by As with any skill, learning the intricacies takes time. While we are certainly no Warren Buffet or Peter Lynch we have had our learning moments while investing in stock that we feel could help you in your financial journey. Take a moment to explore five key steps that we have experienced through our adventures in stock investing.
If You Liked it on the Way Up, You’ll Like it on the Way Down
This is one of the harder lessons to embrace and one that really tests your mental fortitude. We learned this lesson when we invested in Pacific Gas & Electric (PCG). We had originally purchased shares north of $30 as it had a long history of performance and was at a low point that made it an attractive purchase.
Shortly after we purchased the stock a series of wildfires that were attributed to PCG sent the stock plummeting to in the $5 range as the litigation potential and property damage was in the millions. After suffering such a dramatic fall in a short period we didn’t increase our position enough (we did purchase some additional shares) as we were concerned the company could declare bankruptcy. We needed to have the vision that this company would remain solvent, even during this tumultuous period and increased our position dramatically (afterall we did buy it north of $30). Had we purchased a larger set of shares near $5 we could have enjoyed the gains that brought it to trading over $10 a share only months later.
Bottom line is that if you believe in the fundamentals of a company and it takes an unexpected dive consider more aggressively adding to your position to enjoy a lower cost per share and to give yourself the opportunity to reap the rewards as it grows.
Give Yourself Enough Shares For Riding it to the Moon
This is one lesson we have learned the hard way in that we missed out on opportunity. In our blog post about penny stock opportunities we shared how we invested in the stock of OCGN at .50 and sold 500 shares at $2.80 and another block of 500 shares at just over $3.00. With 1,000 shares as the entire position that ended the opportunity for additional upside growth…of course that also did limit any loss potential.
As of 2/8/2021, OCGN moved to $15 a share! With no shares left in our position we missed out on another 5x more gain! At the end of the day we had exceeded our original target of a 2x gain, but we didn’t leave any opportunity to ride the shares to the moon. When you are investing in penny stocks there is minimal cost to hold shares for additional massive upside opportunity. Give yourself an opportunity for massive gains by holding on to a set of shares after you have sold shares at your original target sale price.
Auto-Reinvest Dividends
When you are investing in stocks for the long-haul (which we would encourage for the larger portion of your portfolio) we would encourage you to auto-reinvest the dividends. Regardless of the dividend yield of the individual stock by reinvesting the dividends you are enacting the laws of compounding in your favor. This is a particularly advantageous strategy when you have a long horizon as it allows you to build up additional shares as your quarterly dividends are paid.
An exception to this rule is if you are near retirement or even retired. If you are retired then it would likely benefit you to turn-off the auto-reinvest method and take the dividends as income. This allows you to benefit from your stock in smaller increments without being taxed with a short term or long term gain from a sell event.
Set Stock Alerts
For the majority of us trading stocks is not our profession. We have day jobs, families, hobbies, etc. which means we can’t pay attention to our portfolios every second of the day. Depending on the stocks that you select there could be a great deal of volatility within your portfolio which means you could experience large swings up or down depending on quarterly information or even news events. To help protect you in the event of either direction of movement of the stock set alerts based on your goals. A few alerts that we set for stocks we are tracking or that are within our portfolios are as follows:
- % Gain – The general rule we follow is 20% swing in price on a day. When you consider that the S&P Index has traditionally performed around 10% a year then for a stock to move 20% on a given day is a big move. We set the % gain alert for 20% in a day to see if a stock has moved down closer to our target price and/or moved higher closer to our target sell price. We don’t just look at the gain we try to investigate the “why” of the movement to see if we should actually make a move or merely hold on to our position.
- Low Price/High Price – These alerts aren’t necessarily stop loss or limit orders rather they are alerts to help us track pricing goals. Generally we set low price targets to help us purchase stocks at a low point and a high price target to see if it is time to sell. While this might sound simplistic remember it doesn’t have to be complex for it to work.
Keep a Positive Attitude
Why is this last? Well when investing in individual stocks the swings can be a bit more challenging (in the short run) than mutual funds. When you see your stocks go down you can start to say things (even if they are in your head) like “I am down $X/%X…did I pick the wrong stock?”. This is a natural tendency for those new to stocks, but in reality remember you haven’t lost anything until you sell which means give yourself patience and allow time for your stock to perform.
In the moments when you invest in a stock and you take a loss (it will happen) don’t beat yourself up about it. Even with great analysis, planning, and understanding of fundamentals losing money is going to happen. Even the greatest investors of all time don’t win all the time; no one is batting 1,000 when it comes to stocks or professional sports for that matter. As long as you have a sound approach to investment you will win far more often than you lose.
As you continue to grow your stock portfolio your rules may grow; however, we encourage you to keep these five in mind regardless of how big your portfolio becomes. While we certainly believe that with each level comes a different devil to beat these principles will help you to have consistent growth over the long haul.
