A friend of my wife’s recently wanted my thoughts on a stock that she is holding. She bought a couple hundred shares of a fast-moving penny stock that has returned an incomprehensible 62% for the last six weeks. Why she wanted my opinion I’m not sure. I assume Gorgeous must have mentioned in passing that I enjoy reading about the stock market, and that I take an active interest in the performance of my 401(k). While in fact true, those are hardly qualities that make me worthy of dispensing advice. I hastily dashed off an email to the woman suggesting that she sell immediately and put the proceeds into an index fund. About an hour later, I received a short reply thanking me. I suspect she had hoped for something sexy and exciting rather than a boring ‘ol mutual fund. If she only knew how much I was once like her.
I first started investing during the high-flying nineties when seemingly every other Tom, Dick, and Harry also discovered it. Suddenly regular, every day people were buying stocks because there were commercials showing tow truck drivers who owned islands from the profits of their investments. It was all just so easy.
One of my first forays was to buy a technology stock just as Silicon Valley start-ups became all the rage. At the time, I was working alongside our IT staff so that we could roll out a database that my department had developed, and I had a front row seat to see the tools they were using. I became excited about one particular networking software that allowed Windows 3.1 to connect to our application. In my best Walter Mitty moment, I fancied myself to be Peter Lynch discovering a diamond in the rough for his Magellan Fund.
The stock eventually tanked when Microsoft later issued the much heralded Window 95. To those who knew anything about networking software, it came to no surprise when ’95 contained its own version of the same functionality as my company’s software. The axiom back then for all technology companies was that partnering with Microsoft was like sealing a deal with the devil. You were signing your own death sentence. Since there was no reason for anyone to buy that software anymore, the company disappeared in due course. I was left with a worthless stock but also a wonderful, important lesson about investing. I had been familiar with all kinds of networking terminology, but that made me neither a network engineer nor a tech stock analyst.
I learned that it was important to completely understand a company and its products or services before I invested. Warren Buffett has consistently said that he only buys that which he truly understands. He’s also correctly said that average investors such as myself are much smarter to put their money in mutual funds rather than stocks because only a select few people truly know what’s happening in a particular company. It’s better to let the pros pick for you.
So I followed the Oracle of Omaha’s advice and I began smart investing. Roth IRAs were just being introduced, and I started one up for myself and my then wife with two well-known mutual fund companies. I made sure that we were contributing regularly to incorporate the amazing virtues of dollar cost averaging. But I also thought it would still be helpful to own some stocks as a learning experience. With the help of a really great book called “America’s Finest Companies” by money manager Bill Staton, I started a tiny portfolio of individual stocks in which I dutifully reinvested dividends and made new purchases as much as possible.¹ They were my reason to start reading the financial news each day because I had actual companies to follow. From there I would also read about the overall economic coverage both nationally and internationally. I was getting a very good education, and it was heartening as the years progressed to see each of my stocks grow through good years and bad ones.
Then I got divorced. My divorce lawyer and accountant strongly recommended that the best way forward was to liquidate the tiny portfolio because all of the securities were held by us as joint tenants. It broke my heart to sell them. I had always considered them to be beautiful plants in a make-believe garden I had created to grow long and strong. I enjoyed pulling out the folders where I kept all the company statements for each stock and staring at them with a great amount of pride. I made a vow that I would someday recreate the tiny portfolio.
I still have my Roth mutual fund, fortunately. I believe my ex liquidated hers, probably because she needed the money, but I also suspect done in a moment of private revenge. The investments were always my idea, my passion. I think she viewed each dollar saved as not being available to spend on yet another vacation.
A second marriage in mid-life allows for all kinds of new beginnings, and that includes financial ones. Gorgeous has never had the chance to invest, and she’s very keen to do so. She presently has multiple dental bills to retire, but starting later this year we will open a Roth account for her. For the first time since my divorce, I have finally begun reading the financial pages again to follow the market. I’ve been delighting in explaining the differences to her between an IRA vs. traditional investments, capital gains, tax-deferments, etc. Even in your mid-fifties one can begin investing– you’re really never too old. In fact, in order to keep ahead of inflation one absolutely has to do so. There are always ominous events that have an impact on our savings — war, terrorism, recession, Wall Street subterfuge, etc. But going forward, I plan on sticking to the same cautious saving that has been successful for me up to now: investing in good, solid, and absolutely boring securities and then leaving them alone. Warren would approve, and that’s good enough for me.
I hope my wife’s friend took my advice and will no longer invest in momentum stocks. But some people like the excitement of the thrill and chase. I suspect she might be of that ilk. I wish her well. In my own way, I find the one-dollar-at-a-time approach to be fun, exciting, and rewarding too. It’s not that I don’t enjoy a careless gamble on an every day basis, though. Tomorrow’s Mega Millions drawing has a jackpot of $270 million. This boy needs to publish this post and get out to the convenience store, stat. I want to own an island also.
¹ Those stocks were: MCD, NWL, RPM, FRT, CCL, and the former GMP (Green Mountain Power).