When it comes to money-matters, every body has their share of not-so-smart decisions they made at some point of time. I have had my own share of stupidities and a few ‘unbelievable stupidities’ under my belt. I have come to realize that the best way for me to ensure that I learn my lesson and never ever repeat them is by documenting them. To make it even more embarrassing for me, I have decided to document them in public view and this blog is a great place to do that. Serves me right I guess :-).
Jokes aside, the idea here is not for us to pose as the smartest guys around, but to be honest about our mistakes and learn from each other’s mistakes. I would love my boys to learn from my bad decisions, so that they grow up wiser. They will however, surely come up with their own stupid stuff :-). After all we will all do dumb things, but as long as our quantum exposure to smart actions outweigh the dumb ones, we will come out winners in the long run. I would similarly encourage our readers to share with us their not-so-smart money/investment/risk decisions so that we all can benefit….and by all means tell us about your smart ones too
Stupidity alert # 1
I used to live in Gibraltar many years back and my job kept me too busy to think smartly about managing my own finances. I had a bunch of cash lying idle in my bank in London and did not know what to do with it. So asked my banker for advice (as he of course had my best interests in his mind :-)) and to cut a long story of extreme-dumbness short, ended up investing the entire amount between 2 PE funds on his advice. I did absolutely no due diligence whatsoever and paid no attention to the facts
– these were completely illiquid investments and I would have no control over them.
– that the correlation between the two funds was almost close to ONE
– both the investments were in the same country so no geographic diversification
– the underlying markets were fairly elevated at that time…(that time it was different and markets could of course never crash :-))
– a bit of quizzing could have easily told me that the fund managers in question were complete idiots…which I found out later, but it was too late 🙁
Anyway, as most of you would have guessed, the investments went bad. Now it was stupid not because it was a bad investment. I am sure even in future several of my investments will be losers. I call it stupid because I had completely disregarded all principles of good ‘money management’. Sound money management is fundamental to the overall risk management of any portfolio, and we will discuss the importance with detailed examples in future posts. Even if I decided to go ahead after some preliminary due diligence, the investment amounts should have been less than 10% of what it was (a considerable portion of my liquid net-worth at that time). Many people get carried away when making an investment and fail to ask the most important question that a good trader is trained to ask – “What if I am wrong?” If I asked myself that question, immediately the answer would have lead me to remove a zero from the figure, before signing the cheque. It doesn’t matter whether one is a short-term trader or a long-term investor, if one doesn’t pay close attention to appropriate position sizing, it is just a question of time before one gets burnt. Well that’s exactly what happened to me………………………………………
……………………one load off my chest now.