This is another do as I say, not as I do post.
If you read a lot of financial independence blogs, you will see, over and over again, advice to buy a low cost index fund if you are going to invest in the stock market. It is very good advice, and you can read more about it in posts by JL Collins, and The White Coat Investor, among others. They lay out their arguments in a very logical way, bolstered by graphs and spreadsheets.
That is not this post.
This post goes through my personal experience with buying individual stocks, and the various ways this has come back to bite me in the butt.
The Loser
Stocks that lose money. O! How many examples I could write about here. I have bought and lost money on a number of companies over my investment career.
I think I may write about my decision to buy shares of General Electric (GE).
When I was growing up, GE was a huge company. It was founded by Thomas Edison (also, apparently, JP Morgan). It made light bulbs and home appliances, and produced the energy to run them. It made nuclear subs and bought a major network, NBC. Advertisements were simple but clear: GE, we bring good things to life.
So, I bought 300 shares in 2006, at $50.51 a share.
Unfortunately, GE also got into finance, and was totally clobbered by the 2008 financial crisis. The stock price dropped from $39.80 in October 2007 to $8.18 in February 2009.
I thought for sure that the company would come back with the rest of the economy. How could it not? It was huge, it made real products.
Of course the price of GE would come up.
So I waited for the price to rise. Maybe not to prior levels, but…surely it would rise. And I waited.
Finally, in 2018, I decided to sell it at $14.75 a share. You may notice that price is significantly less than the purchase price.
The astute reader may note that I haven’t accounted for any dividends received, but I counted it up, and those added up to $9.14 over the whole 12 years. I clearly still lost money on this company.
At least it didn’t go to zero, which has happened to other stocks I have owned.
The One that Got Away
Back in 2002, Netflix was a cool new company that would let you rent DVDs by mail. It was genius: they mailed the discs to you, so you didn’t have to go to the store to pick them out. And! You could keep them as long as you liked, no late fees. You just paid a monthly fee no matter how many (or how few) discs you borrowed.
I thought this was a great company–I loved being a customer–and at the end of 2010, I bought a few shares in my Roth IRA at $186.76 a share. (Adjusted for splits, this would now be a basis cost of ~$26 a share).
In September 2011, Reed Hastings ( the CEO) announced that he wanted to split the business in two. The wonderful DVD renting company would get a new (and rather ugly) name, and Netflix would become a streaming company. Remember, this was back in the day when home Wi-Fi was maybe not so common, and, when present, was much slower.
Investors weren’t so sure about this plan. The price tanked, down to a low of ~$7-8 a share in the summer of 2012.
For reasons I wasn’t sure about at the time, this bothered me more than when other stocks dropped in price. Maybe it was the relentless news coverage. Maybe it was my new discovery of the option of retiring early (which doesn’t work out so well when your investments lose money).
Whatever the cause, I was literally losing sleep over my Netflix stock.
Displaying another decision-making error (because my starting point has no real bearing on the worth or performance of a stock price), I waited until the stock approached the break even point, which happened not long after the debut and success of House of Cards, and then sold it.
In the years since, I have watched the stock price grow, and split, and grow some more. If only I had held on, I would have had… more money. (Current price is a $538 a share, for reference.)
But I also really appreciated being able to get a good night’s sleep again.
The Price of Victory
This is more of a humble-brag, I am sure, but still offers a lesson in the difficulties of investing in individual stocks.
I am very lucky to be able to say that I invested in Starbucks early in its history as a public company. For reference, the original IPO price (adjusted for splits) is $0.34 a share, and the current price (as of February 19, 2021) is $103.37.
I did not invest that early, but I most certainly have seen my unrealized gains grow. Tremendously.
For a number of years, this wasn’t a problem. Sales of Starbucks shares supported me through medical school, and allowed me to put a down payment on my first home. Truly, that was the house that Starbucks built.
However, now I have a diversification problem and a tax problem.
I had thought, years ago, that I could get diversification by buying shares in different companies. However, investing the same amount in different companies (who have had different levels of success) means that 20-odd years later, some companies make up an out-sized fraction of my portfolio of my individual stocks. Starbucks shares, for example, accounts for about 17% of my portfolio, which means I am not as diversified as an active mutual fund (which limits the percentage of any one share to 5% of the fund).
As for taxes, these shares are held in a taxable account, which means I have to pay capital gains taxes if I make money on a sale. Though there is a chance to pay zero capital gains taxes, if your income isn’t very high, given my occupation and salary, I will not fall in that category if I sell now. I will pay no less than 15% (plus state income tax), and could flirt with a 20% federal capital gains tax, plus the 3.8% NIIT (net investment income tax) surcharge, plus state income tax.
I know I should not let the tax tail wag the dog, but I just can’t bring myself to sell a large amount of these shares. I guess I like the company; it’s not too bad that the price keeps going up. And I really don’t like the idea of losing over 20% of my money right away with a sale.
But there is a reason not to keep a large portion of your money in one stock, and if something happens to drop the price, I will see a large sum of paper profits get roasted in a very painful way.
Forbidden Planet (or Stock)
Now that I work for a university, I have to file a conflict of interest form every year. It protects the university (and me as well) from potential sources or embarrassment. Or accusations of impropriety. Anyway, it’s important and required.
On my yearly form, not only do I have to aver that I don’t supervise my spouse, or own a company that contracts with the university; I also have to declare any stock holdings that might imply any conflict of interest. Mutual funds (where someone else decides which companies to invest in) are exempt; but picking an individual company to invest in means I must declare it.
This means I have felt I needed to pass on a number of companies that looked very interesting. Most recently, my mother was praising NovoNordisk; she was very happy a few years ago with their customer service when she called, and she decided to buy some shares. She says she has done very well.
She strongly encouraged me to invest as well, but I declined, worrying about that conflict of interest form.
The company makes great products: insulin, glucagon, some very powerful (and expensive) diabetes drugs (GLP-1 agonists, for those who are interested), plus some other specialty products. I prescribe quite a few of them, and am happy to do so. I can see there could be the appearance of impropriety, if I always prescribed the Novo Nordisk insulins or GLP-1 agonists.
So, from that point of view, it’s probably best I didn’t invest.
On the other hand, if I had invested in 2015 when my mom suggested I look into it, I could have seen a price increase from about $53 a share to $73 a share. That’s a 40% increase in price, not counting dividends. [The purists among you can note that since Jan 1, 2015, VTSAX rose from $51.57 to $99.25 a share.]
Final Thoughts
As you can see, there are a number of drawbacks to investing in individual stocks:
- You can lose money.
- You can lose sleep.
- You can bail out right before they hit the big time.
- You can make a big paper profit, but then get stuck with the decision of what to do about an out-sized winner in your portfolio. (Luckily for me, FI Physician just wrote about what to do in this situation.)
- You can worry about missing a good opportunity because of conflicts of interest with your job.
Buying an index fund won’t necessarily bring you a home run, but it will help you reduce these risks.
Are you an indexer all the way? Or do you pick stocks? If so, how has that gone for you?
P.S. I hope it’s clear that I am not advising you to buy or sell any of these stocks that I have mentioned.