How Intelligence Increases Wipe Out Risk

gt advanced technologies abcChills ran down my spine. I had just finished reading about investors losing their entire life savings. These people had doubled down and wagered everything on a single company. A single stock. And they lost everything. This is a fascinating read. As I sifted through the carcass of an online trading forum where this drama played out over 500+ pages, I couldn’t help but notice the story and the lessons that unfolded as the days went by. The company was GT Advanced Technologies.


 

I’ve been engrossed for weeks sifting through the forums where investors gathered and chatted about GT Advanced Technologies. I first ran into this story over at Islands of Investing. From there, Jason pointed me over to Joshua Keenons blog. I’ve been obsessed with it ever since. Ask my wife. All I keep telling her about is how fascinating it is to go through page after page of this disaster story.

GT Advanced Technologies was suppose to supply Apple sapphire screens for the new iPhone 6. They signed a horrendously one-sided deal with Apple and bet the farm. And they missed the mark. And then they went bankrupt. And people lost a lot of money. Some of them lost everything. Everything.

Going through the forums, and in hindsight, one can see cognitive and behavioural biases everywhere. Fear of regret. Short-sightedness. Massive amounts of cognitive dissonance. Overconfidence. Anchoring. Representativeness.

Here is a screenshot of a poster in that forum pointing out all the red flags that were “obvious” in hindsight:

GT Advanced Technologies 8

Now, in all fairness, hindsight is hindsight. But I think he has a valid point that if you really did conduct your full due diligence, there should have been warning signs that made you think twice about betting everything on this one stock.

I’ll give you a couple of the most gut wrenching screenshots from that forum:

GT Advanced Technologies 1 GT Advanced Technologies 2

GT Advanced Technologies 6

If you really want to see the full spectrum, just go over and read the forum thread.

What I found truly fascinating was that it was only on September 10, at page 338, the first post appeared that correctly analyzed what had occurred with the whole debacle. But the most fascinating aspect was that this poster knew logically that he was 95% correct, but still had that tiny 5% emotional-irrational side of him hoping that his logic was incorrect:

GT Advanced Technologies 7

Though this poster correctly analyzed what was going on, it doesn’t appear that most took this analysis very seriously, especially the investors who ended up losing everything. So what’s going on? Why did so many people end up losing everything?

I think the fundamental, root cause is that we tend to overestimate our levels of intelligence.

Let me ask you: did you goto college/university?

Do you believe you are intelligent? At least more intelligent than the average person?

Now, be truthful to yourself. What was your knee-jerk answer?

Ok, now look at this diagram:

gt advanced technologies abc

If a ball is dropped into this tube, which path will the ball continue on once it exits the tube: A, B, or C?

While there are a myriad of factors at play in the drama that unfolded among investors in that forum, I think too many people overestimated their intelligence. I think too many people overestimated what they thought they understood. And actively immersing in an environment where social proof amongst peers reinforced confirmation bias was a dangerous situation to be in.

Especially in order to think critically and independently.

Perusing through that forum thread on GT Advanced Technologies is a must read for any investor who is considering investing in individual stocks or who is cluelessly investing in individual stocks.

Don’t fool yourself into thinking you are more intelligent than you are. There is no shame admitting that sometimes we just don’t know the answer.

And the answer for the question above? It was B. And it has to do with basic Newtonian principles of motion. How many of you got it right?

And for mild comic relief, I leave you with this:

I rest my case.

29 thoughts on “How Intelligence Increases Wipe Out Risk

  1. Margin is a serious beast. IT is one thing to see the investment go bust, but to owe more than you started with and now be at a negative portfolio value is another thing altogether. I am a firm believer in only risking what you are able and willing to lose. The market is not friendly and it can rise and fall at a whim. I happened to read about the Crash of 1929 and margin was a major issue for many investors and they just walked away. The margin calls were not just for the new shiny stocks that were being crushed, but we’re for all of the stocks on the market that were in free fall. Nothing was immune to the issue and even the good companies lost tremendous market cap because of the crash that resulted in margin calls across the board. Margin is quite different today, but the ultimate issues are still potential massive losses that can wipe out a lifetime of scrimping and saving.
    Nice article.

    Keep cranking,

    Robert the DividendDreamer

    1. Investors, especially the inexperienced and new, truly need to understand the pros and cons of margin. I can’t fathom why most investors would even need to consider using it. The downside is as extreme as the upside can be. If you’re caught on the downside, boy you’re in trouble.

    2. I look at margin accounts frequently and then I see the rates I’d be charged and I just can’t justify it! Margin is truly terrifying. You’re using a credit card to invest with (just lower rates).

  2. This is heartbreaking. And in some of the cases it made me angry too. People are so foolish and greedy, but also desperate that they will take ridiculous risks with money they wouldn’t really be messing about with. This is why people need more financial education!

    1. M – you’re still around!! Yes, all ranges of emotions reading through that thread: from sympathy and pity to anger and frustration. In the end, we all make choices and have to accept the consequences of those choices.

    2. This isn’t the first time people have lost their life savings in a bet and it surely won’t be the last. Greed overwhelms financial education in cases like this. It may not be that these people have no knowledge about diversification and risk, but that they choose to ignore it. As Steve said, it’s the behavioural biases that are the culprits here.

      1. The lessons in human behaviour and psychology you can learn from reading that thread is a case study that could teach a course on behavioural finance/investing. Glad you found it interesting Brian!

        1. For sure. I too read through many pages on that forum, but I think you and Josh already covered the ones that gave me the most chills. Still, there’s nothing like reading it as it happens in real time when people begin to realize they have lost their life savings in an instant.

  3. It’s sad to see all those folks lose money. Some even contemplated suicide. Seth Klarman describes investing as the crossroads between arrogance and humility. You have to have conviction when you make an investment. I think these people had conviction. But you also have to be humble and leave a margin of safety for when you’re wrong. I doubt there was any margin of safety in the GTAT investment.

    It’s always humbling to read about these case studies. A truly humbling experience indeed. Thanks for sharing! =D

    1. It really drives home the message that you need to have a considerable margin of safety when investing in stocks and need to know when to walk away when it becomes either too hard for you to figure out or doesn’t provide enough margin of safety.

      I mean, to be fair, on the flip side if everything went off without a hitch and sapphire screens were successfully made for Apple, this company was in for a long, lucrative ride being the exclusive provider for bajillions of iPhones, iPads, iPods, and whatever i-products sapphire could be rolled out for.

      But that contract that was signed between Apple and GT is so one-sided it is frightening as hell. I don’t know what to think honestly.

  4. I`ve been hearing about this story all over the place. You mentioned it, Bridget did, Mr. 1500 did (he lost about $5k from it), etc. It hurts my stomach and I feel for them, but at the same time it`s exactly what not to do.

    As for that graph you showed, I`m going to put some magnets on it and deflect it to Path A… Not B 😛 Especially with that weird kink in the outer loop.

    1. Even with that weird kink, the only thing that matters is the point of exit for the ball, but I guess that doesn’t correspond perfectly with the arrows I drew so I guess you have a point 😉

      It’s a really eye-opening case study on what not to do. There’s a powerful lesson to be learned and I think that’s why it has resonated so much.

  5. Hey Kapitalust, great summary of some of the big issues here, and glad you found this on my site (although perhaps I should apologise to your wife?)

    I’d also add curiosity and an open mind to other perspectives and ideas goes a long way to reducing risk too. There are some super-smart people out there that just wouldn’t necessarily consider other points of view, and don’t want to be proved wrong with something like this. Being prepared to ask yourself what could go wrong, what other risks others might see, and being open to them can help temper some of this over-confidence. Although from the forums it did mostly seem like people who unfortunately didn’t really know what they were doing…

    1. I recall reading a quote, which I loved, that went something like this:

      “If a person’s delusions are strong enough and they are threatened, they will kill to protect them. The pain of murder is less than the pain of confronting the destruction of carefully preserved cognitive dissonance. This explains many of the witch trials and burnings performed by the Catholic church over the past few hundred years.”

  6. You could either win big or lose big with margin. That’s why I only invest with money that I can afford to lose and always think about the potential downsides. A lot of people lose sight when it comes to investing. Very sad to see that so many people lost everything.

    1. We have a very large cash/cash equivalent position relative to equities position and will continue to maintain that cash cushion while directing most of the cash flow going into the future into equities to maintain another layer of margin of safety for us.

      It’s difficult finding that balance between being happy with what you have and need and risking for what you don’t have and might not need. Getting stuck on either end of those extremes can lead to some rude awakenings.

  7. I read though the forum and it’s so devastating and frustrating to read. It particularly broke my heart to read about the parent’s that had invested their special needs child’s money and lost it all. How horrible.

    My coworker is entirely invested in one stock, jumping in and out trying to time the market. She’s been pretty successful thus far, though she did cut it close this last round. It’s a pretty stable stock and she’s not betting to make it big like these people were, but it makes me so mad when she tells other people about her strategy. A couple people dabble with a small part of their portfolio, which… whatever, but I’m very vocal about my commitment to boring diversified investing every time she talks about it.

    1. Yeah that one was very traumatizing to read. I don’t even know how that can feel to be a single mom with a special needs child who just lost her entire life savings and was forced to sell her house because of it. It hurts my heart to read that.

      Ugh, your coworker needs to put a cork in it because if she ever gets burned, she will not be parading around about how brilliant her in-and-out investing is.

      That isn’t to say she shouldn’t do it, but it’s a bit foolish to tell others about your own strategy and leave an impression that they could do the exact same thing. She might have the knowledge, skills, and fortitude to do it but your other co-workers may not. And if they get burned because of foolish ideas put in their heads, that’s just pain for everyone.

  8. Steve,

    Thanks for sharing this. I’ve heard of this company and some of these stories in passing. It seems a lot of people took risks on the stock to varying degrees. Those like Mr. 1500 were smart with a calculated risk that had no chance of wiping him out due to the size of the investment. Others weren’t so smart.

    Greed. It’s been around forever, and will be around long after we’re dead. It’s a shame some of these people are broke, but they let their own greed obviously take control. I feel sorry for them, but sometimes you have to get burned to know fire is hot.

    I’ve never risked more than I can afford to lose. And I’ve always diversified across companies, because even large companies can turn on you. Sometimes we can’t foresee certain events, like the accounting scandal with ARCP. But it’s exactly because of these possibilities that you have to safeguard against them.

    And margin? No, thanks. It’s completely unnecessary for those trying to achieve early retirement/FI, so why even introduce the risk?

    Best regards!

    1. Having a well reasoned, well thought out investment plan and policy should help an investor from ever making such concentrated investments. But like you say, greed can sometimes blind us completely. I think this is a must read for every beginner who has “dreams” of day trading or investing in “hot” stocks.

  9. I can see why everyone would want to jump on that bandwagon but any form of due diligence would show the red flags. I don’t have the time, patience, intelligence or guts to try and time the market or speculate with smaller stocks. Sure, there is a lot of money to be made. But I have tried, and failed, so I stick with blue chip companies only

    1. Essentially agree with everything you said. I’d rather just buy a small cap index ETF and be done with it because I don’t have the time to scuttlebutt around and look super deeply into the smaller companies.

  10. Oh I love a good stock market drama! The boards a pure entertainment. I will have to check those out. Thanks. I had heard a bit out this stock but don’t follow it. I feel bad for the people involved but at some level putting your whole portfolio in crazy! I do know people that have lost everything in similar debacles. (And also blown a bunch of margin or other borrowed money to boot!)

    1. I have yet to get through all 500+ pages but it is a worthwhile and interesting case study on what not to do and the multiple mental and emotional biases that can cloud your judgment and thinking.

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