The Best Investing Lesson You’ll Receive
Here’s a helpful post from InvestingAnswers:
I was attending graduate school to obtain an MBA, and though I was studying to work in manufacturing, I overheard fellow students talking about the stock market. I joined the conversation, and by the end of the day I was hooked. The idea of buying a cheap stock and then profiting from it sounded kind of fun and easy.
I soon learned it was neither fun nor easy. I had no idea what I was really doing, and instead, simply took my hard-earned money (I worked as a waiter throughout grad school to pay tuition) and bought “hot” stock tips. Invariably, I was at the long end of a chain for that stock tip, and by the time it got to me, shares were poised to fall back.
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My losses quickly piled up, and I certainly wasn’t having any fun. To make money, I’d have to ditch the “easy” part and put in the real work.
Reaping What You Sow
I backed away from stocks for a few years, chastened by my foolish attempts to treat the stock market like it was a simple game. When I started investing anew a few years later, I decided to find companies that were fulfilling the B-school notion that a good company finds ways to continually boostprofit margins as sales expand. I started to pore over many magazine articles, trying to find a company that fit that description. And I eventually found it in Dell Computer, which is now known simply as Dell (Nasdaq: DELL).
Once I decided that Dell looked appealing, I resisted the urge to buy. Instead, I watched the company like a hawk. I read every report I could get my hands on and analyzed every one of the company’s financial filings. By the summer of 1995, I was ready. With money from my first job on Wall Street, I was able to plunk down $1,000 for some shares of Dell.
Once I owned the stock, my research became more feverish. Every quarterly report was picked through. Were Dell’s profit margins still expanding? Was Dell taking market share from the competition? Did management have a clear plan to help the company grow yet larger in coming years? Yes, yes and yes.
Pretty soon, shares traded higher and higher. Before I knew it, I was in a pretty good position to pay off some of my student loans–if I was willing to cash in. I vowed to stay the course until Dell’s momentum looked like it was cooling. Eventually, I chickened out, selling my stock at a nice profit in 1997.
In hindsight, that was a very bad move. Shares of Dell surged far higher and I would have had a minor fortune had I stuck around. The simple fact that profit margins were expanding should have told me that the company’s best days still lay ahead.
Keeping Up the Good Work
Despite the lost opportunity at “making serious coin” in my investment in Dell, I fondly recall the giddy feeling of seeing a stock hit highs month after month. Of course, I was aided by a very strong market for technology stocks. But I refuse to believe that luck played a major role. Instead, those countless hours studying the company before I decided to invest turned out to be a wise move. So was the decision to keep studying after I owned it. Had I not done so, I would have sold the stock after it had a nice run, but not quite long enough to feel truly savvy.
These days, the same rule applies. I don’t buy stocks based on stock tips. Instead, I study and study. If I’ve got a hunch that good news may be coming for a stock fairly soon, I may make a small investment. But any large investment, say one that accounts for 5% or more of my portfolio, can only come after I’ve completed my research.
That approach has forced me to miss out on some quick gainers. But it has also saved me from racking up big losses in stocks that I had no business owning.