by Silicon Valley Blogger on 2008-01-17 19

What has Michael Jackson got to do with my money?

Im in a retrospective mood, so I thought Id share with you a couple of stories about my earliest experiences in the stock market. Theres been such a stark juxtaposition between some of these experiences that I thought it was well worth discussing. When you look back at how you first made a thousand dollars from the stock market or how you first lost a few thousand, do you notice the type of circumstances that surround these events? I never realized how much of a cliche these stories now seem to appear when youre analyzing them after the fact, but in reality, Ive noticed that when dealing with the market, the same patterns of behavior would yield me fantastic results, while other actions quickly result in financial loss. Looking back, these were lessons I probably couldnt have learned any other way.

How I Lost My Shirt In The Stock Market

After graduating from college, I found that I had $12,000 in the bank at that time, thanks to my first job and after scrimping and saving throughout my school years. I had built up my savings from odd jobs, internships, gift money and allowance money Id received up to that point and it took all of the first couple of decades of my life to get there. I recall that first year on the job at a quickly growing company that developed database software and it wasnt just software development I was interested in learning about. Since some of the perks of this company also included a small number of stock options, a 401K plan and an ESPP plan, I sought to understand how the stock market worked and thus opened a discount brokerage account.

That time, the stock market was doing very well and since my options and ESPP account were gaining ground, I thought I would put my other $12,000 to good use. I had been closely guarding this money by placing it in a money market fund while I figured out what to do with it. Various financial magazines Id been reading (such as Kiplingers Personal Finance known then as Changing Times and Money Magazine ) were touting individual stocks among other investments, and one particular stock recommendation caught my eye. That year was the year of L.A. Gear, a hip sneaker company with a high flying stock that just snared an ad campaign starring who else but the King of Pop, Michael Jackson!

And you can guess this one coming a mile away: L.A. Gears stock (OTC symbol: LAGR) was over $30 at that time at an all time high, and had a chart that showed a sharp upward trajectory that had unfolded in recent months. Jackson was on television heavily promoting the brand. I ordered shareholder information from the company to study its prospectus and find out more about this opportunity. The ongoing media blitz and rapidly rising stock price convinced me that things could only get better for L.A. Gear, and I became certain that I could never loseso I bit. In a big way. It would be impossible for me to lose, since Id been doing my homework.

How can I not be mesmerized by their fabulous commercials (oooh, Paula Abdul is IN!)?

So I bought close to 400 shares with my $12,000 at $30 a share in the summer of 1990. That June I committed what you may call my lifes savings to L.A. Gear and Michael Jackson. In a months time, that $30 would not make headway. The stock price was at its peak and refused to budge upwards. Eventually it would slip to $28 and would swing in price from $28 to $29 a share all the while frustrating and aggravating me as I saw my account go through a gradual decline.

But that decline would not be gradual for long as August of 1990 rolled in, along with Iraqi war tanks into Kuwait. The Kuwait invasion made headlines, and the whole stock market turned terribly sour for a few months. My investment in this individual stock promptly plummeted and as I watched it go lower, I kept reassuring myself its just a blip, it should come back up. I also thought that as soon as the stock price recovers and goes back to my original buy price, I would get the heck out of my position. This seems so predictable, but its how we all think once the market turns against us. We all just want to get our money back whole.

Instead, the price went lower and before long it was at $15 a share and I couldnt take it anymore. So I sold out, took a loss and recovered all of $6,000 of my original investment.

I will never forget that souvenir of the Persian Gulf war experience that I took home with me. While the rest of the stock market recovered from the short-lived volatility and begun an upward trend that would last a decade, L.A. Gear failed to ever revisit its peak, which was coincidentally as Murphys Law would dictate very close to the price point I had bought at. Several years later, the stock eventually hit $0.

Of course, Ive made more stock market mistakes since then, but none as resounding as this one, from which I learned to not put all my eggs in one basket, especially when it came to individual stocks.

How I Got My Shirt Back and More Through The Stock Market

On the flip-side, you may be interested to hear how I made my first $100,000 in the stock market, or rather, how I made back the money I lostand more. Well, its a story that pales in comparison to how I lost my first several thousand dollars. But it all starts with the leftover $6,000 I managed to recover from my first and biggest investment loss (percent-wise), which was as nasty an experience as they could come. Im sure youd agree that a loss of 50% of your savings in 2 or 3 months time can be called pretty dumb.

But at that point, I vowed to make up for the loss and I began to try out mutual funds. Once more, I looked to some great investment brokers and mutual fund companies to offer me selections. I became gun-shy about participating in the market during that crazy period between 1990 and 1991 so I decided to dollar cost average my way in using whatever money I had left and the disposable income I had from my entry level tech job.

I proceeded to put in $500 a month into a variety of Janus funds and before I knew it, a couple of years had past and I more than made up my money (albeit mostly from the monthly savings I put in religiously into the funds). Heres how it worked:

My monthly investment was $500.

The rate of return was over 10% (though I cannot remember what it was exactly).

The total amount I invested was $12,000 in 2 years.

The value of my investment was then around $13,400.

This helped bolster my confidence that I could actually make up for lost ground. I continued to make regular investments through retirement funds and using any increases in my disposable income to add to my accounts. All I remember was that in a few more years, I had eventually hit $100,000. Heres another illustration of how that happened:

My monthly investment was raised to $1,000.

The rate of return averaged at least 10% (again, this was during the strong market years of the 1990s).

The total amount I invested turned out to be $60,000 in 5 years.

The value of my investment rose to somewhere between $80,000 and $100,000.

Sure, it took a little bit more time to get to a 6 figure investment account, but I finally made it to that point. The system I followed to get to this point was much more strategic, consistent and AUTOMATIC. I also did it without expecting massive returns in a few months time and I promised myself not to get ahead of myself trying to assume more risk than necessary. I thought about how happy I would be if I could just get my money back without it taking forever to do so. Well, I was surprised it didnt take that long (despite how gains were made gradually) and that it took only meeting the market averages to make it work.

I must credit the effect of compounding on my investment returns for this success.

These days, I confine my individual stock investments to under 4% of my entire portfolio, while making sure the rest of my portfolio tracks the indexes. Because of the phenomenon of compounding, you can bet that a 6 figure account is well on its way to 7 figures just by sticking to this path. Theres magic here alright, and its not coming from Michael Jackson.

Final Thoughts

As you can see, it took me only 3 months to lose half my lifes savings playing the market. And it took me another couple of years before I made it back. But continuing down the new path with mutual funds and systematic investing has made me many times more money than Ive ever lost. It goes to show that the stock market provides the best rewards for any investor when its approached with care and caution. I no longer have the urge to swing for the fences (although once in a very rare while I may take additional risks with a very small portion of our portfolio), and our investment emphasis is for modest growth with capital preservation while we nix the aggressive, high-risk investment pursuits. Weve been happy with the results of our basic approach to stock market investing yeah, despite the comments I get here from time to time that I dont know how to invest in the stock market because I use mutual funds . Even if mutual funds are for wimps, those wimps often get the last laugh all the way to the bank.

After ruminating over my previous actions, it is clear that certain simple strategies yielded me good results, while others were just random shots in the dark that eventually cost me a bunch of money. What I learned is that a high net worth is not the product of a sprint but rather of winning the investment marathon with patience, savings discipline and a slow and steady approach to investing.

Categorized under: Investment Written by SVB