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What I Learned From My First Investment

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Stock Market and DiceI made my first investing decision ever when I was 11 and I learned quite a bit, in retrospect, from that little experience. I participated in a classroom stock picking competition that was not unlike the stock competitions you see online practically everywhere nowadays. The contest ran for about a month, the stock choices were limited to those listed on the major markets (anything not OTC or pink sheet), and you started with a mind boggling (at the time) $10,000 of play money. I think the classroom competition was part of a bigger competition (or at least mirrored it), but our team never made it out of our classroom.

I don’t remember where we placed at the end of the month but it certainly wasn’t first but it certainly wasn’t last. We chose to put the entirety of our investment into Caterpillar at the advice of one of our team members. He recommended that we purchase shares of Caterpillar because they’d be instrumental in the rebuilding of Iraq (yes, this would be the first time we went in back in the early nineties with another President Bush), something he invariably heard from his parents since we were 11 and I doubt many of us had much insight into those types of matters. Anyway, we plowed our entire $10,000 seed money into Caterpillar and watched as our investment hovered around $10,000 for the entire month. It might have gone up by a few dollars, it might have gone down by a few dollars, but it didn’t really do all that much in the month long competition.

In the short term, the stock market is basically gambling. In a time span of a month, you’re essentially gambling when it comes to selecting an investment. The team that won the month-long competition was one that invested in a microcap company that spiked at the right time for them and perhaps they understood this idea better than we did. While our team didn’t necessarily research Caterpillar extensively, our choice of a large cap, blue chip company sunk us before we executed the trade. If you’re interested in reading a famous book detailing this well known idea, I recommend A Random Walk Down Wall Street by Burton G. Malkiel.

Don’t watch your stocks every day. In conjunction with the idea that you should be long in the stock market, you shouldn’t watch the market every single day. Since a stock, depending on its volatility, is likely to jump and drop at essentially random, if you watch the performance of your stock every single day then you’re likely to read into those moves when there’s nothing to read. This may cause you to make a decision based on random events and not on the fundamentals, what should’ve caused you to purchase the stock in the first place.

The stock market is boring. At the time, I thought the stock market was ridiculously boring. The speed of information was much slower back in 1991. If you wanted a “free” stock quote, it came in the newspaper the next day. Financial news? Newspaper, maybe even the television in your local news. There may have been cable financial television shows but I wasn’t aware of any. Nowadays you have free instant stock quotes, financial news 24/7, and a connection to the global markets in a way that never existed to the common investor back in 1991. As awesome as it is, the stock market is still as boring (to me) as it was back in 1991. While I’ve learned a lot and I’m very much interested in broader market information, the stock market, and individuals stocks in particular, simply doesn’t excite me and it’s something I can’t find myself devoting a ton of time to. This is probably why a majority of my investments are in index funds.

I must warn you, I didn’t realize any of these “lessons” back when I was 11 (except maybe about the market being boring), it wasn’t until I looked back later (and consumed a few Motley Fool books) that I realized, latently, what I had learned. I probably picked up a few other things back then such as how to read financial news and basic vocabulary (what is a dividend? what is a split?) but I think those ideas above were the most important.

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8 Responses to “What I Learned From My First Investment”

  1. iarenoob says:

    I don’t think the stock market is gambling if you know which investments to invest in. When I pick my stock, I typically look at their financial sheets. That way you can tell if they are moving forward or are trying to move forward. I have been successful so far this way but you can’t account for certain things that happen in the news like someone resigning and such.

  2. “Don’t watch your stocks every day” is definitely prescient advice for this markets wild ride! My mom is giving herself heartburn watching the Dow gyrate.

  3. J Cantoni says:

    Geez,

    I think you were on to more than you know. I looked up the price of CAT in Jan 1991, the approximate time of the first Gulf war. It was selling for about $ 6 a share. Now it is selling for $72 a share. 1200% return. Granted it is 16 year later, but geez, that’s not bad. Maybe you were smarter than you thought.

  4. Good advice overall, at least for value investing. A growth investor wants to watch his stock every day, or close to that, ready to pull the plug if bad news comes out, or it drops below his limit price.

  5. Jason says:

    I played a similar game when I was in 7th grade. I don’t remember what my team invested in, but I do remember the team who won didn’t invest anything and just collected 3% interest on their play money. All of us lost money in the end, except them… Figures.

  6. Meg says:

    I agree with all your points.

    Investing in the short term IS gambling in the stock market, especially if you’re an individual investor–we have limited, imperfect, and even sometimes unreliable information on stocks, companies, and markets. Plus that info reaches us long after company owners, investment firms and institutional investors have acted on that information and moved the market/stock price.

    If you’re watching your stock every day (or even every week) then you’re probably trading way more often than you should–meaning any gains you DO manage to make are wiped out by short term capital gains taxes and/or commissions.

  7. Reasonable says:

    >> If you’re watching your stock every day (or even every week) then you’re probably trading way more often than you should

    I’m not sure I agree: all my investments are in some kind of an index fund (s&p 500, wilshire 2000, some foreign indexes);I sold zero stocks in the last 5 years (I bought around 80k worth of stocks throughout that period), but I watch the market daily.

    Might be a family tradition; my uncle used to drive by the bank every Friday to ‘go and visit with his money’. So there you…

  8. thomas says:

    i dominated my classroom stock market game. My team bought 3 penny stocks. Didn’t know anything about them, just saw them in the paper. i believe it ran for 2 or 3 months, but at the end we had some crazy rate of return. One of the stocks jumped a nickel or whatever and that was pretty much it. Everyone else bought blue chips and saw little or negative gain.

    Worked for play money, but no way I’m doing that with my cash.


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