Be wary of analysts’ reports and news stories. I was drawn into a compelling story, much like a moth to a flame. But the lesson here is that if someone tells you a compelling story it is for their interests and not yours.
I wasn’t diversified. I assumed the diversification within the fund would protect me. But when dealing with sector-specific funds such as technology, health care or energy, birds-of-a-feather do indeed, fly together.
Beware of new offerings. Mutual fund and exchange traded fund (ETFs) manufacturers typically introduce new products in response to the current “big thing.” These new products usually arrive late to the party so don’t be the last to leave. The latest offerings are in the dividend growers and high yield space.
Pros can get it wrong. Don’t assume that fund managers will protect your downside risk. They have a mandate to be invested. I have never known a precious metals fund manager being bearish on gold.
Finally, it is better to agonize over a purchase and sell on impulse. I learned the hard way back in the summer of 2000.
In the summer of 1999, I was doing research for a small investment dealer and conducting seminars on technical analysis for a bank-owned discount broker.
It was also a year when I invested about $20,000 in the dotcom boom, watched my money more than double and in the end walked away losing about a third of my stake. As an industry professional, I should have known better.
The technology boom had investors chasing Internet-related companies. Things were so crazy that Amazon.com, which was a $2 stock just two years earlier was now over $100. Toronto-based Internet security developer, Certicom Corp., was at $5 was on its way to over $100. Nortel Networks at $20 was on its way to over $120.
The discount brokerage business was booming and in Toronto, investors stampeded through the aisles of the annual Financial Forum scooping up any dotcom-related information.
About nine months earlier, Altamira Investments had launched the Altamira e-business Fund, targeting companies taking advantage of the digital economy.
Altamira defined e-business as “the use of the Internet for purchasing a rapidly growing range of goods and services including financial services, travel and entertainment; and for conducting business-to-business transactions.”
Altamira predicted exponential growth for the sector, saying that the U.S. $26 billion global e-business market would “explode” to a trillion dollars in the next seven years.
That was truly a compelling story.
The fund was launched in November 1998 at $10 and eight months later in July, I bought 1,000 units at about $20. I reasoned I could avoid stock picking and participate in the technology boom through the purchase of only one fund.
Initially I was a big winner, with the fund hitting $48 a unit by March 2000 for a profit of over 130 per cent.
A few months later, I became suspicious about the future of the dotcom space when a newspaper article proclaimed: “They’re not just Canada’s hottest businesses, they’re also the country’s elite warriors in a global battle over who controls the next great commercial frontier.”
The article was saying one thing and the price of dotcom stocks, including my fund, another. By the end of June, my Altamira e-business fund was worth $33.58 and my profit had shrunk by one third. By early November the units were at the $25 level and I decided to sell into the next rally.
There was no rally and in the end I lost one third of my original investment. The units eventually bottomed at the $5 level in October 2002.
That June, The Globe Mail’s Rob Carrick noted that: “This pitiful remnant of the technology stock craze has lost a compound average annual 25.4 per cent for the three years to May 31, almost double the loss of the Nasdaq Stock Market composite index.”
The fund had been eligible for registered retirement accounts. He added: “This fund is such a bad idea it’s amazing Altamira hasn’t already taken it out into the woods and buried it.”
I took Carrick’s comments personally and when I thought about it realized I’d made several novice investing mistakes. Here are some of those mistakes and how to avoid them:
Be wary of analysts’ reports and news stories. I was drawn into a compelling story, much like a moth to a flame. But the lesson here is that if someone tells you a compelling story it is for their interests and not yours.
I wasn’t diversified. I assumed the diversification within the fund would protect me. But when dealing with sector-specific funds such as technology, health care or energy, birds-of-a-feather do indeed, fly together.
Beware of new offerings. Mutual fund and exchange traded fund (ETFs) manufacturers typically introduce new products in response to the current “big thing.” These new products usually arrive late to the party so don’t be the last to leave. The latest offerings are in the dividend growers and high yield space.
Pros can get it wrong. Don’t assume that fund managers will protect your downside risk. They have a mandate to be invested. I have never known a precious metals fund manager being bearish on gold.
Finally, it is better to agonize over a purchase and sell on impulse. I learned the hard way back in the summer of 2000.
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