Creating Teachable Investing Moments
I’ve mentioned in a few earlier posts that I’m obsessed with the stock market. I’m “that guy” who seems to always work it into the conversation. Thankfully, most of my friends seem to enjoy it and those who don’t just find a way to put up with it. I’m always amazed at how many of my friends don’t have a single dollar working for them. They’re much more content keeping it in a checking count and letting the money work for someone else. Usually I encourage them to pick a mutual fund, or an ETF if they’re willing to actually take the time to care about their money.
The common thread among all of my friends is that we’re poor (grad school thins everyone’s wallet), and need good investment vehicles for the money we do have. Thankfully, I’ve been “at it” for a few years now and took a paltry sum of money and made it well . . . less paltry.
What’s my secret? Rest assured, it involved a tremendous amount of mistakes that probably should have convinced me to hand my money over to some fund manager. Those mistakes turned out to be the best investing education I’ve ever received.
Here’s a quick example of a lesson that cost me a little over a hundred dollars, but honestly has made me a lot more in return. I won’t name the company, but a few years ago I got the bright idea that I should try and time my investments to quarterly reports that I thought would be favorable. It worked for me once before and I thought I should go big on a particular company after listening to previous quarterly calls, reading news articles, talking to a few people that I thought had a good read on the company.
Well, I went in big and guess what? I got it “right”. The company had a great quarter, but for some reason they seemed rather ambivalent about the upcoming quarter in their call – so people panicked and sold the sucker. The stock dropped 3% the next day and in my own panic, I sold the stock. Two weeks later, it had not only grabbed the 3% back, but also rose another 5%.
This taught me two big lessons. First, if I’m just going to play the trade, use a tight limit order so panicking isn’t an issue and the loss is less than 3% (This also works on an upswing as well). Lesson two, which I hint at above – panicking rarely works. I knew why the company was solid and the previous quarter gave no real hint of future problems. So, why even sell the sucker? At lest put in a limit at 4-5% and see what happens right? Who knows what the best move was, but the truth was that I didn’t make a correct decision rationally by panicking.
For people just starting out, I don’t really advocate the speculative timing method I mentioned above. I do advocate a willingness to take a reasonable chance knowing that you can afford to lose the money you’ve invested if you fail. That’s the real hurdle I see in my friends. They’re afraid they’ll invest in the next Enron or WorldCom. Truth be told – I’ll probably invest in the next Enron, but I’ll make it a teachable moment and learn from it.
Don’t confuse what I’m saying to mean that you should be stupid and reckless with your investing. Remember that company I mentioned above? I can honestly say I spent about 10 hours reading up on the company the week before I purchased the stock. That doesn’t even factor in the time I spent while it was on my radar. You don’t have to spend anywhere near that time if you’re not being a speculative as I was. Just an hour or two can leave you with a rather informed idea of whether or not a stock your investment dollar.
I may write more on this in the future. I’m sure a few of your will enjoy the stock talk, only to be matched by an even larger number who will absolutely hate it – but I think it’s important. I know most of you will agree - personal finance is about so much more than just saving money and keeping up a budget, it’s about unlocking the power of every dollar with which you come into contact.
Related posts:
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- Emotional Investing Doesn’t Work! Last week a few stocks that I owned began to sell so quickly that I thought my broker had begun...
- Debunking Dividend Myths! Lately I’ve become a big fan of owning stocks that offer a solid dividend back to their investors. I love...
- An ETF Primer, Part #1 In addition to regular personal finance articles, this week I’ll start a discussion regarding ETF’s. This series will cover the...
- An ETF Primer, Part #2 For the next installment of my ETF Primer, I’ll be discussing ways to evaluate ETF’s and how to go about...
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April 3rd, 2006 at 7:13 pm
I have been burned on panicking a few times in my investment career. One was on a small-cap stock that I bought one day and sold two days later because it started dropping like a rock. There was speculation that earnings were going to fall short so investors sold and so did I. I knew the company well and had confidence in it but I sold anyway. Turns out the stock rebounded as the company became more profitable and I would have made some good money. The morale of my story - emotion has no place in investing.
August 24th, 2006 at 12:38 pm
[...] Kirby on Finance: Okay, I’ll admit, I wasn’t a regular reader on this guys blog until close to when he stopped posting, but he was, in my eyes, another one of the “big guys” of PF Blogging. A student in law school who just finished his first year. He had some great posts, like the Monster.com Job Force? and Creating Teachable Investing Moments. [...]