Some people look at my current reality — helping people get 9/10 of their investments right in the stock market — and think I’ve got it all figured out.
After all, I do have a low-risk investment process that’s proven to work. But I didn’t start out as a low-risk investor. Far from it, actually!
In fact, the way I started my journey…
Was by losing a tonne of money in the stock market.
$100,000, in fact.
Ouch. It still hurts to think about.
18 months, that’s all it took. I blew three big accounts and lost everything I saved from my corporate job.
And when I look back, I can see 5 big mistakes that led to that devastating loss. The worst part is, I see people making these same mistakes today, thinking they’re being good investors.
Let’s take a look at those mistakes. You’ll learn why they’re so dangerous and what to do instead..so you can profit while staying protected from big losses like mine.
Mistake #1: Learning from the Wrong People
The stock market can be a very expensive place. If you don’t know what you’re doing and taking tips from the wrong people, you can lose a lot of money very quickly.
…Which is exactly what I did.
I started out like a lot of people: going to seminars and taking financial programs. I probably spent over $50,000 easily, on courses.
Here’s where I got burned:
I was learning from people who spent all their time selling courses about the stock market, rather than WORKING in it. None of them were even fund managers!
I followed their advice to a tee and I was the perfect student. I did everything they told me to do…yet I still lost $100,000 in 18 months.
Smart Investor Strategy: Learn from people who are actually making money in the stock market…not just teaching about it.
Once I lost all that money, I switched tactics and started learning from fund managers who were actively making money in the stock market.
I read all of Warren Buffett’s Berkshire Hathaway letters and actually had contact with Warren Buffet himself. I also started learning directly from the top fund managers across Australia.
I stopped looking to people who said they knew what they were doing…and started learning from people who were PROVING, day in and day out, that they did. That shift made all the difference.
Mistake #2: Risking Too Much
Risk management is something I talk about a lot. That’s because I didn’t protect myself well in my early days…
Back then, I would put around 10%-20% of my portfolio into one stock. Then I’d cross my fingers and hope that it went well…because I’d be in trouble if it didn’t since I was also leveraged.
…And of course, it didn’t go well. And I blew $100,000 when just three accounts went bad.
Smart Investor Strategy: Don’t put all your eggs in one basket.
Thousands of opportunities will come your way…so don’t focus entirely on just one!
That’s where my 1% Rule comes in:
Even if I’m very confident in a new stock, now I’ll only invest 1% of my entire portfolio into it.
That doesn’t mean that I own 100 companies at any given time. It just means that I’m only adding 1% at a time. If a stock’s looking promising, I’ll take another 1% and slowly build up that position over time.
I also follow my 5% Rule…
No matter how good a particular stock looks, I’ll never go above 5% of my capital in one company. Even if I think I’ve stumbled upon the next Starbucks, I’ll never invest more than 5% of my portfolio in it. It’s just not worth the risk.
Jim Simons — the most successful investor on the planet — will only invest up to 0.25%-0.5% in any given stock. Diversification works!
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Mistake #3: Invested Emotionally
Early in my career, I believed that trading should be exciting. I was either really excited or really terrified when I made my trades. I never felt peace or security or safety.
That’s mainly because I focused on the dollar amount in my accounts. When you focus on the dollar amount, it’s so hard to grow because your emotions get in the way…
Let’s say you’re investing $200 in a stock. That’s nothing, right? If you lose $200, it’s not a big deal. But once your account grows, and now you’re investing $2,000 or even $20,000 in a stock, that starts to get your pulse racing.
If you stay in the dollar mindset, you’ll always be scared of putting more on the line. You’ll be too afraid of losing money that could pay for your family’s home or your kids’ education…and you’ll never grow.
When I let my emotions run the show, I made some truly horrible financial decisions.
Smart Investor Strategy: Be systematic and unemotional in your investments.
Now, I follow an objective process to know when to buy and sell stocks. I don’t get emotional because I have a plan to follow. (Check out the Freedom Trader Stock Checklist for my simple, low-risk method of choosing stocks to buy!)
I now always look at stocks as percentages, rather than dollar amounts.
In my accounts plus the accounts I manage for clients, I lose or I gain a couple of luxury cars or global holidays, every day. But if I thought like that, I’d be an emotional wreck! I’d never be able to stomach the fluctuation of the market.
Percentages are unemotional and non-exciting. Instead of gaining or losing a luxury car, it might just be 2% of your portfolio. It’s hardly anything! That helps you make smart, non-emotional decisions.
My 1% Rule also helps put some distance between myself and the performance of the stock. Because no stock has the power to break me, it doesn’t affect me emotionally.
Mistake #4: Unrealistic Expectations
Early in my career, I had completely unrealistic expectations of what the stock market could do for me. And it caused me to make risky investments and silly mistakes that cost me big.
For one, I had an expectation of doubling my account every year. I was told (by some of the bad instructors I learned from) that the stock market could replace my yearly income. I was expecting to make $30,000 in profits every year…even though I only had $30,000 in my account.
That’s a 100% return…which is BS! No one makes that.
But I believed it was possible. So I traded like crazy to try and make it happen. I would try and time things to buy low and sell high and only keep stocks for around 24-48 hours before selling them frantically.
I also believed that every stock I invested in should be a winner. If I bought stocks that didn’t perform, I thought that was a sign of failure on my part. I was aiming for a 100% success rate and put so much pressure on myself to be perfect with my picks.
Smart Investor Strategy: Be realistic in your expectations.
Warren Buffett makes 19% returns. Jim Simons — who has 100 PhDs working for him to manage his funds — is at 30%. What makes us, as mere mortals, think we can make 100% returns? It’s impossible.
A healthy expectation is to make between 10-25% returns every year.
The fund managers I mentored under gave me realistic expectations when it comes to stock success rates, too. If hedge funds get more than 55-60% of their stock choices “right” (meaning they’re profitable), they consider that a good year.
We — myself and my Blueprint students — are actually getting over 80% right.
I’m not saying we’re better than the fund managers. There are so many differences between multi-billion-dollar hedge funds and smaller accounts. But I want to give you some REAL numbers to set your expectations.
Aiming for 55-80% of your stock picks to be profitable is a healthy expectation.
Mistake #5: Not Knowing What You’re Buying
Early in my stock market career, I just saw stocks as ticker symbols. I’d say, “Ah, ABC’s doing really well, I should buy ABC.” But if somebody asked me what ABC did, I wouldn’t even know.
At that point, I was 100% charting, or performing technical analysis. That’s where you plot out a stock’s journey, draw trend lines, try to time your buys and sells…that sort of thing.
There were no fundamentals, no evaluation or understanding of what the company did. I just looked at the price on the charts and if I thought it would go well, I bought the stock.
Because I didn’t have that bigger picture about the company and what they produced, I ended up buying into a lot of bad companies…and losing a tonne of money in the process.
Smart Investor Strategy: Buy a great business, not just a stock code.
One thing I learned from Warren Buffett is when you buy a stock, you’re not buying a ticker symbol, you’re actually a part-owner of a business.
You want to read up on the companies and learn what do they actually do. Do they even match your ethics?
I personally shy away from cigarette companies because I know that kills people. There are plenty of other great opportunities where I can make my money.
You also want to make sure you invest in companies that have a track record of being profitable. That greatly reduces your risk.
I always go through financials of a company now before investing in their stock.
And I don’t care what the chart’s doing, I won’t look at a company unless it’s making profits. It’s as simple as that.
That’s why the Freedom Trader Stock Checklist is so important. It outlines the 10 criteria that will literally screen out any companies that haven’t been profitable for the last five years, so you can focus on the right companies.
They say hindsight is 20/20. For me, it’s more like 100/100…because it feels like that number I lost, $100K, is forever branded on my brain.
But now that I’ve come out the other side, I’m so grateful for blowing those three accounts. The experience helped me see what not to do, pushed me to connect with the right mentors, and taught me the crucial investment lessons that guide everything I do today.
And if nothing else, at least you can learn from my mistakes and avoid making the same ones yourself! There’s no reason to risk your precious capital like I did.
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