Trevor Tune shares his experiences trading Penny Stocks in college and falling victim to the “Pump and Dump” scheme. After going on a winning streak attempting to get rich quick, he lost everything. Trevor came to realize that long term sustainable investing is the key to success. Here’s his message for the next generation.
The following is a letter to my children showing my failed attempts to get rich quick.
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Forget “Getting Rich Quick”
Dear Get Rich Quick Seekers,
When I was 16, I worked at a local paint store and did landscaping during the summers. This allowed me to build up a relatively sizable savings for my age. I first heard about investing when I was a Freshman in College at the University of Missouri. I wasn’t working any longer and focusing on studies, enjoying my time as an undergrad, and meeting new people…but I did want to put the money I had to work.
After reading the first few chapters of Investing for Dummies and getting coaching from a friend, I dived in with my first diversified portfolio consisting of a mutual fund, an ETF, and a few single stocks. My allocation was fairly risk-averse except for the 8% I put into a risky penny stock.
After making investments, I would monitor them during my 8 AM class and read news instead of focusing on the subject being taught. Just 2 months after I purchased the penny stock, it made a terrific run. As I sat in my class, I watched the ticker go on a tear up 60, 70, 80% in the morning hours. In disbelief, I watched my gains add up and decided to hold on for dear life.
Three days later, the stock was still on the same trajectory and I had nearly quadrupled my investment. I couldn’t believe it. I decided that it was time to take my winnings and sell. Within an hour, the stock was down 40% and the next day it was nearly back to the level where I had purchased it.
Taking Advantage of the Pump and Dump
After experiencing this type of activity during my first 2 months of investing, I was hooked. I could take advantage of these types of price swings. I rolled my earnings into a new penny stock FNMA. In three months, FNMA went from $0.50 to $4.00+ per share. I was awestruck when I sold Fannie at its peak and watched it tumble a few days later. With only months of investing experience, I had witnessed a cumulative 400% return on my portfolio driven by very, very risky bets.
Unbeknown to me at the time, I was taking advantage of a common illicit trading activity known as a “pump-and-dump” scheme. Investors “pump” money in and generate hype around the stock to inflate the price. This convinces others watching to make follow-on investments, and then devious investors “dump” the holding at the top and watch values fall.
I began to think I must have some kind of innate talent that allowed me to pick up on investing so quickly. When comparing this to my mutual fund’s gain of 5-7%, I couldn’t understand why everyone else wasn’t making similar penny stock investments. Why not get rich quick instead, right? I convinced myself that no-one else was willing to take on the level risk that I was. If I took gambles others would not, I could beat speculators by getting in before them to buy low and sell high.
My next step was to figure out the most risky bets I could make. After all, more risk equals more reward. This is something I told myself I was obviously good at.
Kylven’s Commentary: Falling victim to hyped up speculative investments like penny stocks and cryptocurrencies is so easy for early investors. If you don’t know where to look for good advice, you’ll come across highly marketed schemes. I know I’ve fell for them. The recent hype of Bitcoin and messages from the likes of Jordan Belfort and Timothy Sykes are perfect examples.
I remember watching Season 1 of Wall Street Warriors that featured Sykes. He claimed to have turned $12,000 into $1.5 million by his 21st birthday trading penny stocks. Tim is now 37 and his Twitter profile claims that value to be $4.8 million. People will assume this success is a direct result of his day trading tactics.
I’ll be honest, I haven’t done my due diligence on his methods and can’t definitely say the claims are false. However, I do believe that most of his net worth is due to celebrity, branding, speaking engagements, education courses, DVDs, membership sites, and media exposure. His story is a fun one to market and will get attention, just look at the “as seen on” section from his website. New investors coming across site’s like his are in for a rude awakening if they buy into the hype. As Trevor clearly shows…speculative investments, driven by the desire to get rich quick, is not the path to Financial Independence.
With this frame of mind, I began option and derivative trading as well. With options, I could buy and sell the premiums paid as they adjusted with the stock and “strike price.” Just as with penny stocks, the first few options worked out quite well…despite high volatility. I was so bold as to start trading weeklies, even buying Friday morning when they were expiring the same day.
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” – Charlie Munger
Losing it all
This extreme luck continued into my Sophomore year. I was on a high, and I felt like I couldn’t be stopped. It was at this point that my investment strategy took a turn for the worst. I began losing bet after bet no matter what I did. Nothing was going right anymore. After I made a trade, I watched helplessly as the flashing red arrow ticked away and I saw my money vanishing.
I thought it was just a phase and that I my “skills” would shine through eventually. I thought wrong. Two months after achieving my all-time high, I lost almost everything I had. Granted, it was not much, but at the time it was everything I owned. I found a part-time job that paid well and tried repeatedly to get back to where I was. Each time I did, I lost.
It was at this low where my lesson was finally realized.
- I was indeed not a “special” kind of investor.
- It’s a lot harder to build up wealth then it is to lose it.
- Trading in such high-risk situations is not good for my physical and mental health.
My Investing Strategy 2.0
Those 8 months of risking investing taught me more than I could have ever imagined. It helped pave the way for my current philosophy. Today, there is not an investment I will make that’s not at least a 7-10 year time horizon. My buy-and-hold diversified portfolio consists of a heavy weighting in direct real estate investments, ETFs, and a small allocation toward cryptocurrency.
I live in St. Louis and keep my costs to a minimum. When I pull the trigger on a new investment property, I focus on conserving cash by keeping commissions low and working with a margin of safety.
One of my newest strategies involves the BRRRR method which refers to Buy, Rent, Renovate, Refinance, and (eventually) Repeat. When the price is right, this strategy is a wonderful long-term way to build wealth through stable rental properties and continuous cash flow.
In the St. Louis housing market, there are numerous value plays relative to hyper-growth cities like Austin, Denver, or Nashville. St. Louis has strong underlying fundamentals, such as low cost of living, low unemployment rate, and a burgeoning startup scene. With a unique 1900’s historic architectural style, there are plenty of opportunities to buy low, make repairs, and refinance.
I learned the hard way that placing all your eggs in one very risky basket can come back to haunt you. With my new 10-20 year real estate investing mindset, I feel much more in control of my financial future. I’m confident in my ability to grow a sustainable risk averse investment portfolio. I am happier, healthier, and better off with this strategy than one with 20-30% swings every day.
My advice to anyone with a “get rich quick” mentality would be:
- Learn as much as possible and get started sooner rather than later.
- Experiment with various investing strategies to find your preference for building wealth.
- Never take diversification, patience, and proper asset allocation for granted.
- Study the best investors of the previous generation and the common traits among them. You’ll start to patterns.
Even with technology disruption, political fears, rising rates, and all the risks that exist in today’s world… you’ll come to understand that foregoing short-term excitement for long-term sustainability is the key to successfully building wealth.
Kylven’s Commentary: Many early investors want to get rich quick or exhibit the “fear of missing out” mentality. Both should be forgotten in favor of proven investing strategies that are guaranteed to produce returns in the long term. I like how Trevor framed his penny stock losses as “bet after bet.” That is essentially what they are. Micro-cap stock companies are not held to the higher reporting standard of blue chip organizations on the exchange, which makes them primarily a gamble. They also experience extreme volatility and you may not even find a buyer for your holdings when a penny stock peaks. There are much better high risk investment options out there. In every similar case, only invest (insert typical overused phrase) money you can afford to lose.
A 24-year investing enthusiast with experience in real estate, startups, cryptocurrency, stocks, and option trading. He currently is Head of Content at Clever Real Estate. Previously, Trevor interned for J.P. Morgan in their Asset Management division and graduated from the University of Missouri – Columbia.