I get asked all the time how one should build an investment portfolio. I’m not a Chartered Financial Analyst nor have I taken the Canadian Securities Course, but there is so much literature on the Internet and so many financial books that I’ve read that I can honestly say that I’ve gained a vast knowledge in personal financial investment matters.
That wasn’t the case when I first started dabbling into investing my own money. Like everyone else, when I first started saving a larger sum of money (greater than $5000), I started wondering how I too could get rich like the Warren Buffet’s and the Peter Lynch’s. Obviously I didn’t want to be a millionaire when I turned 65. I wanted to be a millionaire now. As in now, age 25.
When you get that gusto of trying to make money quick, you start reading about success stories and extrapolate to the fact that if they can do that then I can too. That’s exactly how I felt when I started getting into investing. I wanted to make money quick. I wanted to be like the pros and pick great value picks that would soar 250% in a year because these companies were under priced and ripe for the buying.
Being A Hero
Like everyone else, I thought I could beat the markets when I first started investing. I read all the books written about Peter Lynch, Warren Buffet and even painfully went through Benjamin Graham’s Intelligent Investor. When you read about rock stars, you want to be a rock star.
Picking stocks required time and effort. This was something I didn’t mind doing because I had a passion for learning about finance, specifically investing. Taking what I had learned, I decided to emulate some of the past greats by choosing stocks that I felt were value oriented and had potential upside. Not only was I excited about buying stocks for the first time, but my expectations were high. I thought I had the right formula and there was no way I was going to fail. I was going to buy my stocks, wait a few months and reap the benefits of an ever increasing stock market. It was just that simple!
Buying What I Know
If you ever read the book about Peter Lynch, you would know that one of his advice was to buy what you know about. I’m a techie. I’m not knowledgeable on consumer fashion, healthcare or gold and mining. I focused a lot of my energy on buying stocks into companies that I understood.
At that time, cell phones were and are the biggest rage. Only at that point the two biggest players in the cell phone chip industry was Texas Instrument and Qualcomm. Heck, I figure that if there was a TI chip in my phone, why the heck not invest in them. They made good processors and it seemed like they were making good money in a growing industry.
Probably one of the biggest misses for me was the fact that I was a big Microsoft user versus being an Apple fan boy. Of course, we all know what happened to Apple, but back then Microsoft was just about to release Windows 7. The stench of Windows Vista was going the way of the dodo bird. I figured that the general public would be racing for new PCs. Well I’ve reviewed how well my Microsoft purchase went, but obviously Apple would have been the better buy.
To top it off one of my more interesting experiences working through university was the fact that I got to experience the aerospace industry. To be honest it was really cool. It’s where the “real engineers” work and the experience was quite amazing. I came to respect how much effort was put into putting a good functioning plane together. At that time I knew Boeing was developing a brand new composite airplane that was going to change the face of the aerospace industry. I figure, why the heck not! If it’s new technology it had to be good buy. Plus all the investment analysts were raving about the new product pipeline.
It came to be that my first 3 buys were all quite conservative in nature. From the outset they seemed great, but what really happened?
The Great Financial Crisis
Everyone tries to time the market and buy at it’s lowest point. That has proven to always fail because when stocks fall people don’t buy. They panic and sell. For me it came as a big shock when just over a short time that I started to invest in stocks the markets decided to crash. Believe me it was spectacular!
I’m not sure how most people would react when they see 60% of their portfolio go down the gutter in a matter of months. It’s certainly not a comforting sight to see. I can imagine it can be devastating to most. Disappointment, sadness then slowly turning to fear until perhaps anger sets in on why you didn’t sell when the price was higher.
I thought I was on the road to super stardom. I thought I couldn’t fail. How could my stock picks go down? The first notion was probably not to blame myself but others. It’s the government’s fault. It was Lehman Brothers. They made all my money disappear. Perhaps that was the easy way out because I could put the blame on something or someone where I had no control over. Since the events that transpired was beyond my control there was nothing I could have done about it. That meant it wasn’t my fault. I could yell and scream at someone else because it made me feel better, but honestly it didn’t. It probably just made me feel worse.
What Went Wrong
Probably exactly at that time when all my money went down the drain did I start reading up more on what index investing was really about and what it really meant to build a balanced portfolio.
To me I had always though that picking your own stocks was the way to go because when you look around you don’t see many “rock stars” that got rich on index investing. I only ever read about the guys that reached millionaire status overnight and that I could do it too.
Had I actually learned about these things earlier perhaps I could have prevented my portfolio from crashing 60%. That was a lot of money I lost. Many months of working to save up all that money vanished in a matter of months. If there was any comfort looking back now, I would say that I was fortunate that I had this experience when I was younger while I still had many working years left. If I had been 65 and did this, well there goes retirement!
Luckily it was all about learning from mistakes. To be honest, if you don’t fail and you don’t fail hard, you will never learn the right way. The best way to actually improve yourself is to fall down as hard as possible. When you reach the lowest point, that’s when you actually excel.
It took a great deal of effort to continue with my investment efforts. Not only did I have to change my strategy, but I also had to overcome the fear of going back into the markets which is one of the biggest failings of many investors. Fear is what prevents us from doing things to try to improve our previous results. We fail once, so we don’t want to fail again.
When it came time to revise my plan I vowed to not fail again. Obviously that was a bold statement to try to make and ultimately that wouldn’t be true, but that’s a post for another time.