Heed Warren Buffett’s Warning to Avoid Making This “Insane” Mistake

Aurora Cannabis Inc. (TSX:ACB), crypto, and other FOMO securities are hot stocks right now, which may lead you to make this “insane” mistake as a new investor.

| More on:
The Motley Fool

FOMO, or the fear of missing out, is a very powerful force that’s hard to resist, especially for many investors who are new to the game. It has inflated a tonne of history’s speculative bubbles and will continue to do so as we move forward, even in spite of advancements in technology, which allow for today’s investors to have a wealth of investing knowledge at their fingertips. In theory, we should all be smarter investors, but still, it’s hard to resist the temptation of speculative plays that act as siren songs, preying upon the human emotion of greed.

You hear about people becoming overnight millionaires thanks to a small investment in cryptocurrencies, marijuana stocks, cobalt stocks, or any other emerging “sexy play” that are deemed hot at a given point in time. FOMO causes many of us to exhibit a herd mentality and pile in to investment instruments that may have little to no intrinsic value.

In such nonsensical markets, it’s easy to get lost and be driven by euphoria, greed, and the fear of missing an opportunity to become an instant millionaire. We all want to get wealthier, preferably over an unrealistically short period of time, but in order to do so, many of us speculate on dangerous investment instruments that are essentially gambles; however, they can easily be disguised as an investment.

It’s important to tell the difference between investing and speculation early on in your investment career; otherwise, a poorly timed speculation may cause you to give up on investing, even though you haven’t really actually invested. You speculated — gambled, if you will — all while telling yourself that you were investing to make it seem like you were doing something respectable, when in reality you were just pulling the handle on a slot machine with Bitcoin, Ethereum, Ripple, venture miners, or even up-and-coming marijuana firms like Aurora Cannabis Inc. (TSX:ACB) or Aphria Inc. (TSX:APH).

If you’re going to speculative, at least realize that you are, in fact, speculating and not investing. And if you do both, don’t mix your investments with your speculations and keep them in separate accounts; otherwise, you’ll confuse the two and make irrational decisions with investments to finance your speculative activity. If you find yourself dumping any of your long-term core holdings to become fully “invested” in crypto, Aphria, or its like, you’ll stand to lose your shirt. And if you’ve decided to borrow money to fund such speculative shots in the dark, you could find yourself in long-term financial ruin.

As Warren Buffett recently said: “It’s insane to risk what you have for something you don’t need.” He was referring to those who borrow to invest (or speculate).

Moreover, your friends and the talking heads on TV may be pushing you to get in on a “free lunch,” and for those heavily indebted Canadians without free cash on hand, well, one may think investing on a margin may not seem so “insane” at the time, especially at the rate pot stocks have been surging of late! Given the recent rise in speculative activity and leveraged investing, new investors would be very wise to take a step back and really consider the words of warning from the Oracle himself to avoid making “insane” moves.

Bottom line

Despite being one of the richest men on the planet, Warren Buffett admitted that he doesn’t know the secret to getting rich quick right from the get-go. It takes many years of patience, discipline, and smart investment decisions to compound your wealth to the next level. You can get rich, but slowly and steadily; there’s no other way around it other than a path that will lead you down the road of speculation, gambling, and borrowing to invest.

Stay hungry. Stay Foolish.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Investing

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Businessman holding tablet and showing a growing virtual hologram of statistics, graph and chart with arrow up on dark background. Stock market. Business growth, planning and strategy concept
Dividend Stocks

TFSA Magic: Earn Enormous Passive Income That the CRA Can’t Touch

If you're seeking out passive income, with zero taxes involved, then get on board with a TFSA and this portfolio…

Read more »

Man with no money. Businessman holding empty wallet
Dividend Stocks

2 Stocks Under $50 New Investors Can Confidently Buy

There are some great stocks under $50 that every investor needs to know about. Here’s a look at two great…

Read more »

potted green plant grows up in arrow shape
Stocks for Beginners

3 Growth Stocks I’m Buying in April

These three growth stocks are up in the last year, and that is likely to continue on as we keep…

Read more »

clock time
Tech Stocks

Long-Term Investing: 3 Top Canadian Stocks You Can Buy for Under $20 a Share

These three under-$20 stocks offer excellent buying opportunities for long-term investors.

Read more »

Arrowings ascending on a chalkboard
Energy Stocks

Beat the TSX With This Cash-Gushing Dividend Stock

Canadian Natural Resources stock is well set up to beat the TSX as it continues to generate strong cash flows…

Read more »

think thought consider
Dividend Stocks

Down 10.88%: Is ATD Stock a Good Buy After Earnings?

Alimentation Couche-Tard (TSX:ATD) stock might not be the easy buy-case it once was. Here’s a look at what happened.

Read more »

money cash dividends
Dividend Stocks

TFSA Dividend Stocks: Earn $1,200/Year Tax-Free

Canadian stocks like Fortis are a must-have in your portfolio to earn tax-free yields for decades.

Read more »