A Personal Tale of Two Investors

Enter me, a guy that invests quite passively in blue chip stocks and my best mate who is a by the book investor that only invests in index funds and sector tracking securities. Read any modern book on investing and the message is clear cut: Buy and hold index funds over stocks since your return will almost always be higher the longer your investment horizon with the less-than-obvious unicorn exceptions.

So I'd like to share my personal tale over the past 6 months or so where I invested at the peak of the market in literally a single stock which I will refrain from naming and my close friend invested on the same days in the same amount in technology index funds and a S&P 500 derivative security.

I think it was early/mid October 2021 when I first bought approximately $40K of a single stock in the technology sector. (Please hold your reservations as I did an extensive fundamental and technical analysis and found it to be a low risk investment in a company that I believe in and who's products I use). My friend on literally the same day invested the same amount in a major technology index fund.

As we've all seen, the market rose aggressively to the finish of 2021 climaxing in early January. At that point in time, my friend and I had about $60K in the market a piece. At the end of January, he and I had lost about 30% of that value (he less than I). For those more technical, his average beta was also less than mine for what it's worth. We both DCA'd significantly in our same initial investment vehicles and continued to do so through the end of January 2022.

As of Wednesday, 02/09/22, he is no longer in the red on his account and I am about 2% down overall. Looking back, my friend conducted no research, prepared no spreadsheets, and reviewed 0 financials since his initial investment. All in all, in the past 3 months we've experienced a 30% swing on large cap stocks and, yes, I know this is nothing compared to the 08/09 market crash, but the takeaways are the same regardless.

The choice to invest in index funds or stocks is a personal one. I find enjoyment and value in learning about singular companies and investing in them. At the end of the day, I may do worse or better than an index investor with the exception of those previously mentioned unicorns. The major takeaways, for me at least are as follows:

  1. The thing about investing in individual stocks is that it does require more work. You are putting all your eggs in one basket so you better make sure that basket is a sturdy one.
  2. Not losing your head when you wake up to a 10%, 20%, or 30% drop in valuation is key. Investing in a company with strong fundamentals should be reason enough to keep cool and incentivize you to buy more of that stock (or index fund). If the stock you bought was worth it at $100 a share, then surely it's an even better deal at $70 a share all things considered equal.
  3. Dollar Cost Averaging is important for more than one reason. If compound interest is your best friend in passive wealth accumulation, then DCA is a tool to have more of it at a lower price.

At the core of these three age-old takeaways is the singular point that all experienced and new investors should have at the forefront of their minds. Invest in companies with strong fundamentals. If you are investing in an index, know what the portfolio is comprised of. With the introduction of fractional shares on multiple platforms, you have the opportunity to build your own index without stragglers (and without fees). Due diligence and patience pay dividends and I hope that everyone continues to learn and make money from their investing practices! It's a fun hobby and one with real consequences and lessons that you can easily apply to your broader life and invest in a happier you.

I'm u/naterocs and thanks for coming to my Ted Talk.


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