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How I Went Broke From My Own Arrogance

by Simon Black, Sovereign Man:

In 1999, as an arrogant 20-year old kid who thought he knew everything, I went flat broke.

Actually, I was worse than broke. On top of losing all of my money, I was also in debt more than $22,000… so I had a negative net worth.

That was an astronomical sum for me at the time, and I thought I’d never recover.

I wrote about this a few months ago, explaining how I had borrowed money through a bank loan that was secured against my future earnings as an Army officer.

And then, without any real knowledge or training, I dumped the entire amount in the stock market, pretty much at the peak of the dot-com bubble.

At first I had a couple of small wins. I was daytrading popular Internet stocks like Yahoo, moving in and out of positions sometimes in as little as a few minutes.

For example, I would buy 1,000 shares of a company at $20, and then immediately sell if the stock price went up by 5 cents.

Doing so would net me about $30 after commission, and every time I made money it only reinforced my own arrogant conviction that I was a highly skilled investor.

In reality I was just a stupid kid, and I didn’t realize how much risk I was taking.

Eventually my good luck ran out. Stock prices started falling, and I suffered my first losses. All the little profits I had made evaporated, and soon I was in the red.

But rather than learn from my mistakes and re-assess what I was doing, I doubled down, borrowed more money on margin, and bought even more shares of companies I didn’t know anything about.

Then one day the inevitable happened.

I bought shares of Compaq, a leading computer manufacturer at the time.

The day I bought Compaq shares may have been the stock’s all-time high. In fact, I may have literally been ‘the guy’ who paid the most money for the shares.

Because as soon as I bought the shares, the price started to fall… just a little bit at first.

I convinced myself that the shares would rise again and I just had to be patient. But the price kept falling.

Mind you, my belief wasn’t grounded in any actual fact. I hadn’t conducted any analysis about the business, management, or share fundamentals.

I made a decision based on absolutely zero data.

I did, however, ask my friends, who were just as naïve as I was. And naturally they all encouraged me to NOT sell because the price would go back up.

It didn’t.

Eventually the broker liquidated my entire position through a margin call, leaving me with absolutely nothing. And I still had to pay off the original $22,000 debt (plus interest).

It was a difficult, painful, expensive way to learn, but I eventually did gain from the experience.

It’s not to say that going broke taught me how to be a better investor. Far from it.

Going broke taught me that I didn’t know anything about investing.

And how could I? How could anybody?

Investing, just like so many things that make us successful, is a SKILL.

I have friends, for example, who are phenomenal surgeons. They didn’t just wake up that way. They didn’t roll out of bed one morning and start operating on people.

They studied. They interned. They spent years in residency honing their craft and building their skills until they became master practitioners.

Like surgery, investing is a skill– and one that most people never had the chance to develop.

Again, how could we? Successful investment habits aren’t taught in public schools, and most people don’t grow up with much exposure to the topic.

Laszlo Bock, Google’s top HR executive, published a fantastic book on recruiting and conducting job interviews last year called Work Rules.

Read More @ SovereignMan.com

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