The 1 Reason You Should Never Buy Individual Stocks
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About 20 years ago, I bought some shares of a publicly held company. I will never do so again. Said company, which is still around, sells handheld point-of-sale scanners. They were a “hot pick” back then and caught my attention because of a few very positive articles. I'd never dabbled in individual stocks before, preferring instead to put my money into mutual funds, but this opportunity seemed too enticing to miss.
This was a tech company. My company is a tech company! It sells to mostly small- and medium-sized customers. My company sells to mostly small- and medium-sized customers! I know these guys! They're loved by the same experts that I love. Most importantly, the people in the know say this company was poised for success. Why not get in on the ground floor?
I did my due diligence too. I'm not just some rube that just fell of the turnip truck. I'm a Certified Public Accountant, thank you very much. I researched the company's financials. I read their Security and Exchange Commission Filings. I pored over analyst reports. I crunched the ratios. All the indicators were a go. No red flags. No reasons to be overly concerned. So I coughed up about $10,000 and bought the company's stock. So what happened?
Well, nothing. At least not for about six months. I set up news alerts about the company and kept up to date on their goings on, but the stock wavered only a little. It was boring, but stable. Until, that is, one Wednesday in mid-July. That was the day things fell apart. On that day, the company released their second-quarter earnings, which were consistent with expectations. Unfortunately, the company also did something else. It told analysts that, due to supply issues affecting the manufacturing of their point-of-sale devices, their forecasted sales for the third quarter were going to come in significantly lower than expectations. All of this happened while I was meeting with a client. So by the time I received the information and was even able to take action, the stock of this volatile young company had dropped more than 40 percent. Forty percent! By the time I sold my shares in a panic, I had lost $4,000 — all in the space of two hours.
I, the individual investor, got slammed. Of course the bigger, institutional and preferred investors in the company got out much earlier. Ultimately, the experience taught me something: I shouldn’t be doing this. And why? Because I'm not a stock investor. I run a company that sells technology services. Investing is not my job. Implementing software for my clients is my job. If being an individual investor was my job, then I would have an infrastructure for keeping tabs on my investments all day. I would have a process to take action the moment one of my investments were in play. I, like the analysts and professional investors who also had money in the point-of-sale company, would be attending their shareholder meetings, joining in on their conference calls and building relationships with management. I would be in the know.
But I wasn’t in the know. I was in a meeting. I was in the midst of running my own business. I don’t have the time to worry how the people at the point-of-sale company were running theirs. Being a successful investor is a profession in itself. The people who do this successfully are just like I am — they are business owners. They wouldn't install the software I sell on their own because they know it's not their expertise. Just like I shouldn't be doing what they do because it's not my expertise. Sure, maybe they'll get lucky and succeed doing what I do, just like I could get lucky and succeed doing what they do, but the odds are stacked against us both.
That’s the reason why I would never buy an individual stock again. I’ve put my money into mutual funds. Sure, the returns may be lower and there are fees, but I’ve learned that running a successful small business is all about doing what we do best and letting others do what they do best.
By the way, that point-of-sale company not only recovered, but prospered. The shares I bought would've tripled in value. That's OK though, because things could've just as easily gone the other way. What do I know, right? I don't do this stuff for a living.