Is This Guy Yawning or Celebrating?
Even though I generally recommend investing in index funds and low cost mutual funds, from time to time I do trade individual stocks. Don’t get me wrong, I usually end up losing money, but I never invest more than 1 or 2% of my total net worth in one stock and the total value of my current trading account is less than 5% of my net worth.
Ok enough with the disclaimers, we all know investing in individual stocks is dangerous, yet we still do it. Whether you hear a hot stock tip at the bar or you know a guy who knows a guy who’s got some good insider information, it’s too tempting to sit on the sidelines while everyone else is cashing in. We all hear stories from friends about how they bought a stock at $2 and two months later it was at $50. Wow, doesn’t that sound great? Unfortunately, the stock market is a zero sum game so for every winner there is also a loser.
We all like to think we’re smarter than we actually are and picking individual stocks is a good way to prove it. Unfortunately, it’s human nature to forget most of your bad picks and only remember the good ones. If you’ve never traded individual stocks, you’re not missing out on anything but you can read a quick start guide and find everything you’ll need to know.
My Successful Trade
Since I work in the aerospace industry I usually have a pretty good beat on what’s going on. And in the past decade, it seems like nearly every major airline was losing money or going bankrupt. At the end of the day though, these companies end up merging and no one really goes out of business in the aerospace industry. So when I saw American Airlines was bankrupt and their stock price was at a lowly 37 cents, I knew there was no way in hell they were going out of business. That was all it took, I plopped in $738 and bought 2,000 shares based solely on my hunch. Today it’s at $2.52 so I’ve made a nice profit, now I just need to decide when/how much to sell.
My Unsuccessful Trade
You guys probably think I’m a genius after that last trade right? Unfortunately my last three major trades before this did not work out too well. I’ll highlight only the most recent though, a $2,000 purchase of a Chinese solar company called Yingli(YGE). I actually got the tip from a guy in a bar back home and he was adamant that the stock would be doubling very soon. I think I talked to him for at least an hour about China, solar power, etc and I was hooked. I bought it the next Monday and lost about a $1,000 before I eventually sold it off. Good job me.
Should I Keep Investing In Individual Stocks?
Anyone who’s had success investing in individual stocks probably thinks it’s a great idea and anyone who hasn’t probably thinks the diametric opposite. I think there are worse things you could be doing with your money and it probably isn’t that harmful to invest less than 5% of your net worth in individual stocks. If anything, it will remind you how difficult it is to pick winners and that way you won’t be tempted to make those same mistakes in your retirement and after tax accounts.
Remember, there are people who pick individual stocks for a living. They research companies thoroughly, look at P/E ratios(do you know what that is?), and comb through financial documents. And even they can’t consistently pick winners!
Readers, do you think it’s ok to pick individual stocks? If yes, do you do it to have fun, make money or some other reason? If no, why not?
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Well, this is very interesting. I’ve never been the first to comment on one of your posts before. Maybe I should tey my luck at the local casino, huh? Of corse, I’m just kidding. I would never knowingly gamble away my money especially when the odds are stacked against me by the house. Wait a minute! That’s exactly how I feel about betting on – excuse me – investing in individual stocks.
Here in Louisiana where we have land based and floating casinos, one of the worst things that can happen to a gambler is to win. Because then the poor chap feels that it’s not just a fluke and tries to replicate; and this is when he loses all but his skin. This can be the same syndrome for someone unlucky enough to post a gain at the individual stock market.
Just as it isn’t sexy to earn a living by weekly wages and getting rich by squirreling away the left overs, it likewise isn’t sexy to save until retirement by the tried and true way of investing slowly, steadily, and diversely. I’m not a prude, and I realize the sheer excitement of “putting it all on black,” but, I do know what happens on the flip side and it’s not worth the risk…as small as it might seem to be.
Now, on the other hand, I do tend to take that same 3-5% and invest it in something that will make me a solid positive ROI. Perhaps a necessary piece of equipment or a business lunch or dinner. I know, I know….boring!
I like your analogy of gambling and when I’m in Vegas, I definitely gamble but not nearly as much as the average Vegas visitor. I usually go to the cheap casinos and play the $5 limits 🙂
I agree with you though that even though slow and steady investing isn’t sexy, it gets the job done. I’m trying to focus on saving/investing as much as I can right now so that I can semi-retire early and live a comfortable and enjoyable life later on. So far so good..
The only individual stock we own is BP – which Mr. PoP bought with his Christmas/birthday money when there was still oil actively flowing into the gulf and people were bolting from the stock. It’s been a solid buy for him, but since he doesn’t have anything he really wants to roll the money into, it’s just sitting there. I think he has a sell order on the books if it ever gets totally back to where it was before the spill. But it’s still a ways off from that.
For him, that was fun money. But for the bulk of our assets, we stay far away from individual stocks.
Yea I think it’s ok to invest in individual stocks here in there. And even though you’re investing with real money, as long as it’s a small portion of your net worth I think it keeps you focused with your other accounts. I know that I wouldn’t want to take the kind of risk associated with an individual stock in my retirement accounts.
I make more and more of my living off picking individual stocks and profiting off market directional trading.
It is possible to make a living at it.
It’s a combination of owning dividend and distribution paying companies, (consumables, infrastructure, and real-estate) and a bit of trading.
The trick is reading the balance sheet (and even calling up management until they give you enough hints) and picking companies that you know will be around for a while.
I would have NEVER purchased an airline company. They are ALWAYS going to have trouble with unions, with payroll, with regulations, with fuel. However, why not buy a company that makes the airplanes or the airplane parts? They are MUCH less risky picks. (disclosure: I own Bombardier BBD.b.TO)
If you’re looking for a quick trade then STAY AWAY from any hot picks you might hear in a bar. Unless you get DIRECT (illegal!!!) info from a company insider, HOT TIPS fail 99.999% of the time.
What do I like for quick trades? Look for a company that has a solid history of good work, or production, with a clear future. Then wait for a stumble or some bad news. For example SNC.TO. It trades in Canada, France, and on the pink sheets in the USA. It’s a multi-billion dollar international engineering company. They had an accounting “issue” that wiped $1 BILLION off the company valuation. Which was just a complete market over-reaction. The share price plummeted 20%. It did take a while (6 months) for it to begin to correct. Is anything wrong with the company now? I bought some on the bad news and now it’s $6/s higher than what I paid.
Bad news effectively puts good companies “on sale”.
Stay AWAY from “hot tips”. They are almost ALL stale… as in YEARS stale.
Thanks for stopping by, unfortunately I’m still not sold. Since the market has been roaring in the past couple years pretty much any picks you made over this time frame should have been winners(big time winners at that). I’m more curious about the 10 years before that and how you fared.
From your first point about the balance sheet it sounds like you recommend blue chippers – ie companies that will be around for a while. Wouldn’t a company like AA or SW be around for a while? What about Enron?
Do you keep track in a spreadsheet or similar tool of exactly how all your individual trades have fared. Like I mentioned, there is a human tendency to forget our bad trades and only remember the good ones but numbers never lie. If you do the former and you’re still above Market Returns maybe you should consider a career change or start leveraging all your free cash into the stock market because obviously you have a system that is working.
I own 5 individual stocks, the rest are mutual funds. One stock is a dividend producing money machine. The others are high tech and biotech. I bought them for growth and the long term. Together they represent less than 5% of my portfolio and move up many times when the market moves down.
Sounds like a reasonable plan to me. I’d like to find some stocks that have low correlation with the market 🙂
I like blue-chip companies, although I own only a few of them. I like REITs as they ones I own have tremendous tax advantages. (almost all of the payouts are as “return of capital” which means your taxes are only impacted when you sell and it’s a capital gain which is taxed very favourably in Canada and even more favourably in the United States).
My trading history does have some bumps and bruises. It would be foolish for me to ignore what didn’t work in the past. As for pre-2009, I didn’t do much investing before then only because I hadn’t quite come to the realization that Mutual funds are just too damn expensive. Markets go up 5%, mutual funds went up 1-2%. Markets went down 50% in 2008/09 and the funds I held went down 50%… That’s no way to make anybody rich except the issuers of your funds.
Once I came to that realization, I started buying the companies that issued the funds rather than the funds themselves… Those companies make money regardless if their funds win or lose.
I also started purchasing companies where I was a customer. My cell-phone for example. (Telus) Now my bill is completely covered by the dividends paid by the stock AND the stock price has doubled in value.
I started day/swing trading oil futures contracts in mid 2009 and made about $2500 per month for about 5 months in a row. Then the oil market exploded and I was stuck holding my positions for about 14 months until I was able to get out of my positions at break-even.
After which, I put my gains into mostly REITs, banks, and telcos. I like companies that pay me every month as I have bills every month.
I have branched out into energy, a tiny bit of industrial, I have traded some tech (apple), and now I’m writing naked puts as well. Pick a stock you want, sell the put collect the premium. If the stock drops to your strike price, you get the stock. If it never does during the contract period, then you walk away with the premium. (And then re-write a new put)
Like I said in my original post, AA and SW are companies I would NEVER own. I think they are too risky. AA will no doubt go bankrupt many times in the future. They will continue to get bailed out by governments. The stock will essentially be collapsed and re-issued leaving you with nothing but a black-eye in your trading account or a worthless stock-certificate.
If you want to profit from Aviation, own the companies that build the planes. They get cash-on-delivery of their products.
As for my “system”… That’s not a good way to describe it. It’s a method. No, it’s not fool-proof as I’m limited to data that’s publicly disclosed. (Insider info is illegal, and one of the few infractions you ARE likely to get in-trouble from… Martha Stuart for example, and now there will be some traders taken down who profited shortly before Warren Buffet announced his interest in Heniz)
I’ve certainly lost some money, but at the same time, I’ve made way more than I’ve lost.
Seeing as my professional activities have pretty much exploded due to market forces, I’m living off my gains ONLY and for the past 6 months with very little professional income my net worth is increasing. (I track ALL my trades in a spreadsheet… You have to for tax purposes! And yes, my US trading activities are annoying complicated since I have to factor in exchange on EVERY trade… Sometimes I “lose” money on the trade and can claim a tax-loss, but at the same time, it was a profitable trade as I have separate accounts for my various currencies… Example: I have more USD in my USD account after the trade, but due to the exchange when I realize the exchange rates in my home currency for the value of the trade dates, it shows a loss)
It DOES take time. It does take patience. It does take the ability to not panic when the market loses 1000 points in a week. When you see RED like that it doesn’t mean stop. It means BUY BUY BUY!
And yes, I now use leverage for my activities. The margin rates are VERY affordable now. You can borrow at 2-3% and buy boring (but consistent) companies that pay more than that in yield. You can write off the interest as an expense, the yield pays the monthly interest on the loan and then some.
First, thanks for your detailed reply and while although I don’t completely agree with you, I do appreciate the time you took to reply.
I think you explained to me how much better REIT’s are up in Canada, I’m jealous. I keep my funds pretty simple, lowest ER’s everywhere and diversified across stocks/bonds, us/int, emerging/developed, small/large cap. Don’t see a need to get too much more complex(maybe I would add REIT’s if I didn’t own physical property) as it hasn’t been shown by empirical evidence to improve gains significantly. You’re right about mutual funds though, they are too damn expensive. But there are these things called index funds 😉 that will allow you to achieve the exact same return as the markets. Any spartan/vanguard, etc index fund has an ultra low ER of .1% or sometimes less. If you would have invested in these funds your returns would have been exactly the same as the market.
Here’s proof. You can see the returns are nearly identical over the period you described.
I’ll be honest, I have no idea what swing trading, naked puts, etc are but they sound complex and time consuming. It sounds like you’ve started doing all this stuff in the past few years though and based off the market’s returns it makes sense that you’ve made a lot of money. EVERYONE has made a lot of money, the S&P is back at 14k and literally any strategy you would have employed would have made money: dividend investing, etc. IMO, the most dangerous investor is one who’s never experienced a bear market.
It sounds like it’s working out well for you but I think you are in the extreme minority. I’m happy with modest returns for modest risk since I know that no matter how much I make, it’s all about how much you spend.
Yes, but the tax advantages for investors in the United States is even less intrusive than it is up here.
Also, you don’t have to agree with me… That doesn’t change the fact that I’m living off my investing activities on a VERY tiny capital base.
As for any index fund… If I did buy them, I would pick an ETF version. There are ones that only cost 0.07% up here.
My market return y-o-y has beaten my home markets handsomely ever since I took an active role without the help of costly advisers and ditching ALL the mutual funds in my accounts.