My Very First Investment – Learning the Hard Way

Here’s a sales pitch for you: Want to learn how to (or perhaps how not to) turn$5000 into $800? Read on and all will be revealed.

As I discussed in my previous post after moving to Australia and finally making decent progress in paying off my sizable student debt I decided it was time to start learning about investing in the stock market. After asking friends and doing some research regarding the best online broker to use I settled on signing up for by banks online brokerage as it received positive reviews and I knew it was by far and away the most commonly used platform in Australia. I also got $200 free brokerage when signing up which sounded good at the time. Signing up was relatively easy and consisted of printing off a few forms online and taking them, along with a couple of forms of I.D. to my local bank branch for verification.

After setting my very own online brokerage account and I was ready to start losing, *cough*, I mean growing my steadily growing pile of savings. Apart from choosing my online broker the first big decision I had to make was my very first shares to purchase. The whole concept of the value of my hard earned capital rising and falling at the whims of the market certainly was exciting and I couldn’t wait to officially become a market participant (albeit a very tiny one). I’m a reasonably clued on individual so I didn’t expect to become the next “Oracle of Omaha” over night, however as I approached making my very first trade a sense of excitement and optimism spread over me. I was pumped and ready to roll.

I had two main sources that influenced my decision regarding my first stock purchases:

Firstly, I had recently spent a bit of time in the U.S.A. where the majority of people I was interacting with were from the highly conservative segment of the US society – think Tea Party sympathizers and die hard Republicans (Obama is officially the devil re-incarnate). They were all highly intelligent folk – we’re talking doctors, lawyers and accountants, and all had very passionate views on economics and the financial world. It was here that I was introduced to a variety of market commentators, each with their own range of books, blogs and radio shows. I was well aware of my friends’ conservative bias and the likely bias these commentators shared with them, however everything I was reading seemed to make sense and I knew my friends were all highly intelligent people with far more experience in the markets than myself. These commentators tended to have a highly bearish opinion of global markets – a common theme was that the next big market crash recessionwas just around the corner. Most thought that gold, then at an all time high of just over $US1,900, was about to go through the roof (even after a parabolic rise from a low of under $US300 in 2002). They held these views for a variety of reasons, all of which all made sense when the facts presented were looked at in isolation. I’ll save my thoughts regarding market/economic commentators for another post, but needless to say I developed a complimentary view that a significant market crash likely worse than that experienced in 2008 was just around the corner. As you can imagine this had a large impact on my early investment strategy – more on this later in the post.

 

The second big influence on my initial investment decisions was my peers, predominantly my co-workers both in my own workplace and those out on the mine sites with which I worked –  there was never any shortage of banter surrounding the next big stock. The vast majority of companies discussed we’re speculative mining penny stocks both because a) I worked in a predominantly mining based field and b) because we were in the midst, or should I say (and unfortunately for me) the very end of the biggest mining boom the world had ever seen. Just about everything even remotely mining related was going up; drilling companies, junior explorers, mining service providers, producing mining companies, engineering and construction outfits. You name it, there was only one way share prices were going and that was UP.At this stage in my investing “career” I knew sweet bugger all about how to actually pick a decent company to invest in. There are 1000’s of companies on the Australian Stock Exchange (ASX)  and I had never even heard of any of the companies bar the big household names such as the major banks and utality providers and figured I might as well listen to these people who, at the very least, had a little more experience than I did.

I was initially interested in two very different ends of the market. I had heard great things about the four major bank stocks because of their reputation for consistent revenue growth and the solid dividends they offered. In particularly I liked Commonwealth Bank of Australia (CBA), not least because it was my own bank but because it was the largest company on the ASX by way of market capitalization. Investing in CBA seemed like a good, low risk choice as my very first investment in the stock market. In juxtaposition, at the other end of the market I was interested in the speculative mining penny stocks. I knew these puppies liked to move 10’s if not 100’s of percent a day and the allure of buying a stock at 5 cents and selling it at a couple of dollars sure was enticing. I could look at charts of recent examples such as Sirius Resources (SIR) who had multi-bagged (increased in price multiple times) many times over in the past couple of months for inspiration as to what could lay ahead for me.

I decided I should make a few quick trades to get my head around how to use my online brokerage platform. My very first transaction was buying CBA – a measly $1000. I sold a day later for a whopping $24 profit. I made a couple of other small trades like this in the coming weeks, only made possible by my free $200 worth of brokerage fee’s. Without this freebie the fee to buy ($20) and sell (another $20) would have meant these trades would have resulted in a loss. The trades we’re basically pointless but gave me my first feel for what it was like watching my investments move up and down at the whim of the market. Now that I knew how to make stock purchase it was time to make a serious, mid to long term investment. Was I going to opt for the safe stability of blue chip stocks like CBA, or jump into the risky speculative end of the market?

argonautI went for the speculative end (unfortunately) for two main reasons. Firstly, I was convinced that since 2008 world markets were being propped up by central banks, a feat which could only last for so long before the market caught on. I was sure a significant recession or even depression was just around the corner. I knew that nothing would be safe but figured banks were likely one of the most at risk blue chip sectors due to their exposure to the Australian housing sector which I had read was at the height of a bubble (and had not experienced a correction like other economies such as the US or European markets). To me it seemed like the ~10% per year upside I could expect wasn’t worth the big (50%+) downside risks from a large market correction that I thought was just around the corner. Conversely, I knew a correction would hit the spec stocks too, however mining stocks ran on discovery announcements and I had plenty of hot tips regarding mining explorers who were drilling and about to discover the next big thing. These would then run up massively over the course of a day to a few weeks and I’d be able to cash out significantly richer, hopefully before the big market correction happened sometime in the next year to 18 months.

The company I decided to invest in was Argonaut Resources (ARE), a speculative mining exploration outfit drilling for copper deposits in Africa. ARE were drilling in elephant country which simply means there had been very large deposits discovered close to where they were drilling, possibly resulting in an increased chance of hitting something big. My investment was based largely on a “hot tip” from some of the fellow young guns I worked with and just about all of us had brought in. Results were due in the next few months and word on the street was this was almost a sure thing. The prospects of the value of my holdings rocketing northward following the announcement of some solid copper hits was exhilarating and I was constantly checking my brokerage account for an announcement regarding drilling results.

It’s almost embarrassing to point out that my only “due diligence” involved doing a quick investigation into the geology (I had no experience whatsoever with Zambian geology) and a brief read through of the company forum on a popular Australian stock market forum Hot Copper where prominent posters were writing nothing but glowing reviews further validating my decision. I was going all in with my (admittedly meager) savings based on a couple of “hot” tips from friends with little more than a year’s longer experience in the stock market than myself and the opinion of a few anonymous posters on an internet forum. No research into the companies cash position (mineral explorers are notorious for burning through capital), the geology and management teams credentials, whether or not management had much of a stake in the company  – things that I would go on to learn should really form the bare minimum requirements when it comes to researching an investment in a company.

I ended up buying in with about $5,000 – small change by most investors standards but this was huge considering my net worth had only just moved into positive territory for the first time in my life. This was my the equivalent of throwing the kitchen sink at it. I ended up buying in at an average of 7.3 cents, meaning my $5,000 brought me just shy of 70,000 shares in the company. I was already doing the calculations in my head – when this bad boy ran to a dollar plus I’d be sitting pretty on $70,000 minus the contributions to the tax man.

The stock had been rising steadily in the 6 weeks prior to making my share purchase – rumor had it that the increase was the result of a “leaky ship” i.e. the dissemination/leakage of market sensitive information before an official announcement. One of our many theories was the drillers/geo’s on site were buying up large based on they were seeing in the core samples. Another was simply the company were sitting on initial results and had given a few insiders the heads up while waiting for the rest of the results to come in. It was now just time to sit and wait for an announcement.

Within a week of buying my shares ARE’s share price had risen to a peak of 9.2 cents and I was up (on paper at least) over 25% and my investment was now worth $6250. For a week or so I felt untouchable and I genuinely had a sense that perhaps I just had a knack for this whole investing thing. I mean after all I’d read about fund managers doing well if they beat the market which typically went up about 10% a year on average. I’d just “made” 25% in a week, at least on paper.

The euphoria didn’t last long and within two or three weeks ARE’s share price was below my buy in and heading in one direction and one direction only – down. Weeks went by without an announcement and interest in the company was waning (along with the fortunes of the junior mining sector as a whole). They say the emotions of fear and greed drive the share market and i was certainly experiencing some fear. I was very tempted to sell for a moderate loss however the company still hadn’t announced the results of the drilling at their big prospect and I still had faith (or should I say hope) that a big announcement was going to blow the share price through the roof.

The previous announcement by the company had told us to expect results within two or three months. It was approaching six months from that announcement and by now I was checking account four of five times a day for the release of said announcement. Finally the day of reckoning arrived and the announcement was released. Believe it or not a cruel twist of fate meant that I completely missed the announcement and the ensuing rapid but extremely brief spike in the share price.

You see I was spending a fair chunk of time working out on mine sites where reception was patchy (I’d follow my stocks through my brokers iPhone app) but I could usually check in every couple of hours or so as I drove through a spot of reception. However on this very day I was flat tack working at a far corner of the mine with zero reception and no opportunity to go for a drive. You can imagine the gut wrenching feeling which enveloped when I got home at the end of the day to realize I’d missed it.

The announcement itself was a bit of a fizzer – not completely terrible but far from what we had all been expecting. It still resulted in a short and sharp spike in the share price and the opening hour or so of trade saw the share price jump from 6.3 cents to 9.2 cents only to drop right back down to close at 6.5 cents as shown by the long upper tail in the chart below (if you’re new to candlestick charts and need an explanation click here). To recap my average buy in price was 7.3 cents so I was livid (to put it lightly) that I had missed my chance to cash out at a significant profit.

If I’m honest, I highly doubt I would have sold, even if i did have reception that day. You see I was still expecting the share price to fly to the moon and probably would have hoped that any pullbacks would have been followed by a jump back northward. I didn’t really have any clue why other than everyone else I knew thought the same – It was pure hope. I didn’t have the experience to realize that the announcement was a dud and the pro’s (both individual traders/investors and any remaining institutions) would use the announcement and the ensuing volume to sell out and leave the mug punters like myself without a chair when the music stopped. So I held on and kept my shares, hoping that people would read the announcement over night and the share price ascent would continue the next day.

Of course it didn’t and over the course of the coming months the share price moved steadily in exactly the opposite direction to that which I wanted it to. From a high of 9.2 cents on the day of the announcement the share price steadily retreated over a period of six months before settling at about 2 to 2.5 cents where it stayed for over a year. Did I consider cutting my losses and selling along the way – of course. Did I ever pull the trigger – no.

I guess I was somewhat in denial – still hoping that the next announcement would turn things around. It never happened of course and looking back on things my investment was probably doomed from the start -my acquisition almost perfectly coincided with the start of the market wide decline of small cap mining stocks.  I’ll save my thoughts on that one for another post but needless to say the saying “a rising tide lifts all boats” certainly applies in reverse and it was always going to take a discovery of epic proportions to cause a re-rate in ARE’s share price.

In the end I finally sold all of my holding at 1.6 cents after holding  for a total of $800. I had manged to shrink my original $5,000 investment by 85%. My very first investment was officially an absolute balls up of epic proportions. The decision to sell and cut my losses was made because by now I had developed a better knowledge of reading charts or “Technical Analysis” and I could sense the start of another significant downtrend. I had also developed a trading/investing strategy and I was starting to pick some real winners and I figured it was better to lock in my loss and throw the leftover morsels into something that was growing. It was better to try to recoup some of my losses than continuing to watch the value of my capital dwindle in the bottom draw on my portfolio.

But by selling I was finally realizing my losses – locking them in – something that I am only just starting to learn is a necessary (and hard) part of investing. As at time of posting ARE shares are now trading at less than 1 cent, nearly 40% lower than when I sold out so my decision was a good one.

To sum it all up I’ve created the chart below overlaid with comments regarding my thought patterns along the way. I’m sure a lot of you reading this with experience in the markets can relate to the thoughts below.

Weekly chart of ARE showing my sentiment from when I brought at 7.3c in September 2012 to selling at 1.6c just over two years later. (Dont understand how to read the chart? Find out here.)

This post is already far longer than I intended so I will save a decent explanation of the main investing lessons I have learnt thus far for another post but a quick summary of some of the most important lessons I learnt from my ill-fated investment in ARE include:

  • Treat hot tips from friends and family with extreme caution. The day you’re your taxi driver or the milk man tips a stock means it’s probably time to get out (or avoid getting in in the first place).
  • Speculative penny stocks are highly, highly risky and probably not the best investment class for beginners (or anyone who can’t afford to lose the lot). Investment grade blue chip stocks are likely to be far more suitable for those starting out as price swings are much, much less volatile.
  • Have a plan before you make an investment – have a set amount you are prepared to lose and be prepared to cut your losses if your investment goes bad.
  • Research the company you are going top buy into. Aside from the core business of the company the bare minimum things you should look at include the amount of cash your company has, the past history of directors and a quick look at the share price history.

So that’s a brief run down of how I managed to turn my first ever $5000 investment into $800 in two years. Please feel free to comment with any comments or questions you may have. I will leave you with a chart of Commonwealth Bank to show you what could have happened if I’d gone down the more conservative route with my initial investment…

Cheers,

The Nude Investor

If I had invested my money into CBA instead, I would have grown my capital 55% + the annual dividends which has averaged about 8% per annum during that time.

If I had invested my money into CBA instead I would have grown my capital 55% + during the same time period without even including the annual dividends which has averaged about 8% per annum during that time.