Beers, Friends, and Terrible Investment Decisions
The following is a Guest Post from our friend Robbie from Stock Street. We asked him to share one of the worst investment decisions he has made. Fortunately for him, the bad investment decision was his friend Pat’s poor choice, and not his own.
Don’t be like Pat.
Read on as Robbie describes the epic conversation that spiraled down hill over the course of a few beers and resulted in a wildly un-informed investing decision and major losses.
For more bad investing ideas, check out this: A Flaming Hot Stock Tip (Straight from my Spam Folder)
The year was 2014. There I was, having a beer with my friend, Pat, when we unfortunately started talking about investing in GoPro. Regrettably, Pat didn’t take my advice, and that led to a loss of around 90%. Here is some of how the conversation went:
Pat – So what do you think about GoPros?
Me – GoPros are awesome. I want one so bad!
Pat – Ya me too! They just came out with the Hero4. It looks amazing. I think I am going to buy it.
Me – Do it. I want to borrow it once you get it.
Pat – Why don’t you just get one?
Me – Why buy a boat when you can just use your friend’s boat? Am I right?
Pat – Actually… I’m going to buy stock in GoPro. What do you think about it?
Me – What research have you done on GoPro?
Pat – None. But it’s basically a sure thing that GoPro is going to go up. Everyone is talking about it. If I don’t invest now I’ll miss out on a huge gain and then I’ll have to buy it for even more.
Me – I wouldn’t be so sure about that. I mean, I haven’t done any research on it, but I’m pretty sure it is selling at a crazy high valuation.
Pat – Everyone is talking about how the company is going to go to at least, like, 150 (it was currently at 90).
Me – Alright, think about it, how much is GoPro currently worth?
Pat – I’m not sure.
Me – Let’s look it up
We look up price
Me – Ok it is worth almost $10 billion.
Pat – Ok what is your point?
Me – How much do they sell a GoPro for?
Pat – Like, $400!
Me – How many GoPro’s do you think they sell annually?
Pat – I have no idea. Why do you care?!
One more beer
Me – Think of GoPro as if it were a dry cleaner.
Pat – Are you drunk?
Me – No! Seriously!
Pat – Dude, I have no idea what the hell you are talking about.
Me – Think if you were going to buy a dry cleaner.
Pat – You are crazy.
Me – Hear me out. How would you figure out how much to spend to purchase a dry cleaner? You would take the price charged to clean a shirt, how many shirts it has to clean per day, how much the equipment costs, the rent costs, the machinery. If you really think of GoPro like business, you can put a value on the GoPro just like a dry cleaner. You can figure out how many shirts you need to clean per day in order to make a profit more than all of those expenses.
Pat – What are you talking about dry cleaners for? Do you know anything about investing? You’re over here talking about some laundromat shit, we’re talking about GoPro!
Me – I’m just trying to get it through your thick skull that you can figure out how much you should spend to buy a dry cleaner. Just like you can figure out how much to spend on a company like GoPro.
One more beer down the hatch
Me – these are things you need to think about when you are investing! If a company is worth $9 billion dollars, think about how many units they need to sell for you to expect to buy a company for that much money. GoPro has literally no other product. You are completely dependent on their camera. What happens if Sony or Samsung make a comparable camera? What if the IPhone 10 comes out with a contraption that turns it into a GoPro? You have no idea what you are doing!
Pat – If everyone on TV is saying it’s a great stock, I’m definitely not listening to you.
Me – Dude. Seriously. Don’t listen to the talking heads on the news about GoPro. Half of them are just traders who want to see their shares pop this month so they can probably sell it then short it next month.
Pat – You don’t know what you are talking about!
Me – You don’t know what YOU’RE talking about!
One more beer
Pat – Screw this, I’m going home and putting a trade in to buy GoPro when the market opens Monday.
Me – Call me when you lose all your money!
One Year Later
Pat- You remember when you told me not to buy GoPro?
Me – Yep.
Pat – Yeaaaaah. You were right.
When Pat and I were talking about GoPro, the price of the stock was about $78. Over the next month, the company gained a little money. Of course, Pat threw that in my face. But, I knew my advice was sound, and over the subsequent year, GoPro went from around $80 per share to about $30 per share.
Today, it sits around $8.
What can we learn from my friend Pat?
First of all, he didn’t do a single bit of research. He didn’t think of GoPro as a business. He was literally thinking of it as a stock that had increased in value over 100% over about four months, and he extrapolated that same increase into the future. This was his first problem. You should never extrapolate a stocks growth into the future. You need to think of the stock as a company, and a company that is worth a certain price.
Pat also wasn’t thinking of competition. Did GoPro have barriers to entry? Do they have patents that prevent other companies from achieving similar results? Do they have an expensive infrastructure other companies would have to incur?
Whether the answer was yes or no, Pat didn’t really care about the answer to any of these questions.
He also didn’t care about the price GoPro stock was selling for. Was it considered a high valuation? Was it considered a low valuation? He didn’t even care to look.
All he knew was that some people on TV have been talking about it and it was the hot company at the time. Pat literally would have listened to any person on TV. If they interviewed a drunk homeless man in his dumpster house who had never heard of GoPro but had positive things to say about it, he would have listened to him.
Anyone who was alive around the time of the tech bubble of the late 90’s should be able to remember that valuations of companies should matter. But Pat had that same 1990’s tech bubble mentality.
When it comes to investing in stocks, you need to think of them as companies. If you think of stocks as companies that sell a product or a service, you can start developing a theory about what they sell.
You can ask yourself tough questions about barriers to entry. You should ask yourself the toughest question – Do I understand this business? If the answer is no, you need to move onto a company you do understand.
Pat, unfortunately, didn’t even care to try and figure out GoPro.
And, while that cost him dearly, he did learn a valuable lesson…. listen to his friend, Robbie!
A huge thanks to Robbie for sharing his wisdom! Remember:
- Do your research and don’t make investment decisions based on media alone.
- Don’t take advice from drunk homeless men in his dumpster houses.
- Avoid making trading decisions while 5 beers deep.
If you want more hilarious commentary from Robbie, be sure to check out his Stock Street Blog. He offers a wide range of personal finance opinions, all with great humor and insights. He can even answer the question, “What the Hell is an Index Fund?” And be sure to follow him on twitter as well.