Confessions of the worst investor ever

January 28, 2014: 10:57 AM ET
worst investor
NEW YORK (CNNMoney)

My oldest friend is a one of the nicest guys in the world, a killer guitar player, a successful consultant at a top tech company -- and also the world's worst investor.

He started dabbling in the stock market nearly 20 years ago. Things started okay when he bought shares in small tech company Wind River on a tip from me. He made money, though it was pure luck, since I didn't know what I was talking about.

And he has done mostly fine with a small-cap mutual fund -- high expenses, but it's had some big runs.

It was pretty hard to lose money in the late 1990s, but he bought at the exact top of Iomega, the big momentum play then.

At the time, I had just learned about the Greater Fool Theory, the idea of ignoring all fundamental analysis of asset values and just hoping you can sell at a higher price to a "greater fool." In the case of Iomega, I think we figured out that my friend was in fact the greatest fool.

Since then, it's only gotten worse.

For the benefit of small time investors everywhere, he has graciously agreed to share his "greatest hits."

Lost money on Tesla:

Bought into the IPO in 2010 and sold soon after for a small loss. Tesla (TSLA) is up some 600% since then.

Lost on Facebook too:

Bought into the IPO in 2012 and sold soon after for a loss. More than a year and a half later, Facebook (FB) is 40% above the offering price. Noticing a pattern here?

Dividends are good, but not THAT good:

After the stock market fell apart in 2008 and interest rates dropped to zero, he read an article on an investing website (not CNNMoney) that described dividends as a sure-fire way to generate income rather than earning near-nothing in a savings account.

So he bought Star Bulk Carriers Corp. (SBLK) for the 10% dividend yield. He's gotten creamed.

Now it's getting crazy... trading ETFs leveraged at 3x

The Direxion Daily Financial Bear 3X Shares (FAZ) is a way to bet big on a stock decline: it goes the opposite way of the Russell 1000 financial services index -- and by a multiple of 3. He bought it in March 2009, at the exact time that stock prices bottomed and started heading back up.

Translation: He lost a bundle.

China Mobile -- how can you go wrong with all those mobile phone users?

He bought this in 2007 after reading an optimistic article about the growing number of Chinese cell phone users. Of course, it dropped the day after he bought it and he bailed at a significant loss several months later.

His worst mistake yet...

The latest dip in stock prices this month has my friend worried, so this week he moved most of his 401(k) into cash. If his track record holds, the bull market should pick back up soon!

My advice:

Some investors will be able to get better returns than the overall stock market, but it probably won't be you.

You can't go wrong with index funds. They're cheap, and you'll get exactly the market return - about 30% last year, which isn't bad at all.

And because you own a piece of hundreds or thousands of companies, it's not as disastrous when one blows up.

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