Coming out of school I was young, gainfully employed and even had a few solid stock picks that were boosting the bank account; nothing could stop me. Well, that was until I came across Sino-Forest.  Sino-Forest was a company I had some familiarity with, as it was popular amongst analysts and in the media so it was essentially on my watch list at the time but I was never too interested in it as a long-term holding. After watching the stock for some time, out of nowhere, what seemed to be the chance of a lifetime appeared. A relatively unknown short seller by the name of Carson Block came out claiming the dividend paying, $5 billion company, owned by hedge funds and with extensive analyst coverage and audited by a top-tier accounting firm was an outright fraud. The stock plummeted and thinking that all of these parties involved in Sino-Forest can’t possibly be wrong, I decided to jump in. Unfortunately, the stock continued to fall. Some had come to the outright defence of the company, attacking the short-sellers’ claims, which helped support the price. Great time to average down on the name, right? Nope! Down Sino-Forest went to a level where day traders seemed to be jumping in and out of the stock, driving volatility upwards. Nearing the end of this giant mistake and being in the summer, I was at a cottage, unable to sleep with this red line on my bank statement and found myself running through forests and up rocks looking for a cell phone signal, just so I could catch a glimpse of this plummeting share price. Finally, I couldn’t take it any more and wanted to enjoy my time away so I somberly climbed back up what seemed like a mountain at the time to get cell reception and sold it all, fortunately just a bit before trading was halted and the company was indeed shown to be an outright fraud.

To this day I still remember this trade and view it as one of the best lessons I have had through my investment journey so far. Here is what I learned:

Trust no-one – This was an eye-opening lesson for me.  I simply couldn’t believe that high profile analysts and hedge fund managers that were in theory going over this company with a fine-toothed comb as well as auditors could be fooled by a downright fraud. I still cannot really believe it today but alas it is true and I quickly learned that at the end of the day, the buck stops with you, the end investor. If you are carrying out the trades yourself, then the due diligence is your responsibility and no-one else’s, no matter how many research reports or buy recommendations you read. While hopefully these cases are few and far between for readers, investors have to understand that there are always risks with equities and no matter how confident you or anyone else is with a stock, it can all come crashing down.

Listen to short-sellers, especially ones putting their reputation on the line – When you are long an investment, you know the downside is 100% of what you paid. When you are short, you could theoretically lose an infinite amount of money. Because of this fact alone, it is probably safe to assume that a short seller has some sort of insight into an investment or at least genuinely believes they have some sort of unique insight. When you really want to listen is when a short seller makes big claims, such as a company being a fraud. It is one thing to short a company on valuation concerns; it is a whole other thing to short a company claiming that it does not even exist. If the short-seller is wrong, their career and reputation will more than likely be ruined. Decisions like this are not made lightly. They are not always right, but often, where there is smoke there is fire.

Don’t try to catch a falling knife – We have all heard this one but I think it is one you have to learn the hard way. I thought I was smarter than the market and tried to jump into an investment during a time of extreme volatility. I now far prefer to let the dust settle before making an investment decision. 

Check yourself (before you wreck yourself) – This was a time when I was displaying some extreme overconfidence bias. Many of my investments were working out well for me and I thought I could do no wrong. This led me to be overconfident in an investment and think I knew more than someone else. Modesty can go a long way when investing and if you do not consistently check yourself, you will indeed wreck yourself, or at least wreck your bank account.

Don’t try to trade at a cottage – Nothing too deep here, I would just say that, unless you have a great internet connection, do not do this. Try to keep vacation and the real world separate. If you find your mind worrying about your investments while relaxing, it might be a sign that you are taking too much risk in your portfolio. 

It is always better if you can learn from other people’s mistakes before you make your own, so we are going to be posting the biggest investment mistakes of other Canadian bloggers and investors over the next few weeks. Be sure to sign up for the blog below to be notified of posts from Million Dollar Journey, Iain Butler (Motley Fool), Mark Seed (MyOwnAdvisor), Robb Engen (Boomer & Echo), and Peter Hodson (CEO of 5i Research).  Finally, let us know your biggest investment mistake. Message us on Facebook or Tweet at us through #MBIM (My biggest investment mistake).