It was the Fall of 2007. I had about $10,000 in my bank account. (A lot for a 16-year-old ‘back then.’) It was all from auto detailing about 100 cars over the prior summer. I had no expenses back then, so what should I buy?
Stocks, of course. I convinced my parents to help me open an investment account and I was ready to go. There was one particular stock that I had in mind for the entire $10,000: Apple.
My investment thesis was simple: I loved Apple products. I had one of those classic black MacBooks with the light-up Apple logo in the back; it was glorious. I also had gone through several iPods, which ranged from the iPod Nano with the ultra-satisfying click wheel thing to the iPod Touch. My thesis was simple: I loved Apple products. If I loved them, other people probably did, too.
$10,000 would buy about 2,000 shares at the time (using split-adjusted price). Today, that $10,000 is worth well over $290,000 without reinvesting dividends.1
Except, I didn’t do it. I bought 6 stocks instead of 1. And none of the 6 were Apple.
How did that happen?
You see, I started reading online 'expert' stock picks. I read about how banks were the greatest investment vehicle ever; they constantly grew with their deposits and were money-making machines. Their stocks were soaring as the housing bubble hit full steam.
So I bought two banks. One in Scotland. (Why?!) And one in Greece. (Yeah, stupid.) Both of them declined by over 90% from when I bought them to when I sold them in 2008 – at the height of the Financial Crisis.
That wasn't the only dumb thing I did. Per the recommendation of an article I saw on the Motley Fool, I took a position in a Chinese medical stock.
The best stock I bought? General Electric. It wasn't as bad as my other picks, but it didn’t do well, either. Meanwhile, my hypothetical investment in Apple continued to rocket higher for basically the next decade-plus.
So, what did I do wrong?
Lesson #1: Don’t Buy What You Don’t Know
Rather than investing in what I knew, I invested in what I did not know.
Why Chinese medical devices? I literally knew nothing about China. Neither did I know anything about medical devices. I've never had a medical procedure; I've never worked in a hospital; I have literally no knowledge of the products or the customers buying them or even the country and culture.
Why Greece? I've never lived in Greece; I've never even been to Greece. I couldn't even name 5 cities in Greece. Yet, I invested 17% of my assets in a Greek bank?
I knew the most about GE, but that wasn't much. All I knew was that I'd seen a few GE microwaves and ovens and that it was a 'great company'. Still, I owned precisely $0 of their products; I had no experience in those industries.
The point is that I had no expertise in any of these companies. I might as well have thrown some darts at the dartboard.
Lesson #2: Do Your Own Research
Why did I buy them? I followed the investment ‘advice’ of a few articles I read on the Motley Fool. Some hotshot analysts were recommending this ‘can’t miss stock’ in China, so I bit – hook, line, and sinker.
And I missed it. On all 6 stocks.
If you lean on the advice of people on the internet, friends, family, or an Uber driver, you can’t expect to have good investment results. Here’s why:
No Track Record
For one, you know nothing about their historical track record. (At least, you probably don’t.)
If your Uncle Ed has routinely underperformed the market over the last decade, then why do you care which stock he thinks is going to double over the next two years?
You Can’t Stick With It
Second, and most importantly, you can’t stick with ideas that were never yours to begin with. Let’s say your Uncle Ed tells you to buy Amazon (AMZN) back in 2000. Great investment idea; the problem is that Amazon declines by 80% over the next couple of years.
What would you have done?
You sell it, of course. Why? Because you didn’t buy into Amazon. Sure, you may have bought it with your investment account, but you didn’t buy it with your brain.
The only way you will have the conviction to hold onto a winning stock through the inevitable rough patches – and there will be many – is if you personally have conviction in the business.
There is no shortcut. You cannot rely on anyone else for this; you can’t even rely on legendary investors for this. There is no one else that can row your financial boat for you; they may be able to point you in the right direction at times, but you have to put in the time.
If you don’t have the time or interest in doing this, then buy an index fund or hire someone to do it for you. Don’t ride the coattails of others, it is not a sustainable path to success.
Lesson #3: Invest Within Your ‘Circle of Competence’
Meanwhile, the one company that I knew better than any other went on to be one of the biggest investment home runs of the decade. Yet, I bought $0 worth of.
Why? I have no idea. I was 16. And 16-year-old boys do stupid things; probably more stupid than making bad investments.
The lesson, however, was clear: Buy the companies that you know; ignore the ones you don’t know anything about.
As Warren Buffett puts it:
"You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.” Warren Buffett
I’ve long underestimated the ‘circle of competence’ idea, but have come to appreciate it after a decade-plus of investing experience.
In order to beat the market, you must know more than the market does. (Or, be lucky.) The only way you can know more than the market is to have a unique experience with a company that the market does not have. That, or you must have the patience to stick with a business that you believe in during a time when the market does not.
Take a lesson from my 16-year-old self: ignore the so-called experts and focus on companies that you know best. Your future investment results will likely be better for it.
- Source: Yahoo! Finance chart; I did not calculate dividends for sake of saving my own dignity. ↩
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