Jimmy had two rules about investing. He could make decisions to buy or sell within the bounds of the rules, but he stuck to the rules no matter what. We’ll get to those rules in a minute, but first … a little background.
I got my a Bachelors in Engineering and set off into the wilderness of the job market with a diploma in hand and a twinkle in my eye. My first position was in an aluminum foundry. There, I met a man named Jimmy whose office was right across from mine. Over the first few months, we formed a friendship and he introduced me to investing. I was hooked when he told me that one year he made more in investments than he did from working the job we shared. I bought a copy of “Investing for Dummies” (no, I’m actually serious) and set aside a small sum to give it a go.
I didn’t yet understand about dividends, shorting, options and all the other things a person learns when they get further along in investing. More importantly, I didn’t understand the concept of disruptive innovation. But, I put my money in a few companies that might be termed “Rule Breakers” by the Gardner brothers.
Then: I bought eBay Inc (NASDAQ:EBAY) in September of 2005 for $37.74/share. I sold eBay only three months later for $44.83/share (19% return). That’s pretty remarkable and it was the first sign that I knew what I was doing (Spoiler alert: I didn’t know what I was doing).
Investment philosophy then: I like buying things off of eBay. The company is doing something unique. The stock went up in a short time period. Sell it.
Now: Since I sold, the share price has increased over 25%, but it took a nose-dive shortly after I sold. Good thing, right? Well, if you truly believe in the business model, you want the stock to go “on sale.” Patient, long-term investors wait for an opportunity in the stock price and then buy.
Investment philosophy now: eBay has significant network effects. Almost eight years later, they still occupy a pretty unique niche in the market. PayPal is positioned well to capture significant market share in the mobile payment revolution.
Netflix, Inc. (NASDAQ:NFLX)
Then: I bought Netflix the same day as eBay (September 2005). I sold in December 2005 for a loss of 4%.
Investment philosophy: I really hate driving seven miles to Blockbuster. Those late fees are ridiculous.
Now: Since I bought the Netflix in 2005, the shares have increased over 700%. I look like an idiot. Investment philosophy: Although Netflix is battling headwinds on rising content cost and made a major misstep in the Qwikster debacle, Netflix has first mover advantages in the space and is moving in the right direction by beginning to develop its own content. One major proprietary series can help to neutralize the networks during negotiations. That said, I can’t say I am a buyer at this price/earnings (P/E) ratio.
Apple Inc. (NASDAQ:AAPL)
Then: I bought Apple at $84.48/share in February 2007, before the iPhone came out. Impressed, right? Well, it was pure luck. The stock doubled in eight short months and I sold. I bought again when it dropped back into the $120s.
Investment philosophy: I love my iPod and I feel an element of cool with the product. That’s got to be worth something, right?
Now: I’ve bought and sold several times on the way and up and the way down. I’m actually excited about the stock once again with the rumors of the iWatch. Read about that here.
Investment philosophy: Technology companies have been near the top of the market cap before, but rarely has a technology company of this size and prospects traded at a forward P/E of less than 10. Apple still has a few things up its sleeve. The question is whether they can disrupt another market.
That brings me around to the title of this article. The dumbest mistake I’ve made in the market? Not taking the long-term approach at ALL times. If I had adopted a “buy and hold” approach from the beginning, I would have had the following results: >25% gain, >700% gain, >540% gain. If you truly believe that a company will revolutionize the market, buy and hold until they prove you right.
Oh, and those two rules that served Jimmy so well?
1). If a stock doubles, sell half of it. You still have the stock with room to run, but you got your initial investment out. Everything else is gravy.
2). If a stock drops by 20%, sell it. Hardly does a stock recover if it drops more than 20%.
That obviously worked for Jimmy. I have adopted more of a buy and hold approach.
I’ll leave you with some words of wisdom by the Oracle of Omaha (Warren Buffett): “Our favorite holding period is forever.”
The article The Dumbest Mistake I’ve Made In the Market originally appeared on Fool.com and is written by Robbie Laney.
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