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Adult child wants to invest in individual stocks
Old 05-10-2016, 03:35 PM   #1
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Adult child wants to invest in individual stocks

DD is in her mid-20s, has a solid job, and has saved up a 6-month emergency fund. She's also been funding a Roth IRA at Vanguard (no 401K where she works). She lives in NYC with no plans to move in the foreseeable future, so she doesn't need to save for a house or car.

She wants my advice on getting started with investments in individual stocks in specific industries. I'm going to make it VERY clear to her that this should be only "fun" money that she won't be in trouble if she loses it.

That said, any advice for helping her get into this? I'm well-versed in mutual funds but have never bought individual stocks.

Also, has anyone looked at
Learn How to Invest in Stocks - Virtual Stock Market Game? Looks like it might give her a chance to "test the waters" in a virtual market before committing real $$$.

TIA.
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Old 05-10-2016, 04:01 PM   #2
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Just two suggestions beyond stressing the fun money part.
  • Ask her to put at least a small portion in SPY and have her track her performance vs. that for at least ten years.
  • Most brokers allow a shadow portfolio, where the stock gets tracked in a virtual portfolio but no real money at risk. Ask her to do that first for 6 months or so.

Beyond that, let her make her own mistakes I guess. And read, read read ..

Some of my own 'golden' rules:
  • If you haven't read at least the latest annual report in full, including the footnotes, you cannot claim to understand what you are buying and you are gambling.
  • Same thing for the key numbers of the last ten years.
  • Buy in two or three steps into a position.
  • Write down why you are investing. Rationale should be testable and verifiable by third parties (e.g. steel prices will recover within x years).
  • Estimate what a business is worth before looking at a price or what analysts say. Write down an exit price, stick to it unless your rationale for investing turns out to be wrong.
  • Fight confirmation bias: write down reasons not to invest.
  • Work with a checklist: fixed questions you should always answer.
  • Diversify and concentrate. In my case I want 10 companies.
  • Learn from your mistakes and successes. Preferably including errors of omission.
  • Only invest in a business you think is good to own for at least twenty years. E.g. if you think oil is great and cheap now but in twenty years will be suffering, don't invest. Call it a "no-cigar butt" or "no buggy-whip" rule.
  • No IPOs.
[Edit] Attend a few shareholder meetings. It's sobering and enlightening.
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Old 05-10-2016, 04:06 PM   #3
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I once worked with someone who decided she "needed" to start investing in individual stocks so she joined an "investment" club. This was back in 1999.

In a year or two they had lost 80% of the fund and dissolved the club.
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Old 05-10-2016, 05:39 PM   #4
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My own suggestion would be to read Berkshire Hathaway's annual letters or at least a summery of Buffet's investment style. Pick up Margin of Safety (can find it as a PDF) and the intelligent investor.

I totally agree with the track vs index approach and after a few years she'll probably just index.

I'd also suggest reading about how things go wrong for really smart and experienced people.

Have her look at Bill Ackman over the last few years and what's happening to his hedge fund now. Check out Eddie Lampert's experience with Sears.

These are some of the best investors who struggled with investment decisions recently.

Buffet is great but he also can give you a sense of overconfidence because his advice is so simple and "folksy" it's hard to remember that he's probably read about thousands of company's for 50 years and started running businesses as a little kid.

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Old 05-10-2016, 05:51 PM   #5
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Before making any recommendations, I'd steer her to Bernstein's books. If those don't sway her away from individual stocks, and into index funds, give her a stock page and a dart.
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Old 05-10-2016, 06:11 PM   #6
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I also recommend starting with SPY. Three years ago when I took over my portfolio from an advisor I switched from SPY to VTI to save expenses. Three years later SPY is still ahead of VTI (barely). JNK is also a good fund that pays an excellent dividend.
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Old 05-10-2016, 06:36 PM   #7
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I've worked with Motley Fool for individual investments. You might have her check out the free stuff on their site. Later, she can sign up for a trial one of their premium services to see what they offer. She'll have to pay, but can get a full refund during the first month.
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Old 05-10-2016, 07:15 PM   #8
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I am not big on individual stocks. I heard a 'talking head' make a statement similar to this 'Stock analyst spend all day, week, all year studying an industry or stock, and still get it wrong.... What makes you think you can do better or as well with a couple of hours reading'.

Having said that, I would first point her to Scott Burns site, and look into index funds.
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Old 05-10-2016, 08:27 PM   #9
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Quote:
Originally Posted by Big_Hitter View Post
I once worked with someone who decided she "needed" to start investing in individual stocks so she joined an "investment" club. This was back in 1999.

In a year or two they had lost 80% of the fund and dissolved the club.
I was in an investment club 1996-1999. We had several stocks that did pretty well . One of them was Oracle . It became too large of a percentage of our portfolio so we sold it before the tech crash and pocketed the money .
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Old 05-10-2016, 09:01 PM   #10
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The Peter Lynch style can be fun and educational, where you pay attention to the products/services you use, decide which you like the most, then do a little research on the companies that provide the product/service and decide if you want to invest.
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Old 05-10-2016, 10:04 PM   #11
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I've worked with Motley Fool for individual investments. You might have her check out the free stuff on their site. Later, she can sign up for a trial one of their premium services to see what they offer. She'll have to pay, but can get a full refund during the first month.
I used this as well, until I lost enough money following their promoted stocks.
It was back in 2002 , so maybe it's changed ?
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Old 05-10-2016, 10:10 PM   #12
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Good advice to tell the child to limit investment in any one company stock for safety.

If my kids asked me, I'd suggest BRK.B as their first stock.
Because once you invest in a company, you are more likely to read up about it, and Warren Buffet makes it easy to read previous years letters to shareholders.

Plus its always a kick to say to the DW - 'we own part of that company' , since BRK.B owns so many companies, its like a mini mutual fund without the high fees.
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Old 05-10-2016, 10:44 PM   #13
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I used this as well, until I lost enough money following their promoted stocks.
It was back in 2002 , so maybe it's changed ?

I came out ahead but did have some losers too. For the most part, they confirmed companies I was already interested in. I stopped using them when I realized stock picking was too much like work and started shifting to index funds. I still have a few individual stocks that will eventually be converted to index funds or utilized for expenses.


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Old 05-11-2016, 01:15 AM   #14
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A decade ago I was that DD in her mid-twenties. Here are my self-imposed rules for individual stocks, you may not like them but they work for me.

1. Individual stocks have never been allowed to account for more than 5% of my portfolio
2. I chose my stocks by first looking at my favorite companies, then from there I chose the ones I believed had the best justification for investment. This was my play money, not my money-making money, so I was willing to accept lower returns in exchange for owning something I believed in. My money-making money was the 95% that went to index funds, mutual funds, ETFs, etc.

I also think the idea of comparing her individual stock return to an index fund over a long period of time is a good idea. I never did that intentionally, but it was easy to see over time that my funds were doing much better than my individual stocks and as a result my individual stock now comprises less than 2% of my overall portfolio, because most of the time I just go with index funds. I purchase individual stocks less than once a year, now.
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