The financial media has examples of people telling you about great investments that they've made
all the time but too often we don't talk about our mistakes and that's a shame because there's so
much that you can learn from them in that light today i'm going to talk about my five biggest
investing mistakes and the important lesson i learned from each one my name is brian stoefel
thanks to quarter for sponsoring today's video so let's jump in the first big mistake i made
was right when i was beginning investing and that was in a company called rosetta stone
many of you are likely familiar with this company it provides language learning services
and software why was i excited well at the time roughly 12 years ago my wife and i were going
to move for a short period of time to costa rica we used rosetta stone to learn spanish
and loved the product and as former teacher i saw the possibility for it making its way into schools
municipal budgets were tight it was tough to find foreign language teachers and i could see this
being incredibly popular at the school that i taught at and many others with that in mind i
bought shares so how did it go the answer not well i bought chairs for about 26 bucks a piece
and i sold them at about seven meaning i lost 73 of my investment and i underperformed the larger
market by even more but what's the big lesson to learn from this well i realized that i fell
in love with the story about rosetta stone about how it helped my family and how i saw it with the
potential to help many schools who needed foreign language teachers however the market didn't care
about my story and the lesson that i learned is don't fall in love with a story about a stock
fast forward a couple years and we've got a new company that i made a huge mistake with that
was stratasys now this company is a 3d printing company for those that are unfamiliar this is a
pretty revolutionary technology a printer you see here can actually print out products that can be
used in real life or prototypes of things that can be mass produced later on it can even make
things like the shoes that you see here it doesn't take long to start seeing all of the potential
applications for this technology and i was very excited so how did it do again not well i bought
shares at 93 dollars a piece and i sold it for around 40. i lost 57 of my investment but what
really hurt was that the market kept going up during that time so my underperformance was vast
now the lesson i learned from this might have been one of the most important in my entire investing
career and that is you have to focus on companies with sustainable with an emphasis on sustainable
competitive advantages here's what i mean stratasys was a great company with great products
and revolutionary technology because of that its profits were growing rapidly however while i held
shares all of a sudden that growth rate started to slow dramatically why because it wasn't the
only company with the technology the competition came in and stole business away the only way to
have a revolutionary product and benefit over the long term from it is if you have a moat and
we've talked a lot about them on this channel it comes in the form of network effects high
switching costs low cost production intangibles like brand value and even counter positioning
stratasys really didn't have enough of those to benefit over the long run the lesson from this
is clear and that's that moats matter in investing a lot my third example comes from an investment
in a chinese internet car selling site called bitauto.com now here's an article i wrote about
this company for the motley fool and what excited me about bid auto is that one of its subsidiaries
was actually listed on a different exchange and i did the math and when i did i realized that by
buying shares on the us exchange allowed you to get the most valuable subsidiary at a discount
and all the other pieces were generally free in other words i thought that this was a no-brainer
bargain of a value stock but it turned out not to be such a no-brainer i bought shares at 34
a piece and i sold them at about 13 meaning i lost a ton of money and i vastly underperformed
the market i saw the potential for arbitrage or a difference in valuation and i ran after it had
long i ran after it so hard that i fell right off a cliff and what's the lesson to learn from this
it's that sometimes more often than not for me value plays end up becoming value traps my fourth
example comes from a much more recent investment in peloton now what made me interested in peloton
well brian and i actually covered the company right here on this channel about a year ago when
we did there were so many things that i loved about this company it had the barbell technique
which i talked about a lot and it had its bikes and its treadmills and it connected fitness on
one end but what really interested me were digital subscriptions on the other end and that's where
you can pay peloton 13 a month to use its app and you don't need to buy the bike or the treadmill
putting all the pieces together i saw examples of multiple moats that encouraged me to buy shares
but this investment imploded almost overnight i bought shares at about 110 a piece and i sold them
for more than half off meaning that i lost over 60 percent of my investment now brian and i followed
up that video with another one explaining what was going on you might remember that i said that
those digital subscriptions were what was really interesting to me because it meant that you could
be a peloton customer without putting down over two thousand dollars on a bike or a treadmill
but when i dug into the numbers what i saw is these blue charts which are subscriptions that
you have for connected fitness in other words you bought those expensive things versus those digital
subscriptions there was a wide variant then if you add in the cost for each one of those you
see that digital subscriptions which is what was so exciting to me were minuscule compared with
subscriptions coming in for those that already put 2 grand down on a bike or a treadmill when
i took this information went back and reevaluated where the company was at i saw that i was sorely
mistaken and many of the moats were either weaker or eliminated entirely from my analysis this is
embarrassing but the takeaway lesson for me was quite simply that i didn't do my homework and you
this is a stock that i actually still own riskify claims to have the artificial intelligence to help
e-commerce companies reduce chargebacks that's when they send something to someone and they
say they didn't get it which means that that company not only loses its inventory but it
has to refund that money if you look at this chart riskify claims that what they can do
is reduce costs associated with detecting fraud by about 40 percent and increase sales by about
eight percent because you're approving more orders that you normally might not sounds interesting so
how is it gone so far the answer not well i bought shares for about 36 dollars a piece and today they
trade for about six dollars a piece that means i've lost over 80 percent of my initial investment
the key takeaway here was that i understood that this was a risky investment this operates in an
area that i'm not super familiar with but i was intrigued enough to take a small position the
result is that i made sure i devoted less than one percent of my overall portfolio to this therefore
i'm not sweating these losses right now the key takeaway is to keep your risky bets small if you
lose everything it's no big deal and it ends up being a huge winner just a little will be enough
now speaking of huge winners the last thing that i want to point out is that despite all these losses
all it takes is one huge winner to cancel out all of them my personal example is shopify even
with the stock losing half of its value over the last couple of months all of my gains from shopify
cancel out the losses from these investments many times over in the investment world that's what
the power of asymmetric returns really means so those are my five big investing mistakes
i hope that by learning from them now you don't have to commit them yourself but i'm curious what
are your biggest investing mistakes go ahead and share them in the comments section below brian out