First Rule of Investing in Stock

first tip investing

If you had invested in Microsoft back in 1986, when they went public with their Initial Public Offering (IPO), you would have made 44,000% return on your investment (ROI). If you had invested $1000 in Microsoft then, it would be worth  $44 million today. This is why Bill Gates is still the richest man in the world, he owned the majority of Microsoft when it went public some 29 years ago.

Stories like this aren’t uncommon. Pretty much every publicly listed silicon valley company started off like Microsoft, and consequentially has amazingly wealthy founders. And thanks to stock markets, the ability to invest in other people’s good ideas and hard work is available to anyone.

There are many books, websites and careers based on investing in the stock market. So for this introductory post on the subject, I will simply say this: Invest in what you know.

To better illustrate this concept, consider this story that took place in the 1930’s. It was a party that a celebrated banker was throwing, he invited his business clients and colleagues. At the time, women weren’t involved in money matters much, especially the money matters of their extremely wealthy husbands. But the banker’s wife had inherited a small fortune from the death of a relative and wanted to grow the money herself.

She knew from listening to her husband and his friends talking about investing all the time that putting her money in the stock market was the best way to grow it. She saw one of her husband’s investment friends, Benjamin Graham, who at the time was a well respected investor (who later went on to define value investing, and teach other greats, like Warren Buffet).

The banker’s wife asked Benjamin, “What should I invest my money in?” to which Benjamin answered, “never invest your money into something you don’t understand. Invest your money in something you not only understand, but use every day.”

No one knew what the banker’s wife did with her money. Decades later, after her death, it was discovered that she had made a massive fortune, much more than her husband ever made, on the stock market. As it turned out, she followed Benjamin’s advice directly and invested in a revolutionary idea that she was uniquely positioned to appreciate, Tampax, the first makers of modern tampons.

If you don’t know what you’re investing in, you are literally relying on luck. It is possible that some solar panel company that just started up is going to go somewhere, but unless you know about solar technology, or how that industry works, all you can do is hope to get lucky, because you don’t understand what needs to happen for a company to be successful in the solar energy market.

I can’t tell you how much the concept of investing in what you know has changed my money outlook. I have invested in Google, and Visa because I use their products almost every day and I understand how their business models work. I love Netflix, and am very happy that I invested in them 5 years ago, before everyone had a subscription.*

In fact, all my dud investments (and there are a lot of them) have all been in companies I didn’t use or understand.

If you have some extra money you want to play with, and a couple good investment ideas that you personally use daily, then there is no shortage of companies for you to invest in. This means that if you love comic books and video games, invest in Disney (as they own Marvel now, and Star Wars, and have bankrolled all the big superhero movies in recent years). Like playing video games? Put your money where your mouth is, EA and Activision are on the Nasdaq, so is Sony and Xbox. Making lots of money with your home made goods business on Etsy or eBay? Maybe your unique experience makes investing in those companies a good idea to you.

A little more grown up than games and comics, and short of ideas? You should pay for an annual subscription to a publication that analyses individual companies for you. I have subscribed to the Motley Fool before, and indeed, that’s where I first read about investing in Netflix or Marvel. It is a great way to read about what other investors have to say about a lot of popular, and up and coming companies.

* As a full disclosure, I currently own shares in Disney, Google, Netflix and Visa. Though they have been a good investment for me over the years, they might treat you differently tomorrow.

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