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My Biggest Investing Flaw

By Dr. Steve Sjuggerud
Thursday, March 3, 2016

Earlier this week, I told you what I do with my own money... and what has worked for me personally in my investments.
Today, I want to share with you what I've done wrong...
Hopefully you can learn from my mistakes... and not repeat them.
It took me a while to get this one through my thick skull. But I finally get it.
It's the idea of purposely buying what's hard to sell... getting it for an extremely low price from someone who needed to get rid of it... and then expecting that you will someday be handsomely rewarded for it when the right buyer comes along.
(I don't know if there's a technical term for this or not, but I call this "earning the illiquidity premium.")
It all works... except for the part about finding the right buyer to sell to.
"Earning the illiquidity premium" might work in a textbook. But it's tough to make it work in the real world. So far, in my case, it hasn't really worked out that well.
I suggest you learn a lesson from me and do this: Buy what you know has a known value to others... or buy it for your own joy. Don't buy illiquidity, hoping to sell it in "due time." It may never come.
Fortunately, I love some of the illiquid things that I've bought. For example, I have some "prototype" guitars...
Guitar brand Martin produced 91 D-45 guitars in the 1930s before ceasing production in 1942... They are the most coveted acoustic guitars ever produced. But what if you could buy the prototype? Wouldn't that be even "cooler" to own? (I don't own a D-45!)
It took me a while to learn that – even though I think that "one-offs" and "prototypes" are cool – they are not necessarily more valuable.
It turns out, investors actually prefer the production versions of these classics... the pinnacle of the idea.
Whether it's Martin D-45s or "gullwing" Mercedes sports cars, when you have a few dozen of something, you get enthusiasts. You get collectors. There's a known history of the model. There's legend and lore. And importantly, there's a known price history.
When you buy an oddball... at the end of the day, you still just have an oddball.
"One-offs" and "prototypes" are often looked at as oddballs instead of something to be coveted. They're harder to get rid of – as the universe of buyers is actually smaller. People don't know what to make of it.
I thought I could buy some of these ultra-rare things and be willing to sit on them. But I've learned one thing in my sitting:
Just because you think you are willing to sit on it longer than the last guy, that doesn't mean you'll actually succeed in making money from it – or even selling it!
When you buy something pricey – anything, remember...
1.   Buy it because you know you have a "liquid" market to sell it into, or
2.   Buy it for personal joy

Don't buy it because you think you'll win the illiquidity game. It's a hard game to win.
I took me a long time to learn this lesson. Hopefully you will learn it quicker than I did!
Good investing,

Further Reading:

Steve likes to help readers learn from his mistakes in the market. Here are three other examples:
Cut your losses early. Don't make it personal. And move along from that trade until it's no longer personal...
These two sentences have cost Steve more money in his investing career than anything...
A mistake from 2004 still bothers Steve today...

Market Notes


The bull market in firearms rages on...
As we've told you in the past, folks tend to stock up on guns following high-profile shootings and rumors of tightening gun regulations. One reliable indicator that tells us Americans are still buying guns is how many background checks are being run (which happens virtually every time someone purchases a firearm). Nearly 5 million background checks were run during the fourth quarter of 2015... up almost 20% over the same period of 2014.
Another way to take the gun industry's temperature is to check out the performance of one of the leaders in the industry: Sturm, Ruger (RGR). Ruger is a gun enthusiast's dream brand, with more than 400 variations of 30-plus distinct products.
It's no surprise the business is one of Extreme Value editor Dan Ferris' top recommendations today. Readers who took his advice to buy in December are already up more than 20%. The stock has jumped from $48 per share last April to around $72 today. The uptrend in guns continues...

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