This is the story of my worst investment (so far). It’s down 46% since I bought last fall. But even worse, I failed to follow my own investment advice. Read on. Avoid my mistakes.
If you haven’t gotten a stock tip from a friend before, it will happen. And when it comes from someone you respect, it’ll be hard to resist. You’ll strongly consider investing your money based on the advice. At least that’s how it happened when Kyle and I had lunch last fall.
Kyle worked for the past ten years as a banking director and a mortgage-backed securities trader. We’ve known each other nearly as long. Over lunch, Kyle told me he’d just bought several hundred shares of Fannie Mae (NYSE: FNMA). Based on his understanding of the industry, their situation with conservatorship and the political landscape, he liked the investment opportunity. He was an expert in this market, and frankly, I was thrilled to get a tip like this.
There was a chance the stock could increase dramatically if Fannie Mae were released from conservatorship. I hadn’t the slightest clue about the current legal situation or how Fannie Mae has fared during the 2008 financial crisis (not well). But still, I love talking finance, so I was all ears.
In a Hurry
Kyle and I had a lot of catching up to do during lunch. How’s family and work? How did I like being married (love it), when would he pop the question? This didn’t leave much time for Kyle to warn me about the risks of the Fannie Mae investment, how many unknowns were involved or how long he planned to hold the stock (years).
Instead of doing my own research after lunch, I was foolish enough to rush out and buy 190 shares of FMNA, half as many as Kyle. 1 In Kyle’s defense, he tried to warn me, albeit quickly. He didn’t encourage me to invest – Kyle was merely sharing what he was doing and I went from there. Kyle’s not an advisor or salesman, there was no benefit to him if I bought.
Maybe this situation sounds familiar to you. Bitcoin anyone? 2 It seems all of us at some point get overeager and rush into an investment. You don’t want to sit on the sidelines and miss out.
It’s better to miss out altogether than invest in something without understanding it fully. Obviously, I didn’t follow my own advice in this situation. Sometimes we have to learn things the hard (and expensive) way. I’m sharing this with you with the hope you’ll avoid making the same mistake.
Fannie Mae was and still is in conservatorship. Some think this could end due to Fannie Mae’s profits exceeding their bailout amount. I had no idea what that meant when I invested, except that the federal government took all control and profits after the 2008 bailout. Believe me, I am an unfortunate expert now.
The future is uncertain with speculation that ranges from the stock price going to zero to the price returning to pre-financial crisis levels of over $60/share. 3 Who knows if the federal government will privatize Fannie Mae, as they’ve discussed. “It exists solely due to the convenience of the government.” It’s essentially a lottery ticket at this point…
My plan is to wait and see what happens with FNMA. Maybe it will go to zero, maybe not. But every month when I track my Net Worth it’s a reminder of my mistake. It’s a small portion of my overall investments, but it takes a disproportionate amount of my attention and causes stress.
The point is, investing in an individual stock that I didn’t fully understand was a foolish thing to do. I ignored my first principles. Maybe I’ll invest based on a friend’s tip again someday, but I’ll certainly take my time and learn about the company and the industry first.
I’d rather risk missing out on a good investment than rush into another bad one.
Fortunately, Kyle and I are still friends. But there’s always the risk that money, business or investing can sour a relationship.
Here’s what I learned and my advice to you:
-Figure out what your investing goals and principles are and follow them, particularly when you’re stressed and/or uncertain.
-Try to remain stoic about your investments.
-Diversify your investments and don’t pile into one thing.
-And do your own research!