Despite what you hear about single-stock investing being a loser’s game, and how 90% of the time index funds will beat stock picking, there is a real advantage to single stock investing if you do it correctly. And by do it correctly, I mean:
- Buy just a few stocks that you really believe in
- Plan to hold them for a long time
- Don’t invest more than you can afford to lose
The reason is that, if you pick a company that grows and grows, like Home Depot, McDonald’s, Microsoft, Google, and IBM did in the past, and if you concentrate your investments so that you buy a significant amount of a stock, hold for a long time so that things can develop, and understand that things can turn out very badly, so you don’t invest enough to severely damage your economic future if you’re wrong, you can make some investments that really change your life.
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For example, one company that I really believe in right now, and have been buying for more than ten years, is BJ’s Restaurant International, which trades under the symbol BJRI. I think they are a well-run company that packs people in every weekend night and for most of the week. They also have a lot of room to grow since they are not everywhere yet. I first bought into BJ’s a few years ago, buying about 1000 shares around $25 per share. They then went up to around $50 per share, meaning my position had grown from about $25,000 to $50,000. I sold off half because the position had grown so big, taking out about $25,000. The stock then proceeded to fall back to about $30 per share, so I loaded up again. Once again, it rose to about $50, so I sold off half again, taking out $25,000. So I had now made about $50,000 on my original $25,000 investment.
Once again it fell. I bought more again as it fell to the mid-thirties. This time I have held the whole position as it has gone past $60 per share. I’m planning to sell about half again if it passes about $65 or $70 per share. My core holding (now of about 1000 shares) I plan to continue to hold indefinitely, as long as the business itself is performing well. If the position gets way too large (bigger than say 10% of my entire portfolio), I’ll trim it back again. In a way, it is like planing mint in your garden, for those who have ever planted mint. You trim it back to a manageable level and enjoy the bounty when it gets too big. If it went to $0 tomorrow, while I’d be sad to see the loss, it would still be less than 10% of my portfolio. Significant, but sustainable. And at this point, I’d walk away making money overall since I’ve already pulled out my original investment and then some.
And there you see the advantages of single-stock investing. If you buy fairly large positions in a few, select companies, you can make really big profits and beat out the markets. You can also see whole positions lost, but if you take up a few different positions, and are willing to wait for things to happen (it is easier to pick companies that will do well sometime in the future than to pick companies that will do well next year or in the next three years), the big gains will more than erase the stunning losses.
Note that I have my retirement investments in my 401k, which are invested in index mutual funds. I also have some index funds in my regular account and an IRA that is about 1/2 mutual funds. I also have a paid-off home, drive used cars that I buy for cash, and have a large emergency fund. I’m not resting everything on my ability to pick good companies to invest in, but I am putting some of my money there because the gains can be so large and life-changing.
So how can you do this?
If you want to get started in individual stock investing, the first step is to learn. I write a lot about this strategy for single-stock investing, which I call serious investing, in my first book, SmallIvy Book of Investing: Book 1: Investing to Become Wealthy
Want all the details on using Investing to grow financially Independent? Try The SmallIvy Book of Investing.
I also recommend that you spend some time learning about stock picking, which involves reading books like
One Up On Wall Street: How To Use What You Already Know To Make Money In The Market
Trader Vic: Methods of a Wall Street Master
A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing (Eleventh Edition)
The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition) (Collins Business Essentials)
Starting a brokerage account
The next step is to save up some money and open a brokerage account. I would recommend saving up between $3,000 and $5,000 for your first purchase. You can open an account with a broker like Merrill Lynch or Morgan Stanley, but probably the best option is to go through Schwab or Vanguard, which sell both funds and brokerage services. The commissions you’ll pay through these companies are a lot less.
Selecting your first stock
Once you’re set up and ready to invest, you’ll need to find your first investment. I would try to find a stock that you would want to own for many years. Again, it is a lot easier to find a well-run company and then give them time to grow and increase in value than it is to guess which way a stock will move over short periods of time. Find a great company with a lot of room to grow and a great product/business line. Try to find companies that are the best in their industry, make increased profits year-after-year, and maybe even pay a dividend that they grow regularly.
Buying in
Once you’ve selected your first stock, you’ll need to place an order. In the past, this would involve calling a broker, but today you’ll probably just place the order online. Just select the stock using the symbol (you can find this info at yahoo finance and other websites) and put in how many shares you want to buy. The price you’ll pay will be the price per share times the number of shares you buy. Check your math a couple of times to make sure you have enough money to buy the shares, leaving a little room if you place a market order (meaning that you’ll buy the shares for whatever they’re trading for when you place the order) in case the price moves up a bit after you place the order. You can also place a limit order, which is where you specify the maximum price you are willing to pay. You’ll want to pick a stock that will allow you to buy at least 50-100 shares, meaning if you have $5,000 to invest, pick something with a price between about $15 and $50 per share.
Rinse and repeat
After you’ve made your first purchase, repeat the process. Save up and buy more shares. You’ll want to start out with 3-5 picks, each the best in a different industry. Buy whichever of your picks seems the best bargain when you are ready to buy. Use drops in the price of your stocks to buy more. Remember that you’re trying to build up positions, so if the stock goes down a bit, it just means you get more for a lower price.
Cut positions that get too large
If you get positions that grow really big, such that they dominate your portfolio, sell off a portion and use the money to buy more shares of your other positions. As your portfolio grows, start to move some money into index mutual funds to lock in your gains and diversify your portfolio. If a company you own changes such that it no longer fits the great company, room-to-grow model, sell out and put your money elsewhere. Otherwise, hold on and wait for the markets to bid up the prices as they realize what a great company you have.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
