20 Rules To Know To Stop Making Dumb Investments

Rules

Hi Guys,

In response to hearing yet again another story of someone losing their money in investments with fellow Members, I wrote this piece below to help people stop losing money investing in crap or getting scammed by charlatans, crooks, or inexperienced investment promoters. Also, this piece will help you to survive financially in this bear market, which many of you have never seen before.

I’ve witnessed a lot of financial damage realized by Members who invested in crap in my years here as a Member (since 2011 off and on). The Financial event is the single best financial event put on anywhere by anyone, and you are taught how to invest successfully and how to avoid mistakes, but some people get caught up in excitement and hype and end up doing dumb things outside of that event, and ignore what was taught.

As I stated above, hopefully, this post below helps some of you not lose your money and may also make you a lot of money, so if you have a few minutes you should probably read it in its entirety.

I also want to make clear that I’m not immune to losing money or some kind of genius who never makes a mistake. I just don’t lose a lot when I’m wrong and I don’t make dumb bets that don’t have much of a chance of working out. But I did go broke when I was 25 years old (The first piece of advice, go broke when you don’t have much, it’s much better than going broke after you are rich, which I don’t plan to do now). I learned my first painful lesson in early 2000 finally giving in to all the hype of the bubble at that time and buying a dot com stock (Healthion, symbol HLTH, now absorbed into WebMD). I rode it from $63 to $11. Making matters worse, I had bought it in my father’s account (as you aren’t allowed to trade while working at an investment bank-don’t tell them please) and I had to write him a 5 figure check and I couldn’t take the tax deduction on. And there was my first lesson on bubbles, and getting caught up with emotion in an investment. I had even started studying investing 5 years earlier, and still made a bad mistake. But that mistake left an imprint to be more careful, and check my emotions at the door.

(FYI, I’m an investor and I worked on Wall Street at a Swiss investment bank in the late 90s during the dot com bubble. I also was a prop trader (equities) at a NY firm during the bear market of 2000-2003. And I’ve been investing in real estate since 1998 I’m sure my percentage return on capital is in the top 1% of anyone here and more importantly, I didn’t have big drawdowns/losses along the way. I tell you this about me so that you can know I have expertise in this area. It’s healthy to question what you hear, whom you are hearing it from, and what their motive is, and to not accept things blindly. Perhaps that should be rule #1 below.)

Here it is and I hope you get the message (and a bit of humor).

The Top 20 Rules To Know So You Stop Making Dumb Investments

(Disclosure: this should only be regarded as an opinion and not professional advice and you should seek out your financial advisor first for any decisions you make ).

1. Realize that more than finding that one great investment to make you “mega-rich”, you should first avoid doing dumb things that can bring on big losses. This alone will make you richer, and faster if you avoid all big losses along the way and just invest prudently over time. Unfortunately, many people have a “lottery” mentality to investing and are hoping that this “one great investment” works out and they will become a “billionaire” while they are sitting on, and/or realizing, massive losses and taking massive risks they don’t understand. This lottery mentality is brought about because of FOMO (fear of missing out) feelings inside you. It doesn’t matter if you “miss out”. For the one time you missed out on some worthless crap that actually went up (because you were being prudent), there were 19x you were right to have stayed away. This is what is called survivorship bias. We only see the one time something worked (survived) and ignore the many times similar stupid things didn’t work. 


2. Think like a contrarian. When everyone is involved and talking about something it’s likely not a good investment at that time (“hot” investments create overpricing) or it may never be a good investment regardless of price. Look for things that are hated or ignored (but that have good prospects for the future) and are down in price. It’s more important what price you pay than what you buy. Read that last sentence again. 


3. Just because you like someone and they are in the Member group doesn’t mean you should invest with them. Not everyone in the Member group is your best friend. Overwhelmingly, most here are good people, without a doubt. A very small few are scammers, I hate to say. A few more think they know what they are doing but they don’t and they naively get you involved in crap and lose your money, but they had good intentions (for whatever that’s worth). So you need to analyze the investment separately from the relationship If you don’t know how to analyze an investment then ask for help from a trusted professional (hard to find) or don’t do it. Ask the promoter for an income statement and balance sheet for the last 3 years minimum. If they say you can’t ask for that or don’t have it, walk away. If they do have it you need to understand how to read it and draw conclusions from the financials. If it’s an early-stage investment ( angel type) then you are really betting mostly on the manager and the viability of the product. Both things are very hard for most people to make a good judgment about. You should probably avoid angel investing together unless you are financially free and have expertise in that area. Bottom line is, if your sole reason for the investment is you like the person, don’t do it until you look at the financial facts and are able to judge the prospects. 


4. If you are overly excited, or even worse, arrogantly confident about your investment, you likely will lose money. Emotion is the enemy of investing. Don’t look to meet your needs of variety, significance, and connection from your investments. 


5. Think in terms of probabilities when investing. Nothing is guaranteed and no one is always right. You need to be able to assess the probability of a positive outcome. Unfortunately, this is very hard for most people to do. Most people just see the potential promoted gain and get excited and ignore the fact that it’s very unlikely to occur. It’s a major flaw of human nature and the professional promoters and charlatans know how to take advantage of this in you. 


6. If you are buying trading “systems” or “programs” based on technical analysis or “black box” automated trading systems, you will lose your money. Goldman Sachs doesn’t have a technical analysis desk and they make money 80% of the trading days. Technical analysis is maybe 5-10% of professionals thinking but only for entry points on an idea they already have which they based on the fundamentals of the investment. Also, if someone has an easy guaranteed trading system that really works, why are they telling you? If I had that I would just sit there all day printing money with it and I wouldn’t tell you (sorry). 


7. For crypto “investors” who say “investment banks and hedge funds are getting involved, so it must be good” realize the IB’s and hedge funds are trading in it because that is where a lot of dumb money is and they will get that money and you will lose yours. I’m sorry but that is the truth no one tells you. 


8. If someone tells you that you will get 10-40% for just depositing your money in an account with them, and they have no other business prospects other than lending it out to crypto traders, that is a Ponzi scheme at best, and a scam at worst, perpetuated by naive/ignorant people or straight-up criminals. I’ve said this for the last 2-3 years in this group and we see now all of these stablecoins, staking, and other crap imploding. Hopefully, some promoters will go to jail. 


9. Buying stocks should be thought of as buying a part of a business. It’s not just something that goes up and down randomly. If you don’t know how to analyze a business then you should just buy an S&P 500 index fund every week/month over many years and not look at it. You will do fine with this approach and beat 80-90% of most other people’s returns over time. Again you should have at least a 10-year timeline where you do not need the money and set it up automatically to invest every week or month 


10. This one will make many people mad but crypto has no fundamental value to anyone except drug dealers, extortionists, and kidnappers. No one else is transacting in it, it’s not an inflation hedge and it’s not an uncorrelated asset. It’s not a solution to bad fiscal policy, it’s a symptom of it. Like cancer that has grown in one’s body due to unhealthy food choices and an unhealthy lifestyle, crypto has grown out of unhealthy monetary policy. It may go up again(or down) but realize that it’s highly speculative and already 99% of all crypto coins have gone to zero. Why invest in an asset class that has a 99% failure rate? Trade it if you must get whatever emotional juice that gives you (read rule #4 again) but again, think about the probabilities for the long term. Diamond hands and laser eyes (terms that instruct you to “never sell”) is a stupid investing strategy that was sold to you because if no one sells ever then maybe it has a chance. In the end, central banks will likely control the crypto that will be legal and they won’t allow competing currencies (like China and India have done already). The whole thing is basically a cult. Good luck 


11. Interest rates are like gravity. When interest rates go up, asset prices come down. All the speculative crap that works when interest rates are zero and governments are handing out money does not work when that ends (it’s ended). I think this should be clear to everyone these past several months. 


12. Elon musk recently said, “it’s been raining money on fools for too long”. This mainly applies to VC investments. The value of those things is down a lot (primarily because of rule 11), but because they aren’t quoted daily you don’t see it. But does it also apply to you when you made money on speculative crap? Was money just raining on you or was it sound investing? I took delivery of a Mercedes G Wagon in November 2021 that I had ordered 1.5 years ago and I paid $177,000 for it and I sold it two weeks later for $260,000. That was money raining on me, not any great skill. Know the difference. 


13. VC (Venture Capital) investing should be for people who already have a solid diversified portfolio of investments and are financially free from other assets (such as income- producing apartment buildings or commercial properties, a diversified stock portfolio, ownership in private businesses, etc.). VC investing is speculative. Maybe 1 out of 10 VC investments will be a big winner, 2-3 may do ok. 7 will go to zero. So you must invest in a lot of companies to win and only do it if you are financially free already. But most people do not possess the skills to evaluate VC investments. 


14. When you try to buy dips in a bear market, thinking you caught the bottom, or you buy a “good idea” you saw on CNBC, say to yourself “I am the dentist”. Professionals aren’t buying dips in bear markets (except possibly to trade short term) or trading off of CNBC. “Dentists” do that (no offense to dentists in the group). 


15. Now if your timeline for needing the money is at least 10 years, it’s probably ok to invest in this market but should buy periodically- weekly or monthly, over a longer period of time (years). This is called dollar cost averaging which you probably know already. 


16. Some Foreign markets are extremely cheap relative to US markets but harder to invest directly. The valuations are very low compared to the US and there are markets that are ignored out there that will likely produce better returns. Think again about the contrarian rule and look abroad globally. However, it’s better to buy stocks individually there on those foreign exchanges than buying US-based ETFs, if possible. But ETFs may be decent as well. This should be part of an overall diversified portfolio 


17. Many of you have never seen a bear market. The market went up for 12 years straight. Everyone is a genius in a bull market and thinks they have it all figured out. Markets don’t always go straight up. Study history. 1966-1982 the market went nowhere and ended up at the same price after 16 years, and during much of this time inflation was raging. We may be in a similar time now. Also from approximately 1933 to 1952, the market ended up at the same price. Buying and holding an index fund here may not produce any returns, at least in the short and medium term. Stock pickers and other assets will likely outperform indexes now for a while. Can you sit through a long period of no returns or negative returns? It’s possible that this happens now. 


18. Bear markets usually crush the hopes of all the dip buyers before they bottom. Be patient. There is no fundamental reason why stocks should rage to new highs right now. Too many small retail investors are buying every dip right now thinking we will snap right back like in 2020. Highly unlikely. Again I would buy periodically to dollar costaverage here if your timeline is longer.

19. Bear markets have big rallies that look like a bull markets but they aren’t. 


20. And finally, all bets are off if the fed stops raising rates and doesn’t crush inflation here (and then cuts rates!). We will then likely rally to new highs in nominal terms but the purchasing power of your money will go down even more. And maybe then all of the speculative crap will work again but then we will then likely have much bigger problems such as war, more severe inflation, famine, riots, and general chaos. In which case guns, food, some gold, and a rural property may be your best investment.