Twenty years ago, on March 6, 1997, I bought my first stock. And oh, what a stock it turned out to be (more on that later). I had not yet graduated from high school and was trying to figure out how to pay for college. The stock market had been moving up, and my savings were growing. Perhaps stocks could give me a much needed boost.
I did the normal things when learning a new subject. I talked to my dad. I scheduled a meeting with an expert (Rox, a financial adviser friend from church). I went to the library and checked out some books.
My dad said, “Stocks are businesses.” By this he meant that stocks were financial interests in actual businesses – not just lines on a chart or lotto tickets.
Rox, the financial adviser from church, explained some of the basic workings of the stock market. He mentioned The Walt Disney Company, which allowed small savers like me to buy shares directly from the company (skipping the sales commission). I don’t recall his exact words, but I think in a roundabout way Rox was nudging me toward high-quality companies – ones that could be expected to reward shareholders for decades (incidentally, Disney has beaten the market handily since Rox’s recommendation).
Among the library books I read was Peter Lynch’s classic One Up On Wall Street. In it, Mr. Lynch advised readers to do their homework – “know what you own.”
The above was all great advice, and didn’t cost me a penny. Unfortunately, in addition to the good advice, I also picked up some bad advice. It may have been a book or a tape series (I don’t remember), but I recall there was this guy who was saying that some stock charts could be predicted based on past price behavior. “Look for stock prices that go up and down repeatedly,” he said. “Buy when they are down, and wait for the stock price to continue the pattern and move back up. Sell. Repeat.” Now this seemed like a strategy I could master. I went in search of that first stock.
The company’s name was Quadrax Corporation. It made something called “thermoplastic polymer composite materials.” The company’s product was being used in a line of golf shafts, as well as hockey sticks and other sporting equipment. The stock price seemed to be locked into a repeated up and down cycle, and it was currently at a low part of the cycle. Further, since I liked to play golf, I figured I could check the “know what you own” box. In actuality, I didn’t know the first thing about the “thermoplastic polymer composite” business. I plowed in nearly a thousand dollars (big money for me back then).
Sure enough, my prediction about the stock price was dead wrong. I lost patience and sold my shares just under two months later, losing 57% of that initial investment. Ouch. Not long after, the company filed for bankruptcy protection, and I realize now that I was lucky to get anything back. What an ordeal. What a lesson!
In hindsight, it would have been a good idea to look at Quadrax Corporation’s financial statements. Had I done so, even a cursory review would have revealed that the company was hemorrhaging cash, revenues were declining, and debt was unsustainably high. Not good signs for any company, regardless of the stock chart patterns. Financial statements tell a story, and it pays to look at them.
During the three years from 1997 through the end of 1999, the market doubled, while my stock portfolio pretty much went sideways. It was becoming painfully obvious that I didn’t really know how to invest, although I was persistently working at figuring it out.
After high school, I started college. At some point during the first two years, I met a fellow student named Jerome. Jerome, as I found out, had been saving and investing in stocks as well – although his results seemed to be far better than mine. Jerome liked the philosophy of a value investor I had up to then known little about – Warren Buffett. He recommended the book Buffettology, by Mary Buffett and David Clark. I immediately checked out a copy from our local library. Here was a guy who made a living as an investor. Intriguing.
I learned that Warren Buffett viewed stocks as small pieces of businesses. He liked to buy high-quality companies. He did his homework. Hmm…these concepts sounded familiar. Had I heard this before? That’s right, this was the same advice I had received from my dad, my friend Rox, and Peter Lynch.
Mr. Buffett’s approach added another important idea: pay attention to the price you pay. Never pay more than a fair value. Ideally, buy when the price is far less than value. At the wrong price, the right company can be the wrong investment.
It’s taken me some years and a few more mistakes to refine my own investment philosophy, which is to look primarily for stocks that rank highly in the following three areas: 1) good business, 2) good management, and 3) good price relative to value. This philosophy grew as an extension from the advice I had received earlier. Looking back over the many different stocks that I have owned, it is clear that my biggest winners have held true to this basic philosophy. Buy good businesses, run by good managers, at good prices relative to value, and you are likely to end up with good results over the long run.