risky, as there is no guarantee that they will continue to do so in the future.
Emotional investing: Making investment decisions based on emotions, such as fear or greed, can lead to poor outcomes. It's important to stay disciplined and stick to your investment plan, even when the markets are volatile.
Going solo: The consequences of mismanaging your investment portfolio are undeniable. Whether it's due to an honest error, a natural overreaction, or a simple oversight, the financial burden falls directly on your shoulders. Working with a financial advisor can potentially lead to more favorable long-term outcomes. Studies indicate that professional financial guidance can contribute up to 5.1%* to portfolio returns over time.
Investing money you can't afford to lose: Refrain from using funds that are needed for essential expenses or emergencies. Dipping into these funds is a recipe for disaster.
Not having a clear understanding of your risk tolerance: Investing in assets that are too risky or too conservative for your financial situation can lead to making investment decisions that are misaligned with your financial goals and risk appetite. This can have significant implications for your financial well-being.
In a world where life presents enough inherent complexities, it is unnecessary to further complicate matters. By focusing your attention on essential portfolio strategies and seeking expert guidance when needed, you can potentially avoid common pitfalls that might impede your progress toward achieving your investing goals.
~Alex
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*Depending on the time period and how returns are calculated. Value of advice sources: Envestnet’s “Capital Sigma: The Advisor Advantage” estimates advisor value add at an average of 3% per year, 2023; Russell Investments 2023 Value of a Financial Advisor estimates value add at approximately 5.12%; and Vanguard, “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha®,” 2022, estimates lifetime value add at an average of 3%. The methodologies for these studies vary greatly. In the Envestnet and Russell studies, the paper sought to identify the absolute value of a set of services, while the Vanguard study compared the expected impact of advisor practices to a hypothetical base-case scenario.