The short version
- Some companies (cough, cough Blockbuster and Sears) that seemed like surefire investments at the time have turned out to be some of the worst stock picks.
- Crypto and NFTs have proved to be extremely volatile investments, making them two dangerous choices for inexperienced investors.
- Day trading is another dangerous game that ultimately ends in a substantial loss for most investors.
Yes, you read that right. We’re going to start the ball rolling by talking about Tulips. Tulips are the first real example of a huge investing failure.
Back in the 1630s, the Dutch faced a tulip craze, dubbed Tulipmania. Intrigued by new exotic tulips, the price was driven up 12-fold, but as you can imagine, these high prices weren’t sustainable.
As prices dropped suddenly, merchants, farmers, and others involved in the tulip trade paid the price. Those that invested in these tulips spent, at their highest, 5,000 guilders, the equivalent of an entire house at the time.
Think about the last time you stepped foot in a Sears. If you can’t remember, that’s exactly why investors in Sears haven’t fared well over the years. Once purchased by hedge fund trader, Eddie Lampert for $11 billion, the company has been declining ever since and was even bankrupt for four years.
While Lampert recently settled his legal battle with Sears, earning $175 million in the settlement, other investors haven’t fared that well. Today, the stock price is extraordinarily low, making it a poor investment still to this day.
Jeff Bezos may be one of the richest men on Earth, but even he has had his share of upsets in his investing life. He invested about $50 million in the online pet store, pets.com back in the late 1990s. You may remember pets.com by their sock-puppet dog that was the company icon, even appearing in a Super Bowl commercial.
Ultimately, the company failed before it even really got started, beginning the dot-com burst. An interview with the former President explains that the company was simply too ahead of itself. In the early 2000s, there weren’t enough customers shopping online to fully support the company’s growth. That, and they simply weren’t able to raise the capital to meet their financial needs.
Younger readers may have heard their parents speak about Blockbuster, wholly amused by the inconvenience of going to an actual store to find the latest movies on DVD or VHS. In their hay day, Blockbuster seemed like an extremely futuristic stock pick, a sure bet. They even raised over $18 million in investor funding back in the late 80s.
Clearly, no one expected the rise of Netflix, Hulu, and the dozens of other streaming services. In 2010, Blockbuster ultimately filed for bankruptcy, exiting the scene with over $900 million in debt.
Enron was once one of the most successful energy companies and a favorite among Wall Street investors. With $63.4 billion in assets, it was a shock and a major disappointment when the company suddenly went bust. Unlike Blockbuster and Sears which simply became obsolete, Enron went down due to insider fraud. Both the CEO and CFO went to prison and the stock shareholders sued for $40 billion.
“It's paramount to understand how your investment works. Enron is one of the best examples of this,” says Asher Rogovy, Chief Investment Officer of Magnifina, LLC. The collapse of Enron was a rude awakening into the inner workings of the stock market, and the very real potential risks associated with investing in it.
Waumbec Textile Company
Warren Buffet is one of the most well-respected investors in history. Worth a staggering $102.9 billion, he’s clearly made the right investments. That said, Buffet isn’t ashamed of the mistakes he made early on. The Waumbec Textile Company is perhaps his biggest investing mistake to date.
Buffet purchased the company in 1975 and did his research before buying. He believed in the reputation and projections of the company. Just a few years after buying the company, though, it went bankrupt and Buffet lost the bulk of his investment.
How can an investment be one of the worst investments in history when some people have made billions on it? Crypto isn’t necessarily the worst-performing investment in history, but it’s definitely one of the most dangerous. For starters, there are practically no restrictions or rules regarding crypto, so you’re investing entirely at your own risk. With huge swings in price on pretty much every type of coin, the thousands that people invested yesterday are only worth dollars now.
Crypto prices are, in many ways, based on hype and marketing. This causes investors to jump in without actually researching what they’re investing in. “Unsophisticated investors are buying things without understanding how they work.,” says Rogovy. “Crypto enthusiasts often deride government currencies as fiat, but most fail to understand the fragility of the faith required to maintain the value of digital assets.”
Rogovy gives the Luna collapse as an example. About $60 billion in digital assets were dried up and gone when the crash occurred. There were tons of investors that lost a substantial amount of money, in part, because they didn’t fully comprehend what would happen in the event of a crash.
Along the same lines as crypto, NFTs are perfect examples of risky investments that didn’t pay off. Recent data shows that NFT trading is down 97% since the beginning of 2022. Even the most popular NFTs are worth substantially less than they once were. One of Eminem’s Bored Ape NFTs has lost more than 85% of its value since he bought it. Justin Beiber’s Bored Ape NFT is also down substantially from $1.3 million to about $69,000.
NFTs are inextricably linked to crypto, so it makes sense that the value of NFTs has continued to drop. Plus, NFTs gain their value from the hype, just like crypto. When interest goes down, for whatever reason, the investment drops, making NFTs very unstable investments.
While not technically an investment, I’m including them because of a Mark Cuban interview back in 2014 where he said “that credit cards are the worst investment that you can make.” I tend to agree with this sentiment. After all, the average American has $6,194 in credit card debt. The problem with credit cards is the cycle of debt it’s easy to get stuck in.
When you need to finance a sudden purchase (i.e a broken fridge, car repairs, home improvements, etc.) it’s easy to swipe your card. You already have the line of credit and you’ll just pay it back in small increments. Well, the longer you don’t pay off your balance, the more interest you rack up. With an average interest rate of 21.03% (for new offers), this can add hundreds, if not thousands to your bills over time. Of course, none of this is to say you shouldn’t use credit cards, you just need to be able to use them responsibly 100% of the time.
Day trading involves buying and selling stocks throughout a single day (hence the name). To successfully become a day trader, you need to know pretty much everything about the markets, and that’s just not possible. This is demonstrated by the very low number of investors who actually make money day trading. A Brazilian study found that just 3% of their pool of traders make money day trading.
When times are hard, day trading can prove even more difficult. During the height of the COVID-19 pandemic, the bull market forced day traders to lose more than $1 billion. For 97% of investors, the risks that come with day trading far outweigh the rewards.
The bottom line
There are many investments to choose from, and no matter how much you try, it can be difficult to see the outcome of those investments. Even companies that were once successful have long since failed, losing their initial investors millions. To hedge against these losses, work with a financial advisor and be certain that you maintain a diversified portfolio.