My Schwab account ballooned to $100,000. That’s when the greed and day-trader mentality took over.
Back in June 2000, this magazine ran an article titled “True Confessions,” which related the tale of one editor’s foray into the dark excesses of the dot-com-era stock market. The author, who chose to remain anonymous, confessed not only to investing in a number of wildly inflated tech stocks but also to buying them — gasp — on margin. “In retrospect,” he wrote, “I admit that I succumbed to greed and hubris, betraying the principles of responsible investing by playing the market with borrowed money.”
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If you haven’t already guessed, the author was me. Five years earlier, I had opened a Schwab account with $10,000, invested in Microsoft and a few other solid prospects, and watched the account grow to $100,000. That’s when the greed and day-trader mentality took over. I bought into the philosophy that corporate earnings didn’t really matter in the internet era, that momentum would propel popular stocks ever higher. I started investing in companies whose products and services I didn’t understand, and doing so with other people’s money. Then the market crashed, and I got not one but two margin calls.
Volatility and valuation. The same impulsive mindset that pushed stocks to the breaking point in 2000 has parallels today in the cryptocurrency markets. A lot of novice investors have been buying bitcoin, watching its value swing wildly up and down. Like stocks 20 years ago and home prices 10 years ago, cryptocurrencies have crept into watercooler conversations. When our UPS guy reported that he has bought in, we took it as a sure sign that bitcoin has entered bubble territory.
In her cryptocurrency FAQ, Nellie Huang points out that bitcoin has no revenue, no earnings and no underlying asset value, so prices are driven by demand alone. When an ordinary stock’s price rises, it’s usually based on expectations of earnings or revenue growth. At worst, she writes, bitcoin’s rise fits the “classic definition of Wall Street’s ‘greater fool theory,’ and at best, it describes speculation, not investment.” It also reminds me of late ’90s blind investing because few investors understand its blockchain-technology underpinnings.
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The stock market is easier to call. As investing editor Anne Smith explains in Topic A, the triggers for the February downdraft were threats of higher inflation and a rise in interest rates. But we don’t think the bull is ready to expire; it’s still supported by strong corporate profits and healthy economies around the globe. Some excess valuation has been wrung out of stocks, but as yields on Treasuries tick up, many stocks will be vulnerable to selling, and you can expect more anxiety-producing trading days in the months ahead. If you’re buying, Anne recommends investing overseas and in sectors that won’t get socked by higher rates. And if you get queasy when stocks tumble, it’s a sign that you might want to pare back your holdings.
My hard-won lesson. Finally, please take a look at Crowdsourcing. The question we asked readers this time around was “What was your biggest financial mistake — and how did you recover from it?” As you now know, my biggest stumble was playing stocks like roulette nearly 20 years ago. I stayed out of the market for a few years while I licked my wounds, but my lesson in investing (and humility) has served me well. In 2008 and 2009, I took advantage of bargain prices to get back into the market. Now I am fully invested in a mix of stocks and bonds that I won’t have to tweak much until I am a couple of years from retirement — no matter which direction the market goes.
