Lessons From My Biggest Investing Mistake

Recently at work, a question was broadcast over Slack (for those unfamiliar with Slack, think of a messaging tool that is a cross between email and instant messaging) asking if anybody had any interesting stories about stocks that they had sold that they later regretted. The story was to be used in an upcoming podcast (if you want to hear the dulcet tones of my voice recounting the story, check out this episode of Motley Fool Answers and go to the 18:35 mark). I thought it was a fun exercise, and so decided to check to see what my most interesting story was. I had been investing in individual stocks for over a decade, so I figured I probably had one or two stories that could’ve been mildly interesting with the benefit of hindsight.

So I started doing some digging, specifically looking at my earliest purchases. One trade immediately stood out to me for 3 reasons:

  1. I purchased the stock incredibly early in my investing career. It was 2004, one year out of college and the first year I had started investing in individual companies.
  2. It was a large purchase. I bought nearly $6,700 worth of stock in this company. I don’t have account statements going back to 2004, so it’s a little difficult to tell how much of my portfolio this represented, but based on other trades made around that time and how early I was in my career, I have to imagine that not only did this represent a considerable chunk of my “individual stocks” portfolio specifically, but also the entirety of retirement funds in general. In fact, I’m almost positive this investment likely was dangerously non-diversified.
  3. Oh yeah, and the company was Netflix

I had bought 610 shares of Netflix in 2004 for $6,692. About 7 months later, I sold those 610 shares for $10,204 just 7 months later for over a 50% gain. I must have thought I was an investing genius (I don’t know for sure, since I wasn’t keeping an investing journal at the time). However, anybody who has followed Netflix as an investment over the past decade or so likely knows that it’s been one of the biggest winners in the US market. And as you may have guessed from the spoiler-filled headline, selling my shares for a 50% gain in 7 months turned out to be an absolutely horrible mistake.

I bought my 610 shares of Netflix at $10.96 a share. In 2015, there was a 7:1 stock split. Had I not sold and instead held on, those 610 shares would’ve turned into 4,270 shares today. As of this writing (September 15th, 2017), Netflix is trading for $182 a share. So those 4,270 shares would be worth $777,140 if I had held onto them all the way through, an amount that is multiples higher than all of my retirement funds combined currently (despite having 13 more years of contributions). That’s quite a staggering and sobering number to consider.

I want to make sure right away that people aren’t drawing the wrong conclusions about my story, though. This isn’t at all an attempt to brag about my investing genius. Nestled around my seemingly prescient purchase of Netflix were many far less successful investments. Just a few months after my Netflix purchase, I also bought shares in a company called Xybernaut, which ended up filing for bankruptcy within a year. A few months after that, I bought shares in Advanced Micro Devices (AMD) for $18 a share. I watched the stock climb to $40 a share and held while it started dropping. I finally sold at a loss for $13 a share, which coincidentally is almost exactly where the price sits over a decade later.

And while compound interest is an incredibly powerful force, it’s not quite as powerful as my Netflix example makes it seem. As I mentioned before, Netflix has been one of the most amazing investments over the past decade or so, and has absolutely crushed the return of the market. The returns I described above are not something that people should be reasonably expecting. For a pretty stark visual on just how much Netflix has outperformed the rest of the market, look at the graph below comparing the returns of Netflix (in blue) and the S&P (in red) during the holding period in question (roughly 13 years). Having trouble finding that red line? Look really close to the x-axis. You might need to click on the graph to view the larger version in order to see it.

This could be a good lesson in buying for the long term when it comes to investing. In the graph above, you might notice a bit of a dip for Netflix in 2011. During that time, Netflix went from over $42 a share to close to $9 a share. That’s a loss of over three quarters of its value in about half a year. That’s a terrifying drop (and I was a shareholder at the time), but anybody who sold in a panic then is likely really regretting it now.

However, this lesson isn’t a great fit either. Why? Because the money that I had invested in Netflix in 2004 was money that I was hoping to eventually use as a down payment on a house, and that’s exactly what I ended up doing in 2008. There was practically no way I was holding onto Netflix as an investment no matter how strongly I felt about it at the time. So I didn’t really “lose” that ~$700k because that money got put to a different use.

So what lesson should this teach me? After a lot of thought, I realized it wasn’t just an investing lesson, but a life lesson, and one that I had been slowly coming around to over the past year or so. It’s been said by many people and in many different ways (including a whole book being written about it), but seems to be put most succinctly by Dropbox founder and CEO, Drew Houston:

“Don’t worry about failure; you only have to be right once.”

Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten.

The investing application is easy to see. Imagine if, along with my investment in Netflix, I had invested equal amounts in nine other companies. Imagine the unlikely scenario that all nine of those companies went completely bankrupt. Even with that horrible performance (90% of my investments had the worst possible investment outcome), that roughly $60k loss ($6,692 x 9 companies invested in) is still dwarfed by the $777,140 gain from Netflix. Yes, as noted above, Netflix is an extreme example, but so is having 90% of your picks be a complete loss. A quick look at my own portfolio shows about an even split of positions that are up versus positions that are down. The main difference is that where my losers are down 40% and 50%, my winners are up 150% and 200%. The gain from my top winner more than makes up for the losses on all of my losers combined.

So that’s the investing application, but how do I think this lesson applies to my life in general?

I’ve always wanted to be an entrepreneur. When I was young, I thought about making a lemonade stand. Later, when I was older, it was all about creating a board game cafe. However, I never came close to acting on any of those goals. Why? Because as a person, I’ve always been rather conservative: Not in a political sense, but in the sense of being very averse to taking risks and overly fearing failure. Whenever I thought about trying to act on my ideas and taking a chance, all I could think about was all the ways that things could go wrong. I was afraid of failure, and that fear paralyzed me into inaction.

That began to change a few years ago with a fairly traumatic, life-changing event: I got laid off from my job. It was an event that shook me. For those few months that I was out of work, I found myself feeling like a failure, questioning my worth, and wondering if I had anything to contribute. The story had a happy ending, as I ended up getting a job at The Motley Fool that I absolutely love, but the experience of being laid off definitely had a lasting impact on me. I realized the line between failure and success is thinner than I thought, and that no matter how safe you try to play it, things can still go wrong.

Around this time, I started reading a lot about entrepreneurs and their paths to success. I had always assumed that these amazing entrepreneurs basically just rolled out of bed one day and created revolutionary companies like Amazon and Microsoft because of their sheer genius and that their success was basically inevitable. And while that’s true for some people like Jeff Bezos and Bill Gates, what really stood out to me was how often some of the most accomplished people of our time failed before finding success.

Steve jobs was famously fired from Apple after a series of poorly received products before eventually returning to lead them to greatness. Walt Disney was fired for “not being creative enough” and one of his early ventures went bankrupt. J.K. Rowling was “poor as it is possible to be in modern Britain, without being homeless” and had Harry Potter rejected a dozen times. Oprah Winfrey was fired and told she was “unfit for television news”. Bill Belichick was fired as an NFL head coach. Michael Jordan couldn’t make his varsity high school basketball team.

In fact, the more I read, the more it seemed like the defining characteristic and recurring trait found in all of these successful people isn’t that they were necessarily smarter or worked harder (although I’m sure that helped), but instead that they didn’t let failure stop them. Many of these people experienced failure more often and on a larger scale than I ever have, and yet they persevered. Even the aforementioned Jeff Bezos, who found early success with Amazon, has experienced his share of failure (Fire Phone?) and really seems to have embraced the idea:

One area where I think we are especially distinctive is failure. I believe we are the best place in the world to fail (we have plenty of practice!), and failure and invention are inseparable twins. To invent you have to experiment, and if you know in advance that it’s going to work, it’s not an experiment.

Most large organizations embrace the idea of invention, but are not willing to suffer the string of failed experiments necessary to get there. Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten.

We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

Jeff Bezos: ‘We are the best place in the world to fail’ by Eugene Kim

Against my inherent conservative nature, I’m starting to come around to this idea and starting to fear failure less. One example of this is what you are reading at this very moment. Rampant Discourse was born out of a desire to finally take action on some of my ideas and stop listening to the internal voice that kept telling me all the reasons it would fail. 78 published articles and nearly a year later, and that voice is a little quieter now. I’m proud of what we’ve accomplished here so far, and am looking forward to what comes next. At the same time, I’m not content just stopping here. Next on the list? Designing a board game. After that? The sky’s the limit. Maybe a board game cafe?

So, thank you Netflix, for being an amazing investment. I may not have $777,140, but you’ve helped me to learn a priceless life lesson. Who knows? Maybe one day I’ll hit that home run and the lesson will end up being worth even more.

Full disclosure: I work for The Motley Fool, although I do not work as an investment analyst and nothing that I have written is intended to be an endorsement of any investment and all views are my own. I currently own shares of Netflix.

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Paul Essen
Founder and Chief Discourse Officer at Rampant Discourse
Proud geek. Trekkie. Browncoat. Entil'Zha. First human spectre. Hokie. Black belt. Invests Foolishly. Loves games of all types and never has enough time to play as many as he wants. Libertarian who looks forward to the day he votes for a winning presidential candidate. Father to two beautiful daughters.

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