My first "Investments"

When I graduated, I was 24, young and stupid, and I had some savings. 20-something thousand.

As young lieutenants in the Air Force, we often discussed how to make more money and invest. We would also spend much money with little regard for the future. I’m not saying everyone was like this or implying you should change. Much of it was spent on memorable nights I can’t remember even if I wanted to.

But we talked a lot about investing. And this led to my first “investments”: online betting, FOREX, complex financial instruments, and real estate.

Betting as an investment strategy

“You can make money in online betting. You just need to find small sure bets” - ever heard about odds?

Here’s what I did, not for long. I went searching for sure bets. They would pay 1% gain. For every 100€, I bet I would gain 1€.

I’ve always been good with numbers and use logic whenever possible.

About sure bets: we all know those impossible moments in sports, therefore, there are no sure bets. Those would cost me 100€. And I was relying on that base to make money. I intuitively learned about hedging: “I just need to bet on both results”, can you guess who’s making money on that transaction? If you guessed the house, you’re right.

My first two lessons about investment:

1. Don’t base your learning on people who know nothing about the trade. Is your best friend saying crypto is the next thing? Make an informed decision based on people who know what they are talking about. Bonus points if you hear both sides on any matter.
2. If the “house always wins,” it’s not investing. It’s gambling. Mistaking one for the other is an expensive mistake. I’m not lecturing whether you should gamble or not.

This lasted perhaps a week. I gained some, I lost some. I know I didn’t lose much because the bells started to ring pretty early on.

Leveraged Investments

“I have this guy saying you always make money in FOREX. You just need to day trade and cash in small gains every time”. Many people claim to have made fortunes in FOREX.

Here I learned about Spread, the difference between the bid and the asking price. It’s usually a highly leveraged trade, which means you can make money in any tenth of a cent change. While this is funny when it’s rising, you can be wiped out quickly on the way down.

It’s not uncommon for any currency pair to drop steadily for a day and take months or even years to recover. Knowing where a FOREX pair is going is like guessing the weather in a year. Complex systems are impossible to predict with certainty.

You can see that price historically is around 1.00-1.25. In a 25-cent change, for you to make money, you need high volumes of trade and nice timing. This is speculation. As a speculator, you can use a series of tools to make sure you make money in the long run, but the risk is high, and it’s not advisable at all for the average investor.

I believe I had a 10% margin at that time, meaning that with 100€, I could trade up to 1000€ in currency pairs. It also meant that a bigger than 10-cent loss would close my position unless I had extra cash to cover that loss.

There are tools to cover this, with different long and short positions, but I don’t advise this to the average investor. I don’t advise this to anyone who is not a full-time investor. Even for those, it seems risky.

I still had one more go in leveraged investments. I didn’t want to put all my money in Investments because I didn’t fully understand how to make money. I didn’t know then that we were headed into one of the best bull runs in history.

I can’t remember the instrument I used, but I bought a Portuguese bank stock (BCP at the time), and I made 1000€ in profit in a single day. That’s when I learned that the value of a stock is worthless except when you buy or sell. The next day I was wiped out of my position with a 100€ loss on my margin. Leveraged instruments will grow to infinity, but you’re out as soon as they lose to your margin rate. I wouldn’t have made money if I used a safer margin, say 50%.

What did I learn?

3. Don’t speculate unless you are a professional.

4. Leveraged investment is a form of speculation.

About FOREX: it’s a great market, but now I use it mostly to hedge asset positions in different currencies. That way, I’m protected against changes in the currency pair.

“Invest in a new car”

I then played with the idea of spending my money buying a new car. I had an old Audi that gave me a lot of problems, which I eventually had to sell due to fuel leakage, and I bought an Opel Corsa from the shadiest car deal. This is a pretty funny story for some other day.

5. Spending is not investing

Real Estate

I kept thinking about investments and discussing them with people, this time with the parents of a girlfriend at that time. Her mother was a trader, but her father pointed me to Real Estate.

I bought my first house in October 2010 for 180k ish and sold it for 350k in January 2020. This was an 8.5x gain from my initial investment of 20k to 170k in just over ten years. Not bad, is it? Let’s check it out.

170k - 65k in mortgage costs = 105k

105k - 50k in improvements = 55k

55k - 30k in income taxes from the sale = 25k

What was my ROI?

20k down + 65k over 10 years = 85k

85k in my pocket after everything paid up.

I invested 85k and ended with 85k in my pocket. That’s a 0 ROI.

How does it sound now? Perhaps you mightsay: “You could’ve sold better or bought better”. Maybe. Please keep in mind that I bought at rock-bottom prices and benefited from the lowest interest of all time, so a 50k ROI would be completely unrealistic.

If you think this is a good investment, please think again. I’ll add some perspective:

The same 20k would have bought 235 SPY shares, an ETF replicating the S&P500. The dollar was at 1,39 at the time. The 235 shares would’ve sold for 68K in January 2020.

68k - 20k investment = 48k

48k - 13k capital gains tax = 35k ROI

In case I had hedged against the dollar:

54k - 20k investment = 34k

34k - 9k capital gains tax = 25k ROI

That would’ve put me 45k-55k in my pocket. This is an investment.

To really put this into perspective, imagine that on top of the initial 20k, you add what I spent in mortgage year over year. That 65K would have bought me an additional 373 shares, to a total of 608. Same logic:

176k - 85k investment = 91K

91k - 25k capital gains tax = 66k ROI

And this would put 151K in my pocket.

This is an oversimplification, as there are additional advantages to investing in the market over a house. It’s also very unlikely you will get similar returns in the next decade, or any return in the stock market alone, for that matter.

What can you learn from this?

6. Buying your own house is not an investment. It’s a cost, that might or not make sense.

7. Pay yourself first, invest that.

Anything that will generate wealth is an investment. Anything that doesn’t generate wealth is not an investment.

This is how I started my investment journey over 10 years ago, I kept learning in the process. I believe this to be the most important aspect of life: a continuous curiosity and desire to learn and improve.

What do you think of my 7 lessons?

Are any of these new to you?

Peace and goodness to you my friend,

Lourenço Czernin