A few years ago a young colleague posted this question on my firm’s work forum, “Can anyone recommend a good book for beginner investors? More for traditional stuff like stocks, bonds, etc. I’m pretty out of my element in that area, all its nomenclature and such. I need like the idiot level entry instructions.”
In response to that request, I wrote the following.
I can’t offer you a book that does that, but I can offer you a lifetime of experience FWIW. I’ve had 3 opportunities in my life to get rich. They came about completely by chance of circumstance. I was in the right place where I had insider knowledge.
Technical Aside
Insider trading is a term of art in the financial world meaning you’ve seen non-public information about a company (like it’s about to go bankrupt, or win a big contract, or implement a special dividend or stock split—yes you may have to look up those terms). Insider trading is what put Martha Stewart in prison because someone told her such a thing, and she invested heavily based on that. Seems to work for politician’s spouses, but everybody else beware. Now what I’m talking about is not that kind of insider information. It’s just things that I happened to know that no broker or finance guy was looking at.
In the first one, I was fresh out of not getting my Masters degree (I didn’t finish). I happened to be working in what was then the very new world of computer graphics and Geographic Information Systems, and I knew very well the leading company in that fledgling field. When they announced they were going public via Initial Public Offering (IPO, that would be selling stock for the first time, so they could raise money and their big wigs could get rich). I had no money, but recommended it to my retired Grandmother, but her investment broker advised that it was risky, and, since she was old, she should play it safe. Two years later the company was sold to one of the industry giants for more than 200% the price of an initial investment. Strike one.
Sometime later I was working for the 4th largest computer company in the world. It was a good company with a long history, and in great financial shape. So a former US Secretary of the Treasury, may his name be forever cursed, became CEO of the 5th largest computer company, and borrowed over $4 billion in junk bonds (the derogatory term for borrowing money at about 20% annual interest) to induce our stockholders to sell to him. This was called a leveraged buyout. The result was that he took the 4th largest computer company, merged it with the 5th largest and almost immediately made it the 9th largest. How do you like that math? Because we had to pay off the billions of dollars that we were paying 20% interest on, he sold off every part of both companies that he could, and we spent 6 years starving our research budget and paying down the debt with every penny we earned, while the stock plummeted from $67/share at the time of the buyout to $2/share. Those of us inside the company were aware of the public statements required of the company and, if you looked, you realized that the company’s physical assets (buildings and such) were now worth more than the cumulative stock valuation when you multiply all the outstanding stock by the $2 price. Again I had no spare money, so I advised my father, now himself retired, to invest. Of course he didn’t take advantage of investing $10,000 that would have no risk (It’s complicated and has to do with preferred stock, but if we went bankrupt, he would have gotten his money back.), and would have earned him $7,000 a year for life just in dividends. Strike two.
Years later I joined a company I really liked. They did all the things I had tried to do at my previous companies, and they rewarded their employees for doing it. They were named after their founders (always a good sign) and had been around almost a century. For reasons I won’t go into, they decided to go public. They gave employees the opportunity to set aside part of their paycheck to buy stock in the company at a slightly discounted rate. My wife said, “Do that.” Thanks to my wife’s advice, I set aside 2% of my paycheck to buy stock. I ended up with over a thousand shares purchased at an average price of $27/share. The stock price hit a high last year of $163. Home run.
Seems unlike my father and grandmother, I could take good advice from someone smart.
Of course I also have my 401-k and some other minor investments in indexed funds which are doing OK at very little risk.
I could leave it there with, “Wait for the opportunity and pounce,” but that wouldn’t be very helpful for you, so one final story instead. 3 years ago I had $12K in a savings account that I had taken from my investments for spending cash. My bank was paying me .01% annual interest, meaning for one month I earned a dime on my $12,000! I decided that was stupid and switched the savings account to a stock trading account.
When I was a teenager I convinced myself I was smart and looked into ways of getting rich. We had a toy roulette wheel, and, after many trials, I convinced myself that no matter how smart I was, I ended up losing the imaginary fortune built up with my systems of betting. That left me looking at the stock market where I could lose and gain big sums, but it wasn’t necessarily rigged against me. I studied the stock trends over many months and came to a realization. Certain companies were well off financially and were in markets with steady returns where they had been for many years. Still the stock prices fluctuated but in a pattern. They would go down to a low point, and then, usually 3 months later go to a high point, likely tracking their mandated quarterly reports. The low and high dollar marks were never the same, and neither was the exact time for reaching those points, but the pattern was there. One stock I tracked was a consumer insurance company whose stock would fluctuate between $20 and $30 per share. Sometimes the low point would be $25 and the high $30. Other quarters the low would be $20 and the high around $25. If you weren’t greedy or obsessive about waiting for the exact lowest point and the exact high point, you could make a comfortable profit.
So I decided to actually see if my system worked. I picked out two stocks that looked like they worked that way and started investing. The first year I did 5 trades (5 buys plus 5 sales), using a total of $26k and made a little over $3k. The next year I did 4 trades, again investing $26k and made $7.8k profit. This year I’ve only made 2 buys for $7k and haven’t sold yet, being up only about $400 at the moment, so maybe this year will be a wash, or I might lose a little money. (I ended up making $1100.)
Of course the third rule of life is, “Free advice is worth exactly what you pay for it.”
In keeping with the tradition of “one simple trick” articles, I have saved the trick until after I wasted your time with my blathering. What is that one simple trick, you ask? That trick is: PAY ATTENTION.
Musings of a Restless Mind 