How to Invest Properly

Investing Horror Story

Losing all your money

With the high potential rewards of investing. there also comes a great deal of risk. The article, “Investing disasters - when bad investments go even more bad!,” highlights the investing horror story of one novice investor.

John was a member of an up-and-coming start up company in Palo Alto in 1999. Since the company was quickly rising and his capital was increasing, he decided to invest some of the money that he had put away to use on the down payment of a house. When he set out to invest his money, he knew very little about how to invest prosperously. His first mistake, not diversifying his investments. He put all of his investments into 3 small company’s stocks which is  the equivalent of a cardinal sin in investing. This was the first mistake that led to a downhill spiral of John’s capital.

From the minute he started investing, the stocks had already started their downward bubbles. Over the next couple of weeks, John’s stocks had decreased 25 percent. However, the bigger issue is that he bought these stocks on margin, or borrowed money to buy the large shares. This was his next big mistake. So now, not only has his stocks dropped 25%, but he lost 50% of his capital because of all the money that he now owed because of what he bought on margin.

Instead of cutting his losses here, John fell in love with his stocks, another costly error on his part. As expected, his stocks continued to plummet until they fell about 90%. At that point he had reached a point called the “Margin Call.” A point where he had to pay back the money that he borrowed because he owed so much. His problem: he didn’t have any more cash. He was forced to liquidate all of his investments and turn it back into cash, just so that he could pay back what he owed. He eventually lost just about every dollar that he initially invested, money that was supposed to be used to put a down payment on his first house.

As shown by John’s story, it is very easy to get caught up in investing and live a horror story similar to his. This is why it is extremely important to know what you are doing before investing. If one wants to invest prosperously, they must learn from the mistakes of other novice investors by having a game plan before investing.