It’s a dark and stormy night – or a brightly lit desk in an open floor plan office – when you spot an opportunity. Shadowy, distant, and…. perfect. This is the one that will make you rich beyond your wildest dreams. Or is it?...The rising panic as stocks fall, the desperate rush to sell, no value to be found anywhere. These are the stories that Wall Street whispers in the dead of night. Stories so grim, so full of fear, that many try to banish them from their minds.

This Halloween, we asked some foremost financiers and voices of reason to dig deep into the depths of despair, to find their worst investment horror stories, and relive them here, on these pages, and share the lessons they learned, to help you, retail investors, steer clear of these pitfalls and bypass the descent into the madness of financial disaster. March 2020. The oil-pocalypse. The emerging market party that never came…. Hear these tales of terror so that you may tread carefully:

The selling

Horror stories are designed to artificially trigger our ‘fight, flight or freeze’ responses that send a wave of adrenalin through our bodies and prompt us to take action to escape the perceived threat. This is typically achieved by a shocking break to gradually-built tension. Investors will be all too familiar with this experience. Like a hapless character in a movie who runs from one threat right into the hands of the villain, a sudden fall in asset prices can prompt us to take swift action, only to discover later that we made a terrible decision. In my previous career managing portfolios directly for individuals, I witnessed several examples of clients who insisted on selling their entire portfolio when assets were falling. While they often saved money when measured at the bottom of the market cycle, they typically failed to re-invest, believing they had escaped the threat of falling prices. Only later did they realise later that they had run into the arms of the great threat of not investing and they drifted further away from their goals. When watching horror movies or market movements, it is typically better to look away when you are feeling uncomfortable.

-Dan Kemp, Global Chief Investment Officer, Morningstar Investment Management Europe 

It emerges – chapter 1

I cut my teeth in the industry as a closed-end fund analyst at Morningstar in the early 1990s. I felt fortunate when Templeton Emerging Markets EMF was on my coverage list – back then, manager Mark Mobius was the king of emerging markets investing. I’d track down Mobius wherever he was around the globe to get an update on the fund’s holdings. More often than not, I’d be interviewing Mobius in my jammies from my kitchen at home, since it was usually 2 a.m. and he was in some far-flung corner of the world.

Mobius was exceptionally articulate – he sold the emerging markets story, hard. Who could resist the idea of participating in the economic promise of developing markets? And I bought it: Specifically, I bought Mobius’ similarly-run open-end cousin, Templeton Developing Markets, as the first investment outside of my 401(k) plan. I was excited to have the Mark Mobius managing my money – and I couldn’t wait for him to generate a 70% return for me, just as he had for his shareholders the 12 months prior to my purchase.

You know where this is going: Over the next couple of years, emerging markets hit a pothole, and so did Templeton Developing Markets. I sold the fund for a loss. While it might be a stretch to call this an investing horror story, it was nevertheless a meaningful investment lesson: Don’t chase performance, don’t expect a quick return on a story that may need years to play out, and don’t let great manager interviews speak louder than sound investment planning.

-Susan Dziubinski, Director of Content, 

It emerges – chapter 2

The year was 1993, and I happened to see Mark Mobius, then-manager of several emerging markets funds for Templeton, speak about the incredible promise he saw in those markets. I was sold--hook, line, and sinker--and convinced my husband that we should invest at least some of our wedding gift money into one of his funds. Never mind that we were trying to save for a house, so we had no business investing in any stocks, let alone an incredibly volatile emerging markets stock fund. The fund was also expensive and carried a sales charge, even for people like us, who weren't working with an adviser. In short, it was a classic case of an ill-conceived, story-driven purchase made without regard for our risk capacity or our spending horizon. We were lucky we didn't have more money at stake!

-Christine Benz, Director of Personal Finance, Morningstar 

Train to BioNTech

I have a stash of mad money that I deploy to invest in relatively speculative companies and funds. In late 2020, I tapped those funds to buy some BioNTech shares. I had become interested in the company before I understood it was playing such a big role in addressing the pandemic. I read Morningstar’s research about how the mRNA technology it was developing might someday be used to cure certain cancers. When I made the ‘buy’ decision, though, I consciously told myself, “This is a long-term investment. BioNTech is not going to cure cancer overnight.” I did not, however, establish a price—vis a vis a company valuation—at which I would sell the shares.

Thanks in large part to the US FDA’s emergency authorisation in late 2020, the company’s shares took off soon after I bought them. While I was on holiday on August 9th the company’s valuation briefly exceeded $100 billion, at a share price of $447. It had achieved what I would consider a long-term valuation level, but it had done so in a very short time. I thought, “Wait, hold on. Don’t sell. You’re in this for the long run.” I didn’t sell. I also must admit that I committed one of the cardinal sins of selling: I wanted to get into long-term capital-gains territory. And for that I’d need to wait until September 21st. Dumb. The stock market doesn’t care about my taxes, and BioNTech shares have since fallen from $447 to about $260. I have held onto all of my shares in the meantime.

Lessons Learned:

  1. When buying a stock, establish a price at which you’d be comfortable selling it.
  2. Even when you’re buying for the long-term, sometimes a company hits its long-term valuation target quickly.
  3. If the stock has already far exceeded your target, don’t let tax minimisation concerns cloud your sell discipline.

­-Sylvester Flood, Senior Editorial Director, Morningstar

Monster holding globe


A nightmare on oil street

This horror story happened before my most recent social media-fueled trading spree… but it started everything. I had connected with someone on social media who described himself as an experienced investor in his 70s. He hated the risk profile of stocks and having to hand over his money to portfolio managers. He loved options and had a passion he liked to share. I was skeptical, but we had great discussions and I learned a lot from him. Over many weeks that followed, he took to teaching me the ins and outs of options. He was a big fan of covered calls. Specifically, oil-related plays: ‘You can count on OPEC to control the price. I’ve seen this happen for a long time. Just write a call that’s years out. The price of oil will come back into equilibrium and you’ll keep the premium [on the option] as profit’.

His underlying ETF of choice was ProShares’ UltraPro 3x Crude Oil ETF (OILU) – now-defunct of course. He had been making about 30% annually for a couple years thanks to the volatility with 300% leverage and suggested I try. I remember asking him about potential demand catastrophes and he said over time the underlying ETF would recover. I dipped my toes in and began writing covered calls. I started – and began to make a small but steady return over a few months. It worked! Until oil-pocalypse happened. Nearly my entire investment evaporated… I remember feeling numb as futures dove before heading to bed. But I had been stung in one good way at least, only for options to become a hobby I now enjoy. He disappeared from the forum around that time. I wonder how he did and what he thinks of OPEC now...

My lessons from this experience: 1) When using leverage, keep in mind that your investment can be vaporised between trading sessions. 2) Cartels can lose control without public knowledge. 3) Make sure you're incorporating all structural elements of funds into your investment strategy. Commodity products involve futures, roll yield (and loss). ETNs differ from ETFs. These factors can affect the overall risk-return profile of your strategy, so make sure you're sizing your bets accordingly!

-Andrew Willis, Content Editor, Morningstar Canada

Oil be back

My worst investment experience is related to an oil services company I spotted in the course of 2013 before the oil market started to crash. I made several mistakes. I was stubborn because I thought I was right on my valuation (assets that I thought would keep their value), and therefore I added to my position at the wrong time. My other mistake is that I completely missed the bigger picture: 1) the oil crash came after a huge capex cycle by the oil & gas industry and there was clear overcapacity in the industry; 2) oil prices are heavily influenced by external factors (geopolitics, macro) which I didn’t factor in appropriately and were out of control by the company I selected. It was an expensive but useful lesson I will always keep in mind. It has helped me improve my checklist before investing. I also try to be careful of the bigger picture, the capex cycle of the industry I’m interested in and any major disruption that might upset it.

-Jocelyn Jovène, Senior Financial Analyst, Morningstar France

A costly mistake

I was looking for a mutual fund aligned with the UN Sustainable Development Goal (SDG) n.5: Gender equality. I came across an Italian open-end fund that seemed the right choice. I clicked on the factsheet and I read that it was invested in cash, government and corporate bonds, multi-asset products and derivatives. I dug into it a bit more to find out why “gender equality” was in the name of the funds and discovered that the derivatives were used to get exposure to gender-equality indexes. So you didn’t invest directly in “best-in-class” companies, but you got exposure between 30% and 50% indirectly. Other holdings were bonds or in-house funds without any relation with SDG n.5. More astonishing was the cost: placement fees were above 3%, plus management fees, plus performance fees and exit fees (if you disinvest during the first 5 years). Why must I pay so much if I can get exposure to a gender diversity index with an ETF charging expenses around 0,2% annually?

-Sara Silano, Editorial Manager, Morningstar Italy

Tick, tock, time’s running out!

While the markets recovered from the March 2020 selloff, I feared a “dead cat bounce” - meaning a further decline. Therefore, I waited patiently on the sideline while the stock markets climbed higher and higher. After realising that the bull had indeed defeated the bear (at least at that time), I eventually bought stocks at much higher valuations.

Lessons Learned:

  1. Timing the market is extremely difficult.
  2. Dollar-cost averaging can serve you well because it can reduce the impact of regret aversion – the tendency of refraining from making decisions to prevent any potential mistakes, e.g. “I should have bought” or “I shouldn’t have bought”.

I think Peter Lynch sums it up well: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

-Christopher Greiner, Data Journalist, Morningstar

The descent

As a young kid out of college just entering the world of finance, and having saved up some money from my first few paychecks, I was excited to start investing in stocks. I had been watching Wall $treet Week with Louis Rukeyser and listened as a portfolio manager reviewed their top picks. One of them sounded especially intriguing and I wrote down the ticker. The next Monday morning as the market opened, I eagerly phoned in my order and bought my first stock – only to watch it sink precipitously over the next few weeks. Without having done any of my own work to understand the company’s future outlook or valuation metrics, I didn’t know whether to hold the stock or sell out of it. Finally, I couldn’t take the pain any longer and sold the stock for a couple hundred dollar loss (a good deal of money back then for a 22 year old)….but what I learned was much more valuable.

Lessons Learned:

Before putting money to work, to do your own due diligence, synthesize an investment thesis, decide at what valuation to buy a stock, and learn when to either cut a loss or build a larger position when the market moves against you.  

-Dave Sekera, CFA, Chief U.S. Markets Strategist, Morningstar