Recently, I decided to calculate the average buy-price of all the stocks that I currently own. The average is $167.20 US. The least I’ve ever paid for one share of stock (again, of my current holdings) is $25.85 and the most is $848.00.
I’ll be completely honest: when I was a novice stock investor, if somebody had told me that they paid more than a few dollars for any one stock, I would have thought that they were absolutely stupid. Why? Because I assumed that they had no chance of having any of their stocks investments multiply in value, let alone double. I assumed that most of the stock’s growth was behind it and that gains after no longer being a “penny” or small-cap stock would be marginal at best.
Applying this mindset as a novice, I avoided buying any stock worth more than a few dollars per share and went for ones ideally less than a dollar per share. How did I do? After over about six years, I had lost nearly everything that I had ever put into the market.
A saying came to mind that I first read a few years ago as I wrote this last part. ‘How do you lose a million dollars in the stock market? Invest five million dollars!’
This is how I certainly felt when, in early 2013, my portfolio’s losses were not much different (percentage-wise, not dollar-wise!).
At that point, the only thing that kept me holding onto the belief that I could somehow be a successful investor were some relatives who had done quite well in the market over the years and were therefore able to enter their respective retirements in a very healthy financial position. ‘How did they do it?’ I wondered.
When I finally got up the nerve in the summer of 2013 to ask one of them, an uncle, about how he found out which stocks to buy and he replied by subscribing to an “investing newsletter,” I got excited and realized that there was hope after all. He wisely didn’t disclose which stocks had been very successful for him (because I’ve learned that a good stock in the hands of a bad investor becomes a bad stock), but at least I had something to go on.
Shortly thereafter, I learned about The Motley Fool (from the news feed on my iPhone’s Stocks app, of all things!) and liked their transparency and style so much that I subscribed to their Stock Advisor service. (Even though I’m from Canada, I’ve found that the U.S. markets are the best place to invest my money.)
A good stock in the hands of a bad investor becomes a bad stock
To make a long story short, I started digging into what they call their “Foolish Mindset.” That is, I began devouring their articles that preach buying quality companies and then holding them for the long term. The two phrases that I just bolded are what I desperately needed to get re-educated about.
1) Buy quality
Often, you get what you pay for. In other words, some things are worth more because they’ve earned their worth.
If I want to buy a generator, I’m not going to buy the ‘Wal-Mart special’ made by some unknown company. Instead, I’ll buy something like a Honda for even a few times the price simply because the owners of those things rave about them even many years after buying one. I prefer buying quality to crap when it comes to a bigger-ticket item that needs to be reliable like a generator.
Whenever it’s time to buy a car, Consumer Reports reviews are what pretty much make the decision for me. Their reliability stats are based upon thousands of actual owners, so if a particular make or model has a lot more red circles (good) than black ones (bad), I’m going to naturally choose the more reliable product even if it costs more than a poorer-quality equivalent.
Likewise, I started to realize why the Berkshire-Hathaways and the Apples and the Nikes (to state a few examples) were the high-priced stocks that they were back even in mid-2013. They had earned their worth. They were (as they are now) rock-solid companies run by some of the best minds in the history of the business world.
I finally realized that it was better to start buying quality instead of continue buying crap when it came to something as important as my and my family’s financial future. To that end, I finally also realized that a high stock price doesn’t matter; that is, to base my decision not to buy a stock because it’s price was too high was overlooking the fact that it had earned a higher price for good reason.
I could stop here, but I want to elaborate upon the second key of my (and perhaps your?) re-education process.
2) Hold on for the long term
People who had discovered these companies and bought some of their stock years before had the potential to be very well-rewarded years down the road.
Now, why did I just state, “had the potential?” Isn’t it a given that the person who bought a few thousand dollars worth of Berkshire-Hathaway stock in the 1980’s or Nike stock in the 1990’s or Apple stock in 2004 is now a multi-millionaire? This is second key thing that I needed to get re-educated about: holding time.
If you bought some Apple stock back in the early 2000’s, after the Dot-Com Bust but before the iPod came out, then sold after you doubled your money in the mid-2000’s, the explosive chart since that time simply doesn’t apply to you. Instead of returns of multiple hundreds of percent, you got out at a 100% return before you “risked” losing it. You let fear win out instead of letting the magic of time do its work in the form of compounding returns.
Get over your pride
After reading many, MANY such stories on the Stock Advisor web site – of the worth of quality companies versus penny-stock companies, of fortunes gained due to patience versus ones lost due to fear and ignorance and impatience – I decided that I’d better take the advice of what actually works instead of what I think works.
It was time to stop being prideful. It was time to stop taking the advice of well-meaning people, yet completely ignorant about how the stock market works, and instead follow the advice of the most successful investors in history, the stories of which were being told in this new gold-mine of advice that I had come across.
The Final Word
I could write a whole lot more about what I’ve learned since mid-2013. Suffice it to say, by wrapping my mind around the two key lessons that I bolded before – buying stock in quality companies (regardless of current price) and holding the stock for as long as possible (at least 3 to 5 years) – my success as an investor has multiplied. I no longer stare glibly at a statement that shows mostly losses and a few paltry gains, but rather one that shows an increasing number of holdings with multi-bagger returns (i.e. double, triple, quadruple, etc.).
But there’s one thing I need to clarify: becoming successful means that I actually FOLLOWED THE ADVICE I was getting. I had to learn to hold on even when certain stocks dipped well below the prices I had bought them at, sometimes very soon after buying them. I had to believe that the long-term mindset was true, and this was easier as long as I stuck to my initial investing thesis about a company and didn’t get distracted by short-term setbacks. And so I’ve held on even when it has hurt, and most of my biggest gainers are the ones that I’ve held onto the longest yet experienced the most turbulence with during the process.
Even today, just like everybody else, I have to endure sucker-punches like the recent correction of September to December 2018. However, because our greatest asset – time – had allowed me to build an investing cushion, I actually didn’t experience a net overall loss at any point. Sure, some of my stocks went into the red, but my overall portfolio value stayed well above my initial investment costs. Now, over two months after the correction, most of those are again back in the black.
As I’ve stated in other posts where I get personal about some of my investing successes, I write all this not to brag but rather to encourage whoever is reading this that feels like there’s no hope left as an investor. I hope you now believe that there is and that you also can be writing or speaking about your success stories someday.
If you’re a brand-new stock investor – or still thinking about it – then I highly recommend the free e-book, Should You Consider Stock Investing? It could become one of the most beneficial 30-minute reads of your life.
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To new beginnings!