Investing 101: 7 Hard-Learned Lessons

I am not a financial whiz by any means, but I enjoy studying the stock market and following some stocks that interest me. I generally buy them after I get tired of kicking myself for not buying them sooner when they were cheaper. More often than not, after I make a purchase, the stocks experience a dip and stay below my purchase price before inching up, and in some cases, leaping above and beyond my expectations.

The other day I decided to check up on my investments, which I had been woefully neglecting. I have my savings/checking accounts, some mutual funds, a 401(k), and my brokerage account which I use to buy stocks. Interestingly enough, my personal stock picks have been doing much better than my mutual funds.

While my mutual funds have been ho-hum at best, I’ve had an 80 percent return from my stock picks and only because I picked a couple of winners that have washed out my losers. Not too shabby for a graphic designer who majored in English lit, right?

But this is not to say everything was smooth-sailing for me. I’ve certainly made my fair share of mistakes along the way.

Here’s what I’ve learned:

1) Know your investing style/risk tolerance. My friend said that investing in stock was like gambling. Only invest in what you can and are willing to lose. Although I know some people who like to invest on margin (trading on credit), I’m not one of them. I’m also not a churner/flipper—which is how lots of pros make money (they bank on the fluctuation of the stock prices—buying low and selling high). I usually buy and hold for the long haul.

For example, my winners have carried over my losers, which were mostly biotech stocks under $5 and companies that I really knew little about. Of the five biotechs I chose back in 2000, only one has earned me any money and still continues to do so. Questcor Pharmaceuticals (a biotech which I had bought at under $3 a share in 2000 upon a friend’s urging; it’s now just over $75 per share and pays a quarterly dividend) is one example. Don’t get me wrong—it wasn’t all smooth sailing. The stock had more than its fair share of volatility over the years, but it’s paid off in the long run.

2) Buy what you know and/or use. Lately my approach has been relatively simple, though nothing revolutionary—go with what I know and use. This approach has served me well. Some of my winners include Netflix (once purchased at $38, now over $400), Pandora (purchased around $9, now $37), Starbucks (bought at $44, now at $73), Amazon (purchased at $193, now at $349), Google (purchased at $708, now at $1202).

Here’s a story of “the one that got away:” I had been eyeing Apple for as along as I could remember. I used a Mac Classic SE in college; my first computer that I bought with my own money was a Mac IIsi; and it’s continued to be my machine of choice ever since. And don’t get me started on the iPad, iPhone, and iPod—talk about techie toys love-fest.

I remember looking at the stock when it was $125 per share and even when it dipped to around $80. All those times I thought it was too pricey for me, but now I kick myself for not selling my dud mutual funds and buying some Apple shares instead.

Looking back, I would have been better off buying odd lots of Apple shares here and there than the risky, unknown biotech stocks and/or mutual funds that I just happened to pick based on research or advice I got from “experts.” I love the company and its products, and when I have some more money to play with, I will be sure to put my money where my mouth is. When I looked at it in July 2010, it was $250. Right now it’s over $530 per share.

3) Set your limits (decide on when you’ll cut your losses). In hindsight, I should have been much more disciplined about a establishing selling point for some of my biotech stocks—sell when it drops to a certain level and don’t look back. Nowadays, you can set alerts to high and low points, which will give you an opportunity to buy/sell a particular stock should it get to that level. My personal challenge is knowing when to let go.

4) Companies that pay dividends can be a great investment. They’re like a bank that pays interest on your investment but better. Even though their stock prices may fluctuate, if you’re planning on sticking with them awhile, you’ll be rewarded for your loyalty with dividends. For me, Williams-Sonoma (despite limited gains in its stock price), has been regularly paying me quarterly dividends, which alone exceeds the annual interest earnings that my pitiful bank pays. I’ve had this stock since 2003.

In fact, my credit cards pay me more for spending money than my bank does for saving money. Now what’s wrong with that picture?

5) Get out while you’re ahead. Don’t get greedy or lazy. This goes along with the idea of setting your buy/sell limits. Eventually all good things come to an end. Case and point: I bought Lululemon at $59 in 2011; it went as high up as $82 in 2013, before it dropped to around $44 due to its idiotic founder’s PR fiascos and quality control issues. It’s slowly crawling back up, but it’s taking its time.

6) Past performances do NOT guarantee future results (Translation: Even the experts don’t know everything). Yes, I remember reading that caveat in the mutual fund prospectuses, but dang! What are we paying these so-called experts for? Lately I’m starting to wonder if I might not be better off trusting my instincts instead.

7) Don’t invest in stocks if you don’t have a strong stomach. There’s a saying, “Greater risk, greater rewards.” Keeping daily tabs on mutual funds/stocks can be very stressful and counterproductive. I think what’s helped me from losing my head was not checking in on my investments so often and reacting on the short-term. Like a dieter who’s trying to lose weight, don’t get obsessed with the day-to-day gains/losses. Focus on the big picture.

Final Note: Warren Buffett once said that if amateurs are giving out investment advice at a cocktail party (in this case, a foodie blog), it’s probably time to sell because the market is going to fall/correct itself very soon. In fact, I opened my brokerage account in 2000 and purchased my first biotech stocks upon the urging of a fellow stock market dabbler at the height of the biotech market and boom! The market plummeted and has stayed down pretty much for a long time.

So with that in mind, please take what I’ve said with a grain pillar of salt.

(Updated: 2/20/2014)

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One thought on “Investing 101: 7 Hard-Learned Lessons

  1. I hear you about Apple. I should have bought it a long time ago as well.

    Another piece of advice I hear a lot is if you are choosing a mutual fund go for one that has low fees. 0.5% versus 1% may not seem like a huge difference but over time it can really act up.

    Oh and make sure you save for retirement. You can borrow for an education. You can’t borrow for retirement.

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