Way back in 1999, at the tender age of 18, I first invested in the stock market. Over the years my investment strategy has changed significantly to the point that now, with the exception of some play money, solely invest in Index funds. Today we’ll touch on the why by chronically my first investment, a mistake to learn from.
My First Investment, at least I bought what I knew?
Towards the end of high school I was big in to computer games. I had the latest gaming rig and spent my time outside of school, work, visiting friends, and sports playing games in my room. At the time computer games ran heavily on video game chips. The biggest name at the time was Voodoo Graphics, but an up-and-commer had entered the market by the name of Nvidia. I instantly became a fan. By the time they released their IPO in January of 1999 I knew I had to invest. So I took 1K of my savings (I only had about 5k at the time) and cajoled my parents to setup an investment account for me. After much push I was able to purchase the stock the day of the IPO at 15 dollars a share.
High Trading Costs Were All The Rage
Given this was the late 90s there was also some obscene trading costs associated, unlike what you get when you buy a active fund today. If memory serves it was something like 60 dollars, or 6 percent of my investment (ouch!). I held those shares until October 1999 when I began to get antsy sitting on them at 23 dollars a share with the market getting squirrelly. So I sold the shares. And yes I again paid a 60 dollar trading fee. I was up about 400 dollars all said and done and felt like a genius. I proceeded to sit on my money while I planned my next acquisition.
Turning my First Investment into my First Investing Lesson, and Little Else.
Meanwhile, Nvidia sky rocketed. By late 2001 after a well timed stock split it hit 190 dollars a share. By that time I was on to the next stock still thinking I was a guru of stocks, but just wishing I’d held on longer. So what did I buy? A company called Inktomi which was the main competitor to Google. I just knew there would be more than one winner in this space and I bet my 1400 dollars on Inktomi. I don’t remember the exact date, but I dumped in about 14 dollars a share. Fast forward a year, and Inktomi sold itself for 1.60 a share to Yahoo. Yes, I turned 1400 dollars into 160 in a year after paying out nearly 120 dollars in investment fees.
So what did I learn from all this?
- Diversification is probably the single most important part of Investing. Putting all my money into Inktomi was certainly not a diversification play. My entire holdings were subject to the future of one company and when that company went south so did my finances.
- Sometimes Value Stocks are nothing but a Falling Knife. When I bought Inktomi it was considered a growth play but with some aspect of value. I thought I was buying it on the cheap. Instead I “Caught the falling knife” so to say. That is I just bought it and held it as it continued it’s downward spiral to worthlessness.
- Market News is not a good source For Investment Choices. I learned much about Inktomi from reading an article on the stock. I had yet to figure out that market news seems to alternate views by the day. If someone really has an ideal trading strategy they’d be a fool to share it with the public. Everyone would then use it and it would quickly be arbitraged away.
- Market Timing does not work. I bought Inktomi on a dip thinking it was due for an upward swing. Not so much. The price of a stock is said to reflect all available news within 40 seconds . Given I’m not sitting at the market its very unlikely I can beat the market to an opportunity. After all unlike the big guys I have no Coax line to the market, nor a full time job focused on watching stocks. Even with those tools recent studies have shown out of 1034 large cap funds, 0 were able to beat the S&P 500 over a 4 year period: Why would I think I could do better?
- Fees can kill any investment no matter how profitable. I lost out on a full 12 percent return on my Nvidia investment. This one would be rammed home to me again when I came back into the market with my remaining money.
This taught me I was obviously not the next Warren Buffet. I’ve since seen older people do similar things with life savings and penny stocks (shudders). I’m glad I learned early on with only 1K on the line that choosing the next great growth stock is not the road to wealth. But my lessons were not done yet.
What My Poor First Investment Choices didn’t Consume, Fees Did
After licking my wounds I decided to invest my money in an index fund. Yes I got the diversification message. It seemed like an easy way to diversify and admitted that I sucked at investment choices. The only problem? I bought through a very popular brokerage account at the time that favored Traders. This company then decided to institute a quarterly fee for not trading of 25 dollars a quarter. After 2 quarters I gave up entirely and put the money in a savings account. I didn’t venture back into the stock market until I got a real job in 2004.
Consider All Fees
This again rammed home the fees issue. It also made me notice that it’s not just the fees of your investment. After all I bought index funds with their associated low expense rates. I also only traded it once. But I paid a fee to the brokerage house that ate the majority of my investment quickly. As such the key learning here is consider all fees:
- Trading Fees from your brokerage house, like in my first example
- Inacitivity Fees from your brokerage house, like in my second example.
- Front or back load fees on funds, these fees are charged as sales commission on some funds
- Expense Ratio, the yearly charges for holding the fund.
- Turn over ratio, the fund pays fees as well. A high turn over ratio can indicate the return of the fund itself will be absorbed by the funds trading fees.
A 1 percent fee can add up quick simply because just like your investments the 1% compounds. So you don’t just pay 1% each year of your original investment. You pay 1% of your account balance plus that 1% no longer gains a return. So say you invest 10K and it returns 6% a year in capital gains. Over 5 years this fee will cost you ~11% of your total investment return. Pay close attention to fees as you invest.
Index Funds as the Majority and a Play Portfolio
In 2009 I felt the itch to start timing the market again. I struggled to keep from investing with the ebbs and flows of the market. It seemed like year in and year out the market dipped in January presenting a buying opportunity and then rose dramatically later in the year. It seemed like a pattern. My emotions wanted to start playing with my cash, but my brain knew better. I had seen the studies plus I knew by personal experience. Still the call continued.
To satiate the call I decided to create a play portfolio. This portfolio hovers around 1% of my total portfolio (it is in the noise, lately to the monthly or even weekly level). I use this to trade to keep me from doing so with my larger holdings. This account is up significantly over the last half decade, but still lags the market. Typically I use it for more defensive plays, I.e. it is still not swinging for the fences for penny stocks. After all what good would it be if I had to keep funding my 1% play fund because I lost it all on penny stocks. I’d end up playing money games until I had nothing left. Even with more stodgy investments it keeps me happy. It’s more of a psychology play then an investment. But, as the final lesson tells, so much of investing is psychology. Protecting oneself from oneself is the road to the best return.
What was your first investing experience? How do you invest in the stock market?