Successful investors always avoid them.
“You must learn from the mistakes of others. You can’t possibly live long enough to make them all yourself.” — Sam Levenson
Everyone invests expecting future returns. But investing in the wrong places for the lack of experience can cost you a lot of money.
To avoid this, you can gain knowledge in two ways: The quick and cheaper way, learning from other people’s mistakes. And the expensive and long path, making your own investment mistakes and learning from them.
The good thing about the first way is that indirect learning helps you avoid losses and time. So you will have more profit in your account and will accelerate your journey to financial independence.
For that reason, let’s take a look at these 6 top toxic investments you should avoid if you don’t want to lose your money.
1. Penny Stocks
Penny stocks are common shares of small public companies that can be traded for less than $5 per share. The advantage of these types of stocks is that you can buy many shares with a small amount of money.
Some investors believe that they can become millionaires by investing in those stocks because if the company goes up, they will have many shares that can give them a good profit.
Why penny stocks are not a good investment
According to several sources, penny stocks are much riskier than regular stocks. The reason penny stocks have these low prices it’s because most of the companies behind them are losing money and might be on their way to bankruptcy.
Also, there is a lot of manipulation in the market with these types of stocks because of their prices. Most “investors” publish articles about how a stock could be the next big project to try to pump the price, and they can sell it with 50–60% profit.
Investing in penny stocks is like gambling due to market manipulation and the reason behind their price.
2. NFT Games without any security or an established company.
NFT games are play-to-earn initiatives that pay you with cryptocurrencies (that you can convert into cash later) to play a game. They usually have an entry fee, and the profits are almost instantaneous.
These kinds of gaming structures are prominent. For example, Axie Infinity has been one of the most successful projects so far. According to CryptoSlam, the game accounted for over $500 million in NFT token sales in a month, with all-time sales totaling $2.2 billion. Apart from NFTs, Axie’s cryptocurrency is valued at $9 billion.
If you enter into one of those games early and it’s from an established and “trustworthy” company, you can make an outstanding amount of money. I have tried two games this year and have made about $3000 playing.
The problem with NFT games
Thanks to the hype that the first NFT games have had, and the desire to get into one of these new blockchain inventions early, you can easily fall for a scam.
In addition, you must consider that the price of the currency can change drastically from one day to the next, so if you do not make a profit on time, you can lose all your money.
3. Financial derivatives without the proper knowledge.
Derivatives are financial instruments that “derive” their value from an underlying asset. That underlying asset can be stocks, bonds, currencies, commodities, even market indexes.
For example, Futures are financial derivatives — contracts that allow for the delivery of some underlying asset in the future, but with a price determined today in the market.
For instance, you might have a derivative that gives you the right to buy 100 shares of an S&P 500 index fund for $2,000 per share in three months.
Why derivates can be dangerous
While it is difficult to predict how much something will cost in the future, it is doubly difficult to predict how quickly the price will hit a target. The derivatives investor must be right about both price and timing to make money from derivatives.
Experts have lost fortunes because they failed to predict the price or the time. Warren Buffett described derivatives as “financial weapons of mass destruction” because they are too hard to profit.
4. Shitcoins
The term shitcoin refers to all those useless cryptocurrencies that exist in the market. These cryptocurrencies were created without a defined purpose, offered at speculative prices, and simply have no use because they are cheap copies of other projects.
Most people who are investing in cryptocurrencies start by buying shitcoins. The reason is mainly hype. They see on social media how someone doubled or tripled their money overnight for a cryptocurrency, and they feel like they should ride the wave.
Then inside, they realize that there is a better world and projects with purpose.
Why shitcoins are not a good investment
Although many people have indeed taken advantage of the shitcoin hype, most of the time, when you see a new coin on social networks, it is because it is too late to invest there.
Many of the shitcoins on the market never really go up, and most projects are eliminated before you can get your money out.
Lastly, unlike other coins, the price moves too fast that you may not be able to control your money.
5. Airlines Business
Popular airlines seem like a good investment to beginners because, at first glance, it looks like a successful, safe, and profitable business, especially if you invest in popular brands like Delta, Jetblue, and American Airlines.
People who travel a lot know the potential and advantages of an airline and all the money they make on a single trip. Many airline prices went down with the pandemic, but even before the Covid Crash, the airline business wasn’t a good investment.
Why airlines are bad investments
The airline industry is no stranger to bankruptcies. Big companies like American Airlines, United, and Delta almost went bankrupt once, but all recovered by merging with other airlines. But there is an extensive list of airlines that weren’t so lucky.
Warren Buffett called airlines a “death trap for investors” back in 2013 for all the irregularities these businesses have. Even though he tried to invest in 2017, he later sold all his stocks because it didn’t seem reasonable.
Robert Crandall, the American Airlines CEO, even said that once in an interview:
“I’ve never invested in any airline. I’m an airline manager. I don’t invest in airlines. And I always said to the employees of American: This is not an appropriate investment. It’s a great place to work and it’s a great company that does important work. But airlines are not an investment.”
6. Forex market.
Forex trading sounds like a simple prospect. The forex trader takes a position in a currency pair, for example, the USD and the Euro. The trader could “buy” the USD, benefiting if the USD gains against the EUR and suffering losses if the USD weakens against the EUR.
Currency trading has a reasonably large audience globally. There are entire Reddit threads, Facebook groups, forums, and YouTube gurus exclusively dedicated to currency trading.
Why this investment is not worth it
Most of these currencies do not change much against one in monthly or yearly periods. Therefore, to get a significant return on their investments, forex traders generally assume leverage in their trades.
Leverage is another word for “borrowing.” If a trader leveraged “10: 1”, the trader would borrow $ 9 for every $ 1 invested. A 1% move in favor of the trader would now result in a 10% profit due to leverage.
But the leverage cuts both ways. A 1% move against the trader would lead to a 10% capital loss. If the position were to deteriorate by 10%, the trader’s capital would disappear completely.
Final thoughts
“The ability to focus attention on important things is a defining characteristic of intelligence.” — Robert J. Shiller
Many different investment strategies can lead you to success, but all of them require the proper analysis and a good implementation over the years to assure that you can come out a winner in the end.
For that reason, when an investment is based on rumors, hot tips, stories, conjectures, predictions without any backend, or an expectation, it’s probably not a good idea to put your money there.
You must have a plan based on a demonstrable positive expectation, and none of these approaches qualify as a plan despite their widespread use and popular appeal.
Risky investments can be part of your investment portfolio if they are done with intelligence because they could give you good profits. But if you do them without any prior analysis or risk management, you could lose everything.
Your financial security deserves better.
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