Individual Stocks: There are as many fortunes to be made as strategies to make them. Peter Lynch (manager of Magellan fund at Fidelity) has suggested that individuals investors have many advantages of personal management of stocks over professionals and mutual funds. Among those are that you'll never know when the pros are selling a specific stock, you've got many sources that you're familiar with right infront of you. "It doesn't take much to outsmart the big money which as I've said isn't always very smart....my biggest disadvantage is size. The bigger the equity fund, the harder it gets for it to outperform the competition."13
"You [the individual investors] are not forced to own 1400 different stocks...you're free to own one stock, four stocks, or ten stocks...You don't have to spend a quarter of your waking hours explaining to a colleague why you are buying what you're buying, there's nobody to gripe...If no company seems attractive, you can avoid stocks altogether and wait for a better opportunity."14Mutual funds managers are also burdened by their own institutional requirements for each stock purchase, which rules out the list of the small, new companies that oftentimes are where "the tenbaggers come from."15 Many great investment opportunities are right under the investors nose. "The best place to begin looking for tenbaggers is close to home. "16 He goes on to tell this important story of a fireman in New England.
"Apparently back in the 1950's he couldn't help noticing that a local car manufacturer was expanding at a furious pace. It occurred to him that they wouldn't be expanding unless they were prospering, and on that assumption he and his family invested $2000. And another $2000 each year for the next five years. By 1972 the fireman was a millionaire and he hadn't even bought any of the cars!"17
Google Story:
I noticed a similar thing when google had its initial public offering (IPO). IPO's happen when a private company
decides that it's time to open up part of the ownership of the business to the general public. This is done by issuing common shares
(public shares). They often do this to try to raise money for future expansion. Anyway, I had just started working for an air bag
manufacturer in my home town. Every break we would head to the lunchroom and watch programs about the market and the economy on CNN.
The biggest news at the time were the incredible gains that certain techy stocks were making. Yahoo had had its IPO a short time
before and had done alright, and now it was Google's turn. It was announced that the stock was going to open, not at some inflated
price decided by the Board or CEO (like facebook did when it went public at $38 per share in 2012), but was going to be offered
at its actual book value (the cost of the physical equipment to run it). Which turned out to be at nearly $0. It opened at a fraction
of a penny and over the next few days and weeks I watched it tripple every day.
I thought gee I should get in, this is my chance. I could become a millionaire with this golden ticket? But at the same time there was all the noise from the so called experts about the foolish idea of investing in a company that owns no buildings, or machines, has no inventory, warehouses, cargo, or ships. I stood by and watched the stock soar higher and higher. Three months later (August of 2004) it was at over $100 per share and continued to rise. What I learned is that the market decided that there was great value in intellectual property. Not every company has to own massive real estate or physical property. What something is thought to be worth today can change dramatically in the future. I should have tuned out the talking heads, and speculated but didn't. It's easy to be a cynic. There are any number of reasons a person can find for not following through on a good prospect. Use your better wisdom and you may be pleasantly surprised.
Where to begin? The 401(k): As said before, there are many ways to invest. But before jumping headfirst with all your savings into trading in your own stock portfolio and getting shaked out (it's happened to the best of us), you may want to begin building wealth first in an employer sponsored 401(k) plan through payroll deductions. Employers very often match employees contributions usually up to 6% (or higher) of an employee's salary.
Example: As a simple example suppose Susy, 25 years old, makes $10 an hour working in retail and gets 32 hours a week on average. Her gross biweekly income would be $640. If she has a payroll deduction of 6% from her company sponsored retirement plan that would translate to $38 per pay period. Her employer's match would be $38 for a total of $76. Now if the money is invested in a good growth mutual fund or an employee sponsored 401(k) that performs similar to the Sp500 at 8% annual growth on average (conservative estimate),18 and suppose she only saved in this account for 5 years. By the time she is 65 the estimated account value would be $194,940, through the power of compounding interest. Interestingly if she would have started saving at 18 years old (just seven years earlier) the estimated amount would be $340,645.00. Quite an amazing difference for beginning a few years earlier!
Managers of 401(k)s almost always invest their clients money in what is called mutual funds. Which are funds that own stocks in different equities and sectors of the market. They often allow customers to choose from different types of mutual investment based on whether the stocks are considered risky with greater growth potential or less risky, the riskier funds are encouraged for the investors who have more time before needing their money--those that are younger.
Financial manager Peter Lynch described their purpose as follows: "the mutual fund is a wonderful invention for people who have neither the time nor the inclination to test their wits against the stock market, as well as for people who have small amounts of money to invest who seek diversification.19" It's a great way to begin building wealth over time in a low risk, simple, minimal effort way. After your bases are covered and your future is planned, then with what extra money you may have, it can be an exciting adventure to choose your own special investments--to try stock trading.
_________________________________________________________ 13. One up on Wall Street, Peter Lynch, p. 42, 65, 2000 edition 14. One up on Wall Street, Peter Lynch, p. 66, 2000 edition 15. One up on Wall Street, Peter Lynch, p. 65, 2000 edition 16. One up on Wall Street, Peter Lynch, p. 95, 2000 edition 17. One up on Wall Street, Peter Lynch, p. 36, 2000 edition 18. http://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp 19. One up on Wall Street, Peter Lynch, p. 32, 2000 edition