March 4, 2024
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Mea Culpa: My Worst Trade Ever

You may read financial columns like this one and come to believe that professional investors never make mistakes. To disabuse you of that notion, it is time for me to come clean. Even professionals make their share of mistakes and misjudgments.

Achieving success in investing can be a long and error-ridden process. But there are some tangible benefits of making mistakes when helpful lessons can be learned from those mistakes.

I will share a story of one of my most costly investment mistakes earlier in my investment career from which I learned an important personal lesson. The irony is that this investment was indeed a profitable one. But the consequences of my mistake were quite painful.

Right now you may be wondering how one who made a profitable investment could have committed an egregious faux pas. As I will explain, selling a winning investment too early can be costly.

Right Idea, Wrong Implementation

A former boss of mine on Wall Street shared a story with me about a bright, young college dropout in Texas who launched his own PC manufacturing firm. The personal computer market at that time was nascent and PCs were used primarily by corporations for business applications. Corporate America was embracing PCs manufactured by stalwarts IBM and Compaq. But our trading desk purchased new PCs from Dell Computers.

Right after I began using my new Dell PC, it became evident to me that this product was arguably more powerful and less expensive than the leading brands.

It became nearly obvious to me that Dell was about to grow rapidly and take market share. Yet the stock price did not seem to be foreshadowing this potential. The future for PCs was bright and the future for Dell seemed even brighter.

Eager to benefit from this possible bonanza, I purchased 400 shares of Dell at $10.25 on November 29, 1988. This was during a period of time when investor psychology was still somewhat tempered by the market crash of October 1987. While the market had recovered sharply from the lows, most investors still had the mindset of protecting capital and not taking on excessive risk.

Lo and behold, the stock began to move higher. As the unrealized profit began to rise, I immediately jettisoned my long-term vision of a stock that could appreciate substantially over time. Moreover, the old investment adage of “There is no harm in taking a profit” overwhelmed my psyche.

Leaving money on the table was the last thing I considered at the time. On December 12,1998, I sold the stock at $11.875 per share and walked away with a profit of nearly $500. I never invested in the stock again after that happy experience. It occurred to me years later that I would have made quite a bit of money if I had stuck to my investment thesis. But I really never calculated how much I had left on the table.

Even I was surprised by how much money I could have accumulated had I stuck to my original plan. According to the price history on the Dell website, the stock rose over 500-fold from the date that I bought the stock in November 1998 until the peak in March 2000. That means that my initial investment would have grown to over $2 million had I done nothing during that time. So maybe the old adage that “There is no harm in taking a profit” is not necessarily true.

Learning From One’s Mistakes

My investment philosophy has been shaped in part by mistakes that I have made over the years. As in life, making mistakes can be painful. But the lessons learned from those mistakes can be helpful in shaping and improving one’s future behaviors, leading to greater longer-term success.

And I have certainly learned at least one useful lesson: When you are formulating an investment thesis, make sure that you have a tangible price objective from the outset. Indeed, I believed that Dell had a bright future. But my motivation to sell was driven by locking in a quick profit by subjective criteria.

Zeroing in on that price objective helps maintain the discipline even as stock prices fluctuate. Do not sell just because a stock price has moved up over the short run. Wait until the stock price has moved closer to your original objective.

And then determine whether there is a fundamental case for changing your price target. Only when you have determined that the stock price has exceeded your price objective should you consider selling.

Lastly, keep in mind that you will have to pay capital gains taxes on your profits in a taxable account. If you sell within a year of purchase, your net profit after taxes will be considerably impacted.

Of Weddings and Anniversaries

To conclude this article without mentioning some personal milestones in my life would be a missed opportunity. Many regard the long-term equity bull market having begun in August of 1982. This coincided with the week I married my wife and business partner, Lori. Happy Anniversary, Lori! It has been quite a run and I am, bli ayin harah, very “bullish” on our future.

One other milestone is the marriage last night of my nephew, Yair, to Arielle Miodownik. Yair is the youngest son of my brother and sister-in-law, Josh and Naomi Caplan. He is a brilliant young man with impeccable middot and a colorful personality. Arielle, the daughter of my shul rabbi and rebbetzin, Rabbi Steven and Gila Miodownik, is a perfect match for Yair. She exudes brilliance, warmth and chesed in everything she does.

Very best wishes to you, Yair and Arielle. We are so happy to welcome you, Arielle, and the Miodownik family into the Caplan family! May you be blessed with many years of good health, happiness and hatzlacha in all your endeavors as you embark on your life’s journey to build a bayis ne’eman b’Yisrael!

The views presented are those of the authors and should not be construed as personal investment advice or a solicitation to purchase or sell securities referenced in this market commentary. The authors or clients may own stock or sectors discussed. All economic and performance information is historical and not indicative of future results. Any investment involves risk. You should not assume that any discussion or information provided here serves as the receipt of, or as a substitute for, personalized investment advice. All information is obtained from sources believed to be reliable. However, we do not guarantee the accuracy, adequacy or completeness of any information and are not responsible for any errors or omissions or from the results obtained from the use of such information.


Jonathan D. Caplan, a former Wall Street executive, is president and founder of wealth management firm Caplan Capital Management, Inc., with offices in Highland Park and Hackensack. He holds a BA from Yeshiva University and an MBA in finance from New York University Stern School of Business. You can find other recent investment articles by Jonathan at www.caplancapital.com/blog.

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