Ted Allrich is the founder of The Online Investor and author of the just-released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.
The last two columns described my experience with two biotech stocks. One was bad: Hollis-Eden Pharmaceuticals (NASDAQ: HEPH). One was good: Dendreon Corp. (NASDAQ: DNDN). (Please note that I am not recommending you buy or sell either of these.) Here's what I learned from the experience of losing a large amount of money, then gaining some of it back.
First, I got greedy. As they say on the Street, bulls and bears make money, pigs get slaughtered. I over-leveraged my position in HEPH because I got carried away with the science. I thought the stock was a sure winner. With all the indications coming from Washington that the company qualified for a contract, it just seemed impossible to lose. So I put way too much money on one stock, thinking this was a sure thing. But it wasn't. Without a contract, the company had no other revenues.
What the company has done and is doing with the body's own immune system is very exciting. But it doesn't produce revenues. As Warren Buffett once said, after learning about the fundamentals of investing, "Prior to that I was investing with my glands instead of my head." I let my glands get in the way of my brains. Never a good move. Cold and calculating always wins in the stock market over exuberant and stupid.
I was betting, not investing. The company had no sales, no profits. It wasn't a company, it was a research project that, if funded by the government, would turn into a business. It's always better to buy a business that has both sales and profits. That's investing. Putting money on stocks that have neither is gambling.
The only way you can make money in the market is to be in it. Had I simply slumped away after losing so much in HEPH, I never would have made any of it back. By being less aggressive with the position I took in DNDN, I was able to determine that even if I lost all of it, I wouldn't be wiped out.
Most of all, I got out of my comfort zone. I overweighted one stock. I created anxiety that wasn't necessary. If I had bought less HEPH, I would have lost less and been able to stay well within my comfort zone. In the long run, adding stress to your life by betting on one thing isn't worth it. If you lose, you stagger from the experience. If you win, it's nice, but it doesn't compensate for the stress when you lose. Somehow, the losses always seem to hit deeper than the good feelings winning engenders.
Did I already know these things? Of course. I've been investing for more than 30 years. Sometimes, though, you repeat mistakes before you can learn from them. Here's hoping you can learn from mine.
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