How I Lost $3k on My First Investment and Made it Back 10x
I just lost $3000 after foolishly signing up for variable life insurance.
I knew nothing about what it was and how it worked. The idea of insurance and an investment sounded too good.
That was back in 06-07.
You see, I was just a 24 year old kid who recently moved to the US with no money, no family, no friends.
Making just $30k a year at the time, I saved my tail off and $3k was a huge part of my net worth.
Before deciding to pull the plug on the insurance, I noticed the market going up really nicely into double digits so I was excited to see what my quarterly performance was going to be like.
LOW single digits.
The investment part of the variable life insurance was supposed to be making me money.
Instead the account, maintenance and administration fees were unbelievably high, the insurance salesmen was getting a fat commission and the mutual fund was charging me excessive fees.
The loss stung badly.
But that’s what motivated me to get started.
You Need to Take Control of Your Own Investments
I started to research and study like a madman on investing because I had never studied anything finance or business related.
All I knew was that I needed to take control of my own investments.
But with so much noise in the investment industry, it was getting so hard to keep track of everything I was learning.
That’s how old school value and the stock analyzer got started.
I’m no genius and there were so many things to remember in investing, my head was spinning.
So I took to writing everything down and started creating models and formulas to make it easier the next time I had to look up companies.
I was just so sick of wasting time manually calculating the same ratios over and over again.
That’s why I love this quote by Einstein because it was the opposite of everything I learned in school.
Never memorize something that you can look up
You’re probably in the same situation.
There’s only a limited amount of time each day, and you don’t want to waste half your time tapping on a calculator or updating your own spreadsheets manually.
Use Pareto’s 80/20 Rule for Maximum Success
Getting back to the story, I lost $3k, started studying like crazy and then got to the point where I was automating all the fundamental analysis.
By doing so I was able to fly through a list of stocks to find the best ones to invest in.
The 80/20 rule states that 80% of the work is done in 20% of the time.
And it’s true.
I was able to go through a list of 30 stocks in a day and get detailed stats while working full time.
Originally it took me 4 days.
I’m not talking about basic stats like PE, PB and ROE.
I was getting highly relevant value investing numbers metrics like NCAV, Magic Formula Yield, Owner Earnings ratios, Piotroski Scores and more in 20% of the time now. Numbers that really made sense in knowing more about a company.
It made it really easy to toss out losers quickly and shortlist potential investments.
I even did an experiment where I created a model portfolio selecting companies based on strong fundamentals with what I found using the Stock Analyzer.
Companies Shortlisted for a Portfolio | Click to enlarge
The purple stocks were some of the ones that were selected.
Then couple of years later, here’s what it looked like. The dark blue line is the portfolio performance. Gray dash line is the market performance.
2010 OSV Fundamentals Portfolio Results
2011 Q2 Fundamentals Portfolio Results
(The site where I was tracking this portfolio shut down so the latest results are gone)
I’ve done this with many stocks for my own portfolio which helped to yield a total of 10x more than my first loss in a couple of years.
It’s all thanks to learning from that first big loss and understanding that nobody cared for my money or portfolio as much as I did.
I just needed the proper methods and tools to help me get on the right path.
Expert Among Friends
Along the way, something funny happened too.
I was suddenly the investing expert among friends.
One day I was talking about AAPL with a really smart friend and the first thing he asked me was;
“What’s the Beta?”
Completely blew me away. I had zero idea and he grinned at the dumbfounded look on my face.
But remember what Einstein said?
I told him, I’ll look into it and later that day, sent him an image something along these lines.
For some reason, we never talked about investing after that.
Now. How Do I Find Stock Ideas?
I must admit that things have changed since 2007.
Running old school value takes an enormous amount of time and energy. Something has to give and so far, sleep and my investing time suffered because of it. That’s why I need even more efficient and powerful tools to get up to speed.
Just a few weeks ago, I released a complete upgrade to the premium spreadsheet package to make it even better to take control of my investments.
OSV members and I can;
- quickly pull 10 years of data + 16 quarterly statements to identify YoY and QoQ trends
- easily determine whether a stock is a stud or a dud with extra custom ratios and visualizations
- identify red flags before stocks crash with deep inventory analysis
- calculate intrinsic value based on a new EBIT valuation model. I’m against using a single model for every stock because there is no one size fits all. You need to use the right tool for the right job.
Here’s a sample of what the new Analyzer looks like. If you’re looking for something to help you gain control, confidence and save time, you’ll love it.
There are two main ways I use the Analyzer to quickly go through ideas and find stocks to invest in.
1. Find a Good List
Leverage somebody else’s work. No need to reinvent the wheel.
Every year, I try to go through all the stocks in the Forbes Best Small Companies list. I’ve listed a number of sites where you can find quality stock ideas. If you are having a hard time finding ideas, start with this list because there are so many great small companies here. I’ve literally profited from dozens of stocks on this list.
But before I continue, click on the image below to be a VIP and get all the hidden content and exclusive resources we don’t publish anywhere else.
Here’s an example where I identified SYNA as a very good value candidate at the beginning of the year.
My intrinsic value ranges were;
- Base case estimate: $45
- Normal case estimate: $62
- Optimistic estimate: $75
Too bad it didn’t drop to my buy price. It’s up 15% on the year already.
So if you do go through a list like this and it has 100 stocks, you can use the OSV Analyzer to shorten it down to 20 or so in no time.
2. Go Through Some Qualitative Factors
With the remaining 20, I go through deeper value metrics and information like
- insider transactions
- inventory breakdown analysis
- quality scores like the Piotroski Score, Cash Conversion Cycle, DuPont Analysis
I can do a rough valuation to further reduce the list down to 10 or so.
3. Time for Some Reading
See how 80% of the hard work is already done by this stage?
Now it’s time for some good ol’ reading of SEC filings.
I dislike going to the SEC site to read filings. But thankfully, there are two sites I use that further speed up my reading and research time.
Both curate and organize filings to make it really accessible and easy to read.
After going through the 10-K or proxy, you’ve got a few stocks to invest in.
But finding ideas in bull markets is tough. So here are some extra ways I look for market beating returns.
The Buffett Workout Strategy and Special Situations that Work
One of the best ways that I was able to achieve 10x my initial loss in a short period was by participating in Buffett style workouts and special situations.
Take a look at the 100% winning performance from his partnership days. Who doesn’t want to know how he did it?
Warren Buffett Performance Portfolio
To emulate Buffett’s special situation strategies, I dove into the following methods
In bear markets, special situations prevent your portfolio from drowning with the market.
And in bull markets, it gives you a different area to look instead of chasing after overvalued stocks.
Use My Google Alerts Strategy
This real simple Google Alerts method I’ve been using and published earlier in the year has receive a lot of attention.
Both good and bad.
Good because many investors are able to take advantage of special situations that they never knew about.
Bad because some people are complaining that by I’m wiping out the arbitrage opportunity by publicizing it.
My response is always towards the good side. There will always be people who dislike what I do. But I’m here to share and educate. If I wanted to keep the good stuff to myself, that’s the day I’ll shut down old school value.
Arbitrage will always come and go. The market continually comes up with new financial products and methods so I am not worried letting extra value investors know about these deals.
Your Turn
So that’s how I went from losing everything on my very first investment to making it back more than 10x by willing to do the work, coming up with my own process, leveraging other people’s ideas and creating tools to speed up my own analysis and research.
You have your own story about how you got started in investing.
Won’t be the same as mine but the common thing is that it takes hard work and lots of practice.
I know how difficult it is to try and invest when your day is filled with other duties but at the end of the day, the best decisions are made by you.
I did it by breaking through a lot of pain points and you can easily leverage what I did through Old School Value and my Stock Analyzer.
Whatever your process and methods are, take comfort in knowing that I’m not an investing genius.
Just a lot of trial and error and figuring out what works.
