You Will Go Broke If You Do These Things (Beginner Investors, Take Note!)

Hey guys, before we got started with this video, I just wanted to let you know that, um, all November long I will be doing Movember. So hopefully, over the next few weeks, you'll start to see in my videos, I'll start to be getting a little bit of a mo. I am pretty darn bad at growing facial hair, must be said. But it's not just me; it's, you know, myself and Hamish and Investing with Tom. We got a whole range of value investing YouTubers on board, and our team name is Margin of Safety. I think that's the best team name.

Um, and of course, we are doing it for, obviously, the Movember Foundation. The Movember Foundation is trying to tackle a whole range of men's health issues, predominantly men's mental health and suicide prevention. It's a bit of a sad statistic, but pretty much one man dies by suicide every minute of every day. And the Movember Foundation is trying to reduce male suicide rates by 25 percent by 2030. So it's a good cause. If you have any spare change that you would like to donate, then please do follow the link down in the description below. Even if it's, you know, one dollar, because I feel like if, you know, 5,000 people see this and they decide to donate, and it's just one dollar each, hey, that's still five thousand dollars that we could raise. So any amount is appreciated.

I really do appreciate it. If you wanted to donate, head down to the description, follow the links, head over to Movember, and feel free to donate to Margin of Safety. But with that said, let's get into the video. Over the past few years, we've seen a lot of first-time investors enter the market. Earlier this year, Robinhood noted in their S1 filing that they had 10.8 million new users between March 2020 and March 2021, and over 50 percent of their then 18 million user accounts were held by first-time investors.

Now, don't get me wrong; I love the fact that more everyday people are getting interested in investing. I mean, that's definitely a good trend, but with investing, there are common mistakes that particularly beginners fall prey to that can very easily wipe you out, you know, if you're not careful. And in today's video, we're going to go deep on these issues. We're going to look at what causes financial disasters in the investing world and how you can be aware of and avoid them.

This video is brought to you by Sharesight, a tool for tracking your performance manually, tracking capital gains, dividends, and currency fluctuations easily. And when it comes to tax time, have everything you need ready to go with just a click of a button. Try Sharesight for free or use the referral link in the description to get four months free when you sign up for an annual plan.

Now, you might think investing is all about making money. You know, what are you talking about, Brandon? Of course, it's about making money! Well, yes, it is, but that's only half the story. Right? In investing, the amount of money you make actually boils down to two factors: it's the amount of money you gain and the amount of money you lose. Because I can guarantee you not every investment will go well. Even if you've done, you know, all the research in the world, you've done your due diligence.

I mean, Peter Lynch says if you finish your investing career 60/40, then you've done very, very well. And when it comes to investing, while hitting winners is definitely important, I'd actually argue that not hitting losers is more important. I mean, the world's best investor, Warren Buffett, says his first rule of investing is "Don't lose money," and his second rule is "Don't forget rule number one."

So, what are some of the quickest roads to financial disaster, and how can we avoid them? Well, number one has to be leverage. This is when you simply take out a loan to invest. For example, you might be able to put up, you know, five thousand dollars towards an investment, and then you get your broker to loan you an extra five thousand dollars. So, it takes your total stake up to ten thousand dollars.

But imagine the case where the stock price falls by twenty-five percent. Your position is now worth seven thousand five hundred dollars, but you still owe the broker the initial five thousand dollars that you borrowed. This means that your position is actually now worth two thousand five hundred dollars. But that broker may require your equity position to remain above, say, thirty-five percent at all times. Now, if this is the case, you'll get a margin call, which means you must deposit more money into your account to bring your account value up past the thirty-five percent maintenance margin.

Now, if you can do that, that's all well and good, but if the stock keeps falling, you have to put in more and more and more. And if you eventually find yourself unable to meet a margin call, then the broker will automatically sell your position and lock in your loss so that they can recoup their money. Yeah, and this wipes out investors, you know, all the time. They get too greedy; they start relying on loans to invest, and when those margin calls keep coming, they eventually choke. They get forced to sell at a huge loss, and then they get completely wiped out.

So, how do we avoid that financial disaster? Well, this is an easy one. Just don't invest on margin; simply don't do it.

And on the topic of margin, the second common cause of financial disaster in the stock market is short selling. This is where you try and profit from the share price going down. Now, how you actually do that is a little bit tricky to understand, so I'll try and run through it.

So, firstly, through your stock broker, you're going to borrow somebody else's shares and sell them immediately. You think the stock price is way too high, and it's going to come down, so you borrow and sell at your estimated high point. But because you've borrowed somebody else's shares, you have to give them back. So at some point in the future, you have to buy back those shares and return them.

So ideally, the stock price crashes, and you get to buy them back, you know, super, super cheap because that means that you'll then profit the difference from that initial sell price and your new cheapest chips buy price. Now, the problem is, with this idea of borrowing shares, the broker says, "Hey, you need a margin account," and you need to put up fifty percent of the value of the trade. Why do they say that? Well, you know, what if you borrowed shares and then sold them immediately, and then the share price shot up? You still have to buy back the shares at some point, as you have to return them to the owner.

But the broker obviously doesn't want to take on the risk that the share price rises and you can't return what you borrowed. So you have to put up the initial margin amount, and then similarly to taking on margin loans, the status of your short position will then be monitored. And if the share price rises, you'll have to put up more and more money into your account, or you'll get a margin call.

Now, the problem is there's no limit to how high a stock can go. Imagine if you shorted Tesla; you'd have margin call after margin call until eventually the share price has risen so much that you're just completely drained. You can't make the margin call, and the broker locks in your loss and closes your short. Ouch!

So, the moral of the story so far is definitely avoid margin accounts, and you'll avoid two of the biggest financial disasters that typically completely wipe investors out.

So, from there, now where do we go? Well, potential financial disaster number three is holding a lot of non-productive assets. Now, I don't care if you want to hold some crypto or gold or cash, or you want to invest in baseball cards or art or stamps, but one thing that you should ask is, "How much of my portfolio is going towards stuff like this?" Because each one of those items is what is called a non-productive asset.

You know, while you hold it, it doesn't do anything. See, when you buy shares of a company, you own a percentage of that company. While you hold the shares, that company operates and makes money because it produces cash. You can work out an expected rate of return from your investment. Put simply, cash-producing assets like stocks or bonds or real estate have intrinsic value, whereas gold or fiat money or bitcoin or baseball cards or paintings, they do not have intrinsic value. They have perceived value; their value comes down to what the next person is willing to pay for them.

Now, in the good times, usually the next person is willing to pay more for them, and that's what we're seeing right now. But in the bad times, these assets can be wildly volatile. Why? Well, investor sentiment turns. You know, people are tight on cash. Remember, these things are just worth what the next guy is willing to pay. There's no underlying earnings; there's no underlying cash flow that can ground the price.

So, yes, while these things can definitely go up quickly, as we have seen, definitely don't think that's the norm, and don't get wiped out by holding a portfolio that's stacked full of non-productive assets while the sky is falling. So that's the third big one that can lead investors to getting wiped out.

Then from there, the fourth big financial disaster is investing in things that you simply don't understand. I mean, investors get wiped out all the time by speculating in stuff they don't know anything about and then panic selling when the price goes down. So, no, buying things because the guy on CNBC said it was looking cheap. No, buying a stock because you heard about it from a YouTuber. No, buying Tesla simply because I think EVs are probably going to be the future.

You know, when you invest, you have to stick within your own circle of confidence, and you can't drift because when you buy companies that you know inside and out, when the share price crashes, you don't hesitate in buying more. I know personally, when the companies on my watch list go down, I get super pumped up; I am excited. But what do you do when you buy a stock you don't really know that much about, and then it tanks by fifty? Should you buy more, or should you get out because there's a fundamental problem with the business? Who knows?

I mean, put simply, investing in stuff you don't understand means you're more likely to miss key information, you're more likely to experience share price declines, and you're more likely to panic sell and lock in big losses or simply never step away and just ride the wave down to zero. So definitely, definitely, definitely stick to things that you understand.

And then from there, finally, what else wipes out investors? Well, I think this, along with investing in stuff that you don't understand, is probably the most frequent killer of investors, and it's being stuck in a short-term mindset. I mean, if you're thinking about the next three months as an investor, please stop investing now because it is only a matter of time before you are wiped out.

I mean, to make returns, really solid returns in the stock market, you need to have a time horizon of at least ten years. You know, stock trading is not your pathway to riches, I can guarantee it. You need to be patient because if you're short-term minded, here's what's going to happen: you're going to be disappointed with things like ETFs and long-term stocks, so you're going to start to speculate.

You're going to start to make bets on earnings reports. You're going to get a little FOMO when the new crypto goes up twenty in one day. You know, you start chasing returns, and good investors don't chase returns; they wait and wait and wait, sometimes for years until they get that perfect pitch. Then when they've got that business that they understand well and it's been crunched based on some short-term factor that really won't matter at all in ten years, that's when they buy.

Then once they've bought, they hold and hold and hold. They don't care what happens in the next six months. They ask, you know, is that business going to be worth more in ten years than what it is today? And if the answer is yes, then they buy, and then they hold it for ten years. Then the short-term event usually blows over, people forget about it, you know, the business resumes its growth, and what do you know? In ten years, they've made huge gains.

So, definitely do not get caught thinking short-term; just don't do it. It's a one-way ticket to bad investments. So there you have it, guys. They are five things in the investing world that inevitably will lead to financial ruin. So hopefully, that helps, maybe gives you a little bit of insight into some things that you should definitely avoid, particularly if you're a new investor. These are some fairly common mistakes, and they're really bad mistakes because, of what I say, they do lead to financial ruin; they wipe investors out, essentially press the reset button on your financial life.

So I hope that that helps; you know, maybe you're an experienced investor, and you've watched this, and maybe in the early days before you really knew what you were doing, maybe you got hit by one of these. If that's you, please let me know about it in the comment section below. And beyond that, there's also, you know, countless other factors that can also lead to financial ruin. So, you know, let me know if some other ones down in the comment section below.

Let's use this as a bit of a thread to really highlight some things that can lead investors down a path that doesn't go where they were expecting. So anyway, guys, hope you enjoyed the video. Leave a like on it if you did enjoy, subscribe to the channel if you are new around here, if you want to see more content similar to this. If you're interested in how I go about my investing, check out profitable links down in the description below. New Money Clips is linked down in the description below as well if you want to check out more new money content.

But guys, thank you very much for watching, and I'll see you all in the next video. Thanks again to Sharesight for sponsoring this video. So recently, I finally decided to stop being lazy, and I imported all of my stock portfolios across into Sharesight finally. I should have done that a hell of a lot sooner. So with Sharesight, you sign up, you link your Sharesight account with your stock broker, or you just add your positions manually, and then from there, Sharesight tracks everything for you.

It tracks your capital gains, it tracks your dividends, it'll track your dividend reinvestment plans, it'll track gains and losses from currency fluctuations. Seriously, this is by far the most thorough portfolio tracker I have ever seen, and because they track and record everything so thoroughly, they can provide you with all of these reports.

So from literally simple performance reports to complex predicted future cash flow reports if you're a dividend investor. But here's the really good thing: they also provide all of these detailed reports for tax time. So send these reports to your accountant, done. You know, plug these numbers into your tax return, done. Simple as that! It's a big, big help, and most of these features are available for free.

But to be honest, to get the best experience, I would personally bite the bullet and upgrade to a paid plan. Honestly, this is one of the few stock market-related subscriptions that I would actually recommend. It's very, very helpful, particularly when it comes to tax time. Anyway, if you did want to sign up, simply use the referral link in the description, or you can go to Sharesight.com forward slash new money, and Sharesight will give you a special offer of four months free when you sign up for an annual plan.

So at least sign up for the free plan; it will make your life easier. But that's it for today, guys. Thanks very much to Sharesight for sponsoring this content, and I'll see you guys next time.