Tuesday, June 23, 1998

Education of a Fool
by Michael Rasmussen ([email protected])

On the anniversary of my first year as an investor...

It was a year ago today that I placed my first stock order. I deposited $1,400, and because of this small start I decided to go with the UV2 approach of Beating the Dow -- 18 shares of AT&T and 15 shares of Phillip Morris.

That was the start of my independent investing life. More important, that was the start of my investing education.

It wasn't long before words of caution and advice were sent my way. "It's too risky to have only two stocks in your entire portfolio. You should be in an index fund." Oh yeah? That advice came to me right after I noticed that my holdings were down 10%. While an index fund might have been safer, would it have given me the sure knowledge, gained through experience, that I could live with a drop in my holdings? That initial dip was small, only 10%, only $140. But it did prepare me for the experience of watching a position slide, something I now do with mild interest.

Lesson #1: Live with volatility; it is part of the stock ownership experience.

It wasn't long before I added more money to my account. By the end of August, International Paper and General Motors fleshed out my UV2 to a full Foolish Four. Then I added Ross Stores and Quantum as my first individual picks. In August, September, and October I made a flurry of trades -- my first "error" in investing. Before I knew it, I had racked up 16 trades. Impatience ruled. With it came muddy thinking about the "why" of a buy. Which led to...

Lesson #2: Know why you buy, so you know why you should sell.

In December I sold off my losers for the tax benefit. With the end-of-the-year review came the realization that I had traded myself out of a market-beating return. In fact, I had almost traded myself out of profitability. Then came the big shock. If I had just stuck to a simple strategy the rewards would have been great.

Lesson #3: Develop a strategy for your portfolio. Then live by it.

Lesson 3 is familiar to any of you who have read James O'Shaughnessy's books, Robert Sheard's The Unemotional Investor, or follow the portfolio reports in the Motley Fool.

My second year is starting. In May I rolled a portion of a 401(k) into a self-directed IRA. The lessons I learned with that $1,400 start are already paying off. Can't wait to see what I'll learn this year.

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