Don't Let These Five Investing Mistakes Ruin You

A guest essay from Whitney Tilson... Lessons from his hedge-fund days... Five mistakes to avoid... His biggest one... Don't miss Whitney and Jeff Brown's free event tomorrow... An AI 'super chip' could dethrone the Mag Seven...

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Editor's note: Today, we're taking a pause from our regular fare to bring you a guest essay from Stansberry's Investment Advisory lead editor Whitney Tilson. As we've mentioned recently, Whitney has an exciting free market briefing coming up tomorrow...

In short, Whitney and his friend Jeff Brown – a Silicon Valley legend – say you haven't "missed" the big market gains in artificial intelligence ("AI"). That's why they're going on camera tomorrow in a free event...

The opportunity they'll talk about tomorrow has to do with an AI "super chip" from a little-known company Jeff says you should add to your "buy" list right now... And it could lead a set of obscure stocks to replace the Magnificent Seven as the market leaders.

Jeff recommended both bitcoin and Nvidia (NVDA) before they went on to soar by thousands of percent, and he has gotten into 18 tech deals that each returned 1,000%. So you want to hear what he has to say.

And importantly, the catalyst of this story is just days away. That's why Whitney is sitting down with Jeff to explain more at 10 a.m. Eastern time tomorrow. You can sign up for the event here.

In the meantime, I (Corey McLaughlin) want to share a peek behind Whitney's investing success. Whitney doesn't shy away from sharing his personal investing "wins" and "losses," as you'll see in this guest essay, pulled from a yet-to-be published book Whitney put together...

Regardless of whether you tune in to his free presentation tomorrow (and we suggest you do), the lessons here – rooted in Whitney's experience running a hedge fund earlier in his career – are timeless for any investor. Enjoy...

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There's more to this than picking good stocks...

When I first started investing in the mid-1990s, I thought that all I had to be was a good stock picker to achieve my goal of market-beating returns over the long run.

Boy, was I wrong!

Over time, I learned (mostly the hard way) that portfolio management is just as important as the stocks you pick.

Early in my career, I was so inexperienced that I didn't really understand what it meant to be a portfolio manager.

I simply bought the cheapest 10 or 15 stocks I could find and didn't hold much cash. The thought of short-selling never occurred to me. I was only vaguely familiar with what an option was, and I didn't know a thing about trading on margin.

On occasion, I developed conviction about something like the dot-com or housing bubbles and took some steps to adjust my portfolio accordingly.

But at the end of the day, I was just a plain old bottom-up stock picker on the hunt for a dozen or so cheap stocks, and that was it.

Had I just stuck with this simple approach, I would have done well. Instead, I strayed from that approach. Over time, I made terrible mistakes in every aspect of portfolio management. In today's essay, I'll show you exactly what I learned...

Be careful with exposure and margin...

Banks and brokerages are generally delighted to lend you money. If you have $100 in your account, they might lend you $50 so that you can buy $150 worth of stocks. This can magnify your profits... and your losses.

Worse yet, banks and brokerages keep a close eye on your account. If your losses start to pile up, they can give you what's known as a "margin call," forcing you to quickly sell and raise a certain amount of cash (or they'll do it for you).

Per the example above, let's say you have $150 invested and your account falls by 33%. You've lost $50 and your account is now worth $100. But the amount you owe the bank is still $50... so in reality, you've suffered a 50% loss, since you now only have $50 of your original $100 in capital remaining.

A bank is happy to lend you $50 on $100 of equity, but not $50 on $50. Long before your account shrinks by 33%, you're going to get a margin call. That can be a real disaster because you're forced to sell immediately, usually at the exact moment you want to be buying.

This is what happened to me in 2011 when I was running my hedge fund. My business partner and I had allowed our exposures to creep up to 136% long by 63% short that summer. In July and August, the European debt crisis caused turmoil in what had been complacent markets. In a matter of weeks, the S&P 500 Index fell nearly 20%. Our fund fell even more than this because we were trading on margin, and some of our stocks got hit especially hard.

Normally, that would've been OK. We had a strong stomach for volatility. In fact, we embraced it because it gave us good opportunities to both buy and sell at attractive prices.

Thus, we were eager to take advantage of the sell-off. (Our instincts were correct, as the markets swiftly rebounded.) But at precisely the time we wanted to back up the truck, we were instead forced to sell because we got a margin call in August.

Our fund got crushed, falling 13.9% that month. In total, from July through September, we were down nearly 26%, nearly double the loss of the S&P 500. It took us years to dig ourselves out of the hole we had created.

Limit your number of positions...

This is the next tenet of proper portfolio management.

At our hedge fund's peak, we were wildly overdiversified with 41 long positions and 87 short positions. Even two experienced investors like us couldn't possibly have a deep knowledge of and closely track that many positions.

You don't need to own more than 10 or 20 stocks. That's a good number to be reasonably diversified, while also being concentrated in your best ideas.

Size positions carefully...

We made another critical mistake back then. We had oversized positions in some of the riskiest companies in our portfolio, most notably a 14% position in clothing retailer JC Penney, an 8% position in satellite company Iridium, and a 5% position in Spanish media firm Grupo Prisa.

In general, I've found it's best to put no more than 5% to 6% in even the bluest of blue-chip stocks. For smaller, off-the-beaten-path stocks, I recommend sizing them even smaller, in the 3% to 5% range.

Resist the urge to overtrade...

As we got into a hole, we ramped up our trading, churning the portfolio. Our goal was, of course, to turn around our portfolio's performance. In reality, we only made things worse.

Countless studies show that the less trading you do, the better your returns are likely to be.

Here's a funny story that underscores this point to an extreme...

Nearly two decades ago, my sister set up a retirement account at the company she worked for at the time. Every two weeks, she had money withdrawn from her paycheck and automatically invested in the S&P 500.

Then, she switched jobs and forgot about the account, so she didn't make a single trade or investment decision for more than 15 years.

She recently switched jobs again, which reminded her to check that old account. She contacted her former employer's human resources department and discovered that the account had compounded into a small fortune.

The irony is, had she remembered she had the account all along, she probably would have done something dumb like sell and go to cash at the market bottom in 2009.

Know when to add to, hold, trim, or exit your positions...

This is the most important – and most difficult – element of successful portfolio management. It's critical to have the judgment, humility, and fortitude (which come from experience) to know when to let your winners run and cut your losses.

I didn't do this well. In 2011 and in subsequent years, I rode my positions in JC Penney and Iridium lower and lower, taking big losses before finally exiting, and watched Grupo Prisa eventually go to zero.

I sold finance giants Citigroup (C) and Goldman Sachs (GS) far too early, as well as tech giant Microsoft (MSFT), watching their shares march higher for years to come.

But the biggest portfolio-management mistake of my life was, ironically, in one of my biggest winners... I trimmed and then sold my position in streaming company Netflix (NFLX) far, far too early. It's so painful to know that had I only done one thing – held the stock of the decade, which I nailed at the absolute bottom – it would have made up for all of my other mistakes... and then some.

Instead, I took some profits when Netflix went up 50%. When it doubled, I trimmed some more. I kept trimming as the stock went higher and higher, always keeping it a 3% to 5% position. By the time I sold my last shares, it was up 600% from its lows.

I was so proud of myself for this super-successful investment...

But then the stock rose an additional 600% from where I exited. I left millions of dollars on the table by being too quick to take profits, focusing more on the rising stock price rather than how well the business was doing... It's a mistake that still haunts me to this day.

If there's one portfolio-management lesson I want to leave you with, it's this...

You must let your winners run.

In an investing lifetime, you'll only have a few opportunities to own moonshots like this. Identifying them and then maximizing the profits can make up for a lot of mistakes.

The opposite is true, too. When you hang on to your losers way too long – or worse yet, average down on your position – your losses can mount quickly, so you also have to be willing to acknowledge mistakes and get out.

It's not always that easy to decide to sell, though.

The more common situation is that you buy a stock, it falls 20% or so, and you have to decide what to do next.

When should you sell? How can you tell if you've made a mistake... or if the market is giving you a great opportunity to buy more?

This is the hardest part about investing.

Some people think that the most difficult decision is when to buy. But that's not hard – buying a stock is fun and exciting! Making the right decisions about stocks you own that have declined in value is what separates good investors from bad ones.

Let's say you buy a stock trading for $10 a share that you think is worth $20... and then it falls to $8. What should you do?

First, you need to set aside the inevitable conflicting emotions. On one hand, your ego is telling you that you're right and the market is wrong, so you should buy more. But losing money causes pain, and there's a simple way to end it – sell the stock and get out.

But then you've permanently locked in a loss and are forced to acknowledge a mistake. If you simply keep holding, you can tell yourself that you're not wrong, just early. There's no worse feeling than selling a stock and then watching it soar. (Just writing that sentence brings back awful memories for me!)

So the easiest thing to do is... nothing.

But then you risk falling into the trap best captured by an old joke on Wall Street about the guy who says, "I've got two kinds of stocks in my portfolio: my winners and my long-term holds!" (It's funny, but there's a lot of truth to not wanting to admit a mistake.)

How do you navigate those waters?

I suggest doing the following... Ask yourself, "If I didn't already own the stock, would I buy it today at the current price?" The fact that you bought some earlier at a higher price is irrelevant to the decision of what to do today. As the saying goes, "A stock doesn't know that you own it."

When a stock falls, you have three choices: You can buy more, do nothing, or sell. There is no clear right answer.

Sometimes, when you're losing money on a stock, the market is giving you an accurate signal that you've made a mistake and stumbled into a value trap. If so, sell, hopefully learn some valuable lessons, and move on.

Other times, something bad – but not fatal – happens to the company, which whacks the stock. If the stock and the company's intrinsic value have declined in tandem, but you still believe in the long-term prospects of the business, you should probably just hold on.

As an investor, your challenge is to figure out when the market is making a mistake and to take advantage of it. These decisions are what separate the winners from the losers in the investment world.

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Editor's note: Tomorrow at 10 a.m. Eastern time, Whitney will sit down with Jeff Brown, founder of our corporate affiliate Brownstone Research, in a free presentation to reveal the recent development in the AI story that could spawn a "new class" of AI companies.

This is the kind of opportunity Whitney describes in today's essay – one that many investors in the market are overlooking right now. He has identified five different investments that could "absolutely soar this year" – potentially doubling your money – while the "old world" stocks of the past decade crash even further.

This is a story you want to hear.

Register for this free event now to make sure you don't miss anything, including getting access to a special report that includes a free recommendation and more information to get you ready for tomorrow's event. Click here to sign up now.

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New 52-week highs (as of 5/19/25): Automatic Data Processing (ADP), AutoZone (AZO), Alpha Architect 1-3 Month Box Fund (BOXX), WisdomTree Japan SmallCap Dividend Fund (DFJ), Dimensional International Small Cap Value Fund (DISV), Enel (ENLAY), iShares MSCI Germany Fund (EWG), iShares MSCI Italy Fund (EWI), iShares MSCI Spain Fund (EWP), SPDR Euro STOXX 50 Fund (FEZ), GE Vernova (GEV), iShares U.S. Aerospace & Defense Fund (ITA), Grand Canyon Education (LOPE), Rubrik (RBRK), Sprott (SII), Spotify Technology (SPOT), Travelers (TRV), UGI (UGI), Visa (V), Vanguard FTSE Europe Fund (VGK), Verisk Analytics (VRSK), W.R. Berkley (WRB), and Industrial Select Sector SPDR Fund (XLI).

In today's mailbag, we have feedback on Moody's becoming the last of the "Big Three" ratings agencies to downgrade U.S. debt from Aaa, which we wrote about in yesterday's edition... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"I wouldn't get too excited about the recent ratings downgrade. It was overdue and is about as consequential to honesty and accuracy for economics as many believe UNH is to healthcare... Many believe the rating agencies are as 'bought and paid for,' as is Congress." – Stansberry Alliance member Bill B.

Regards,

Whitney Tilson
New York, New York
May 20, 2025