My Biggest Investing Mistake As a Beginner
This mistake cost me $5,900!
Hey 👋 - Thomas here.
Good day to my fellow compounders!
In today’s issue, rather than the usual 3-Bullet Sunday, I’m going to reveal my BIGGEST investing mistake when I first started out.
Don’t make the same mistake I did.
In September 2008, I bought 5,000 shares of Raffles Medical. The company provides healthcare services primarily in Singapore.
As an 18-year-old, I had just started investing. My school's library had a Bloomberg terminal where I geeked out every day. All that flashing light from the terminal made me feel legit.
But I was quickly humbled by Mr. Market. As soon as I bought the company at $0.33 per share, the stock price dropped to $0.19. In just two months, I lost over 40%.
Unfortunately, that wasn’t my biggest mistake.
It took the stock SEVEN months to recover to breakeven and it went on a bull run thereafter, so imagine my delight when it shot up to $0.47 by October 2009!
A return of 42.4% after approximately one year. I locked in my profits and gave myself a pat on my back.
After all, Jesse Livermore once said that “no one ever went bankrupt by taking a profit.”
Except that it was the WRONG move. In the following years, the company made all-time highs after making all-time highs.
Oct 2010: $0.77 (133%)
Mar 2013: $1.10 (233%)
Jul 2015: $1.65 (400%)
My 400% return was snuffed out because I sold solely based on share price. Fundamentally, the company was doing well, doubling sales from $200M to over $400M.
Don’t sell based on stock price alone!
My mistake cost me $5,900! Luckily, I learned this lesson early.
This lesson led me to hold on to companies such as Google, which became massive multi-baggers for me.
You don't have to make the same mistakes I did. Here are three lessons I learned from this experience:
#1. You Own Pieces of Businesses, Not Stocks
The stock market serves as a place to buy businesses that can compound your wealth for you. Your ownership is not just a piece of paper that changes hands for a quick buck. Mr. Market will occasionally mess with your head, but always remember that you are a business owner, not a stock trader. This shift in mindset is crucial to your portfolio's success.
#2. Valuations Isn’t Just About Stock Price
Just because Nike’s share price is $131 and Lululemon’s share price is $387 does not make Lululemon more expensive than Nike. Valuations do not simply equal the current share price. Valuations are a function of cash flows, growth and the durability of the business. To learn more, check out the articles I have written on valuations:
Beginner ➜ Figuring out a Company’s Intrinsic Value with PE Ratio
Intermediate ➜ A Primer On Valuation
#3. When to Sell?
Being long-term investors isn’t all about buying and holding forever. It’s about buying and consistently monitoring the fundamentals of the business. Three guidelines I apply on when to sell a business:
The business has deteriorated permanently.
There are better opportunities out there.
My thesis was wrong.
That’s all for today.
If you are enjoying this newsletter, the greatest compliment you could give me would be to say something kind about it online or share it with your friends. I always appreciate knowing that my newsletter helped someone.
See you again soon.
Cheers,
Thomas