This is Why I Never Invest in Individual Stocks
A long time ago in an era far, far away I once bought a stock.
This was in 1988 and the company, which made a new kind of bar-code scanner was hot, young but established with a few years of operations and a growing customer base. It was a good, publicly held company. I was a good, responsible, certified public accountant working for a good, well-known Big 6 accounting firm. Because I was in my twenties and an incredibly brilliant guy who knew everything there was to know about the world of high finance I thought: hey, why not make a killing on Wall Street? And so I set forth to earn my fortune.
Following all the rules of good investing, I read the company's public filings and it's quarterly and annual financial statements. This was before the internet so I requested and read analysts’ reports. For about three months I tracked the company's stock daily in the Wall Street Journal. Convinced that I had found the right investment, I took the plunge with a $10,000 investment - pretty much all of my savings at the time. Baby, my ship was about to come in!
For months, not a lot happened. I checked the Journal's daily index of companies but the company was never mentioned. Oh well, no news is good news, right? The stock mostly hovered around the same price I paid for it – it even went up a point or two so things were on track.
Until one bad day.
I'll never forget that day. I checked the Journal over coffee that morning and, lo and behold, what did I see? My beloved investment mentioned! Cool! Until, flipping back to the eighth page of the third section of the paper I saw the unbelievable news: my baby, my bar-coding company…its stock price fell 40 percent! In one day! Worst of all? It fell the day before. Shocked and discouraged, I sold my remaining holdings a few days later and retreated, licking my wounds, back to my comfortable world of conservative accounting and savings bonds.
Sure, I’ve invested in the stock markets since. But the experience has made me smarter about the stock market. Here's what I learned.
I learned not to invest in individual stocks -- unless you're actually in the stock market business. That’s because you and I are never going to be in the know. Publicly held companies are beholden to their large, institutional investors, not little nobodies like me and you (no offense). What happened to my bar code company was that they released a very negative sales forecast for the upcoming year. The analysts and big investors found about it immediately and dumped their shares. Me and the rest of Main Street America got our education more than 24 hours later. You know what they say about information being everything? On Wall Street, it's the only thing - and I had none of it.
I learned that investing in stocks is fine, as long as you let an expert do it for you. I know what I do and they know what they do, so let’s just all do what we do best. Sure, there are fees to be paid and they're not always right. But trust me -- your money is in better hands with people who do this for a living and work for those large firms like Vanguard and Fidelity that represent the interests of countless shareholders. We little guys don't know all the information we should know to make an informed decision. Even the big guys don't know it all. But they have a better shot at finding out then we ever will. So pay them their fees and let them do their jobs.
Finally, I learned that there is no better investment than me. Yes, in order to diversify I have some savings in mutual funds that invest in a broad array of S&P 500 companies. The stock market has always had a relatively better return than most other investments over time, despite its ups and downs. But if I'm going to speculate I'm not going to invest in someone else's company. To hell with them. Instead, I invest in...duh...my own company! I invest in technology, people, processes and marketing. I have better control over those investments. Besides, who better to take a risk on than someone I know best: me.
So should you invest in individual stocks? Hey, go ahead and have fun. But while you're up to it, consider taking that same money and putting it on a roulette wheel in Vegas. Considering what you're allowed to know about your investment, it's pretty much the same risk. That's what I learned from my own stock market adventure back in 1988.
P.S. If I had stayed with that bar coding money I would have quintupled my money. See what I mean?