My first year investing – How to Start Investing (Personal Case Study)

I have studied investors with a great long-term investing track record on multiple occasions.  Often, I noticed that investment failures are not given the same coverage as investment success stories.  I believe this practice of limiting exposure to your mistakes does a disservice to those seeking to learn.  Not only does limited coverage of mistakes prevent others from learning from you, it can also create an unrealistic view of the accessibility of investing.  I hope to provide a more accurate accounting of my own investment history.  In this post, I will take you through my journey of learning to “trade” stocks.  Hopefully, my story will encourage you to start investing as well.  Below is my autobiographical account of my first year investing.

How to Start Investing in the Stock Market

I firmly believe the best way to learn how to invest in the stock market is to start investing in the stock market.  Take action.  Open up a brokerage account, begin researching companies, and make your first stock purchase.  It’s as simple as that.

Anything worth doing well is worth doing poorly at first.” – Joshua Sheats

Joshua Sheats spoke the above quote in episode 300 of Radical Personal Finance.  Although his focus was on another topic, his point is incredibly relevant here.  If you truly want to become a good investor, it’s worth being bad at first.  Your future self will thank you for starting your investing journey with some mistakes.  I certainly look back fondly at the lessons which I learned in my first year investing.  Every investor was once poor at investing.  Don’t let that stop you from getting started.

Start investing using real money

Although this account will detail many mistakes that I made investing my own money, the lessons I learned from this exercise were invaluable.  I am a better investor today because I risked my own real money buying and selling stocks.  I didn’t truly know what I was doing at the time.  Yes, I made mistakes. Yes, I lost money on some of my purchases.  However, I also made money on some of my purchases.  Each of these experiences taught me something.

Now, it’s important to be smart about this.  Don’t risk $100,000 learning to invest in the stock market.  Choose a much smaller number.  It should be a meaningful amount of money that matters to you if you lose it.  However, not so large that you couldn’t easily replace it with continued work in a short period of time.  I don’t agree with the idea that you should only invest what you’re willing to lose.  That’s nonsense.  You shouldn’t be willing to lose ANY of your money if your goal is to build wealth and achieve financial independence.  However, that doesn’t mean you never put any money at risk.  Instead, risk management should be your first priority as an investor.

I began learning to invest with only $1,000.  Your number may be higher, but I would encourage you to not have your number be any lower than $1,000.  In fact, this is the bare minimum.  If you can’t manage to put together at least $1,000 you should probably focus on the rest of your personal finances first.  Eliminate debt and build up an emergency fund.  Then begin investing.  For most people, a number in the range of $1,000-$10,000 is probably correct.  However, this depends on your circumstances.

My investing story begins with $1000, a brokerage account, and a dream of financial independence

Since I was young, I’ve thought about becoming financially independent.  Only more recently have I known to call my goal financial independence.  At times I thought I wanted to “get rich” or “make a lot of money.”  Yet, those were ignorant and limited expressions of my true goal.  Over time, I learned about Warren Buffett and how he became the richest man in the world by being an investor.  Warren Buffett inspired me to become an investor and follow in his footsteps.

In 2011, I managed to pull together $1,000 which was nearly all of my savings.  I took a check for the entire sum to my local Scottrade Brokerage office and opened a taxable investment brokerage account.

[I am going to detail my first year of trade transactions below.  As I am writing this account almost seven years later in 2018, I am recreating this history using my personal financial records.  I believe the transaction details to be as accurate as possible.  In some cases, I derived the number of shares purchased by back-calculating from total cost basis and sale proceed amounts.]

My first stock purchases occurred in August 2011

On the 19th of August, 2011 I purchased shares in four companies: Bank of America, General Electric, Hanesbrands, and Microsoft Corporation.

I bought:

• 14 shares of Bank of America (BAC) at an average of $7.40 for a total of $103.60.
• 10 shares of General Electric (GE) at an average price of $15.95 for a total of $159.50.
• 20 shares of Hanesbrands (HBI) at an average price of $24.48 for a total of $489.60.
• 8 shares of Microsoft Corporation (MSFT) at an average price of $25.26 for a total of $202.04.

At the end of these purchases, my portfolio went from $1,000 in cash to $45.26 in cash and $954.74 in stock.

Looking back, it’s not difficult to determine why I chose each of these stocks.  Each one had experienced a very recent stock price decline at the time I purchased them.  In February 2011, Bank of America was traded at $14.29 and had declined by nearly 50%.  General Electric declined from $20.82 in February 2011.  Hanesbrands had declined from $33.26 per share in July 2011.  Finally, Microsoft Corporation had declined from $28.08 in July 2011.

I was already a value investor at heart.  Warren Buffet was going to be proud; I bought stocks when they went on discount.  I had no idea how the business models of any of these companies worked, but I just knew it was smart to buy companies when their stocks declined in price.

In fact, I was following “what would Warren Buffett do“, even better than I realized.  Just six days after I purchased Bank of America stock, Warren Buffett announced he was investing $5 billion in Bank of America.

I began selling my stocks in less than three weeks

Unfortunately, however much I wanted to be a value investor, my behavior reflected that of a trader.  Investors don’t sell stocks after a holding period of three years let alone three weeks.  Yet, that’s exactly what I did.

On September 6th, 2011 I sold all 20 shares of Hanesbrands for $510.99, netting a profit of $21.39 or 4.36%.  Not bad for three weeks.

Looking to compound my gains, I rolled over all of my earnings into buying 36 shares of General Electric on September 14th, 2011 at an average price of $15.25 for a total of $549.00.

Less than a week after that, I sold my Microsoft shares for $215.19 a gain of $13.15 or 6.5%.  Another good return for such a short time period.  Unfortunately, the absolute gains are fairly small.

Next, I sold my Bank of America stake for a loss.  I received $86.79 for my shares on September 22nd and a dividend of $0.14 on September 23rd.  These transactions resulted in a loss of $16.67 or approximately 16% of the original $103.60 purchase.

One last purchase to close out 2011

After selling Bank of America, I funneled all of my earning so far into buying stock in Dow Chemical Company (DOW).  I purchased 12 shares for a total of $289.48 on September 23rd.

I received two dividends in October from my remaining holdings, GE and Dow Chemical.  GE paid a dividend of $6.90 on October 25th and DOW paid a dividend of $3.00 on October 28th.

Subsequently, I sold out of both positions before the end of 2011.  I sold my General Electric shares for $774.98 on December 16th, 2011 for a gain of $66.48.  When combined with the dividend, I earned 10.3% on my General Electric investment during those four months.  I sold my Dow Chemical Company shares for $317.11 on December 20th, 2011 for a gain of $27.63.  When combined with the dividend, I earned 10.5% on my Dow Chemical investment during the three months I held it.

Thus, at the end of 2011, my portfolio was once again 100% in cash.  My $1,000 initial investment had increased 12% to $1,121.88 in just four short months.  In spite of my losses, it was hard to not feel proud of my investment gains.  I knew 12% was a respectable return for an entire year, let alone four months.

Lessons learned from my investments in 2011

It is important to always study your previous investment mistakes.  If you can avoid making the same mistake in the future, you could save a large amount of money.

My primary investing mistake of 2011 was making small investments because I had a small portfolio

Although I made numerous mistakes with my purchases and sales in 2011 there was only one mistake which I focused on.  I had ignored the transactional costs of brokerage commissions when planning out my investment portfolio.  After reading about the importance of diversification, I thought I needed to own multiple stocks in order to do well.  However, by doing so, I ensured that a large percentage of my gains would go towards paying trading commissions to my broker.

In 2011, I had eleven transactions within my Scottrade account.  Scottrade charged me a $6.95 fee for each transaction.  Therefore, I paid $76.45 in pure costs in order to earn my $121.88 return.

Essentially, my investments earned $198.33 or a 19.8% return.  However, I only received 12%.  This means that commissions eliminated 38% of the gains from my underlying investment portfolio.

Best Practice:  Make investments such that brokerage commissions are a low percentage of your cost basis.

My 2012 investing record begins on a positive note

Having learned my lesson in 2011 about spreading my investments around too thinly, I bought only two stocks in January 2012 with my portfolio full of cash.  On January 30th, I purchased two shares of Apple Inc (AAPL) for a total cost of $912.64.  Then, on January 31st, I bought 13 shares of Momenta Pharma (MNTA) for $208.50.  These two purchases brought my portfolio from 100% cash to less than 1% cash in a two day period, while only involving two transaction fees.

Momenta Pharma was bought without having any understanding of the underlying business.  Like many purchases that I made in 2011, this stock was bought simply because it had recently fallen in price.  I was forced to again learn that a recent fall in stock price was an insufficient reason to buy a stock.  This practice is known as ‘catching the falling knife’ which is exactly what I did with Bank of America.  I would lose money on Momenta Pharma catching another falling knife.  I sold my Momenta Pharma shares on March 15th for $193.32.  A loss of $15.18.  Most of this loss was due to commissions as I actually sold the shares at a very similar price point to what I bought the shares at.

Apple Inc as a first step towards understanding a company before purchasing stock

My purchase of Apple stock in 2012 was the first stock I purchased using any semblance of a circle of competence.  As a consumer, I had a lot of experience with Apple smartphones.  I saw how popular they were amongst my peers.  My thinking was that the company should, therefore, be a good investment.  This investment thesis was quite thin.  The investment was definitely not in my circle of competence in the way that Warren Buffett coined the term.  I had no idea how the business behind Apple worked.  I didn’t understand the economics.  All of these things are important for a value investor to understand.  Yet, this was an important step in the right direction.

I ended up making a relatively large profit on my purchase of Apple stock.  I sold my shares six weeks after I purchased them, on March 14th, 2012 for $1,173.13.  This represented a gain of $260.49 or 28.5%.  I knew that such a gain over only six weeks was quite impressive.  It didn’t take long for me to regret selling though, as I saw momentum bring the stock even higher.  I bought back into Apple using some of my money from Momenta Pharma to buy at $1,187.00 on March 19th.  I held the stock for only another week before selling again at $1,222.97 for an additional gain of $35.97.

At this point, my portfolio held $1,403.16 in cash.  My net gain on my investments was slightly over 40% after seven months of investing.  However, this would be the peak of my portfolio for 2012.

Lack of Fundamental Analysis leads to a massive portfolio loss of 49%

Although I wouldn’t admit it at the time, I had been fairly lucky in my investment track record.  I purchased stock in companies in whom I had done no research.  I was riding a tailwind of a major bull market which could cause even bad investments to provide positive returns.  This situation could not last forever.  My profound lack of even basic fundamental analysis eventually caught up to me when I purchased Zynga Inc (ZNGA).

I purchased over 200 shares of Zynga at a total cost of $1,387.00 on May 31st, 2012.  Zynga Inc is a maker of video games which were quite popular at the time.  My investment in Zynga combined both good and bad aspects of my investing performance so far.  On the positive side, I invested in a company which I knew the product from having played the games.  I also concentrated my investment by using my entire portfolio of cash.  This allowed me to limit transaction costs as a percentage of my portfolio.

Unfortunately, the negative aspects of this investment far outweighed the positives.  When I bought Zynga, I didn’t perform any fundamental analysis.  Instead, I bought ZNGA stock simply because it had recently fallen in price.  Little had I anticipated how much further Zynga’s stock could fall.  Once again, I caught a falling knife and got hurt.  I eventually sold my shares of Zynga on July 26th, 2012 for a total of $705.98.

I lost $681.02 or 49% of my investment in Zynga in a matter of 8 weeks.  As I had concentrated my investment to be 100% of my portfolio, this represented a portfolio loss of 49%.

Lessons Learned from my investing mistakes of 2012

There were two key lessons which I took away from my 2012 investing decisions.

1. I need to more fully understand a company before purchasing stock.  In other words, I need to perform adequate due diligence or fundamental analysis.
2. I shouldn’t buy stock based upon recent price movements.  A recent drop in a stock’s price does not mean the stock is undervalued.  My investment in Zynga was a classic example of ‘catching the falling knife’ in trader’s lingo.  My takeaway is that I need to perform a true valuation analysis before investing.

First year trading losses are simply tuition at the school of investing

After a year of investing in the stock market, I had turned my starting $1,000 into $722.14.  Over the course of my first 12 months investing, I lost $277.86, completed 19 trades, paid $132.05 in commissions, and invested in eight different stocks.  My sale of Zynga stock on July 26th would be the last trade that I made in 2012.  I would go on to close this investment account and not make any more investments for nearly a year.  Yet, I learned more from those first twelve months investing my own money than I could have ever learned from a book.

By investing and losing my own money I was able to recognize the weaknesses in my investment process.  In addition, I gained valuable insight into my psychological behavior when I experience investment losses.  I consider the $277.86 of losses to simply be tuition paid in my investment education.  The lessons I learned from spending that $277.86 has made me countless more money in the years since.  That’s why I encourage anyone who wants to learn how to invest, to simply start investing as soon as possible.  You’ll learn more from risking your own money than you’ll ever learn from reading a book.  Investing books have their place, and I recommend quite a few.  However, their usage is to supplement your personal experience, never to replace it.

Please comment and share your first year investing story

Let me know if you found this sort of case study content useful.  I hope that by sharing my story and publicly admitting my investing mistakes, new investors will be less intimidated as they seek to start investing.  Please comment and share your story as well, so that we can encourage each other.  Thank you for joining me on my journey to become a better investor.

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