When I was a kid I mowed neighborhood lawns. I made almost $100 a week. I put all my money in a school box under the bed. One day, my grandpa noticed my method of savings. He immediately took me to the bank to open a savings account. He suggested I keep the money from one lawn and save the rest.
After jobs during high school I had a fair amount of savings. The bank noticed and suggested I open a CD. I was familiar with the interest I earned on my savings account. As I understood it, a CD would earn even more interest under the condition the money could not be withdrawn for a certain amount of time. This was okay since I rarely withdrew from my savings account.
By sophomore year of college I had steady work as a web developer. It paid well and allowed me to save even more. I still had my original savings account. I was also rotating money through CDs. With limited expenses as a college kid, I wanted to do something more with the money.
I can’t remember why exactly I made the leap, but the stock market became my next evolution for investing. While my profession is programming, I have been investing in the stock market for nearly as long. These are the lessons I learned over the last 15 years.
2002 - It’s easier than you think
In 2002 I opened an online brokerage account with Ameritrade (now TD Ameritrade). I filled out a few online forms, made a phone call, and mailed a check (it was 2002). Once the check cleared, I was able to start investing in the stock market.
People think investing in the stock market has all these barriers. It was pretty easy in 2002, and even easier now. You can probably open an account with an online brokerage faster than you can read the rest of this article.
There’s no amount you have to invest. I started with $500. It was enough to get started and not too much if I lost it.
2003 - You’re not Rockefeller
When I started investing I had some silly notions. I thought investing was about big trades - Buy 10,000 shares of Standard Oil. The problem was I only had $500. What could I buy 10,000 shares of? Penny Stocks.
There are all sorts of reasons why penny stocks are a terrible investment. Nonetheless, it seems to be a rite of passage for aspiring investors. Fortunately I made it through without losing money. I’ll tell you the same thing everyone else will - don’t invest in penny stocks!
2004 - Finding value
It took almost two years, but I learned to investing in “real” companies, not penny stocks. Technically, this meant a company with a stock price over $5. This narrows the choice to a few thousand companies. To choose, you need to find value. What companies do you believe will be a good investment?
This is, of course, a fundamental question of investing. There’s no clear answer, but I found it’s best to invest in companies you know.
As a programmer, I knew tech companies like Apple and Amazon. Friends talked about trending companies like Lululemon and Under Armor. My Dad told me about a company called First Solar. I didn’t have to do a lot of research. I just applied an investor mindset to conversations I was already having with people around me. All of these companies proved to be good investments at one point.
2006 - Stay diversified
By now I was listening to podcasts and reading books on investing. In fact, I learned this one from Jim Cramer - stay diversified.
Since I knew tech, I found value in tech companies. While most of these investments did well, when the tech sector did poorly my portfolio dropped significantly.
The stock market moves in cycles. Although you never know when the cycle changes, it will happen. So don’t have all your eggs in one basket. You want to spread out your investment across multiple companies and multiple sectors.
I try to invest in companies across five sectors. Right now I’m in tech, energy, financials, telecom, and airlines.
2007 - Dividends are awesome
Similar to interest you receive from your bank account, dividends are distributions you receive as a shareholder. These are usually cash distributions, paid quarterly.
While I knew about dividends, I didn’t have many dividend paying stocks in my portfolio. I thought the growth of my tech stocks outperformed dividend paying stocks. But dividends are pretty awesome.
Annaly Capital Management (NLY) yields 10%. Even though NLY has gained around 20% in the past few years, combined with the dividend it has gains of over 50%.
These days bank accounts yield less than 1%. A lot of household names pay dividends that outperform a bank account - Apple yields 2%, Target 3%, GE 3.5%, AT&T and Verizon over 5%.
2008 - Phasing in and out
Until 2008 I usually bought or sold my entire position at one time. As I read more articles and listened to more podcasts, I learned this is not how professional traders managed their positions.
They buy in phases. They buy some initial shares, maybe 50% of their total investment. If the stock price comes down a little, they buy a little more. If it goes down a lot, they can reevaluate the investment. If it goes up a lot, they already have gains.
They also sell in phases. When a stock reaches a certain gain, they may sell half their position. Depending on the gains, this may recoup the initial investment. Now they are in a position where they’ve locked in gains, have no risk of loss, and still have shares that may gain even more. This is what’s called playing with the houses money.
Timing your trades is the most difficult thing about investing. Stock prices often go a little lower when you buy and a little higher with you sell. Phasing in and out of a position is a good way to manage this uncertainty.
2009 - Track market events
The market is full of events. These include quarterly earnings reports, company announcements, even geopolitical events. Any of these can affect a stock price. I learned the hard way you need to be aware of when these events occur.
From Fall 2009 to Fall 2010 Amazon nearly doubled in price - going from $85 to $165. I had an open order to sell at $110. It filled when Amazon jumped nearly 30% overnight to open at $113 the next day. Had I simply marked my calendar with the date of their earnings report I could have seen the jump and canceled the order. In fact, Amazon has not fallen below $100 since that date. They just hit $1,000 last week.
2010 - Money makes money
I learned the truth in the saying you have to have money to make money. Even though I had gains of more than 20% on some investments, I wasn’t making a lot of money.
That’s because 20% of $1,000 is $200. A good percentage gain, but relatively speaking, not a large monetary gain. Even the rare 100% gain, still meant turning $1,000 into $2,000.
This is not about greed. This is about work. I’m choosing good stocks, investing at the right time, and making the trade. Same as the professional traders on Wall Street. I’m just not investing as much. So I don’t make as much.
In 2010, I started making larger trades. Each year since, I try to increase the amount a little more.
2011 - The other side of the trade
Many people are familiar with buying a stock at a low price and selling at a higher price. This is known as being long. The belief is the stock price will go higher. There is another side of the trade. Meaning I sell a stock at a higher price and buy it back at a lower price. The belief is the stock price will go lower. This is known as being short.
In 2011 I shorted my first stock. It was pretty scary. Shorting a stock has more risk. When you’re long a stock, worst case scenario the stock price goes to $0 and you lose your initial investment. When you’re short a stock, worst case scenario the stock price goes up infinitely. Theoretically, you could have unlimited losses.
Why short a stock? Since the market moves in cycles, this means you can trade both the upward and downward movements. While I don’t short stocks often, its important to know different ways to trade.
2012 - Don’t be a fund
With diversification, dividend paying stocks, and speculative picks my portfolio had 20 positions. Jim Cramer recommends spending 1 hour of homework per stock per week. This means I needed to spend at least 20 hours a week managing my portfolio. That’s a part time job.
Professional traders and investment intuitions have the time to manage large portfolios. I had a full time job programming. I found I did better by limiting the number of positions in my portfolio. I still try to keep it under 10 positions.
2013 - A balanced portfolio
I took some big losses in 2013. Big losses.
I had a diversified portfolio. I had a few dividend paying stocks. In fact, most of my stocks were doing well. One position wasn’t. I watched it closely. The company reported some bad news overnight and the next day they dropped another 30%. I sold immediately.
I made a lot of mistakes on this trade. But the real mistake was being overweight this position. Before the drop, it accounted for 60% of my portfolio. After it dropped, my portfolio lost almost half its value.
Had my portfolio been more balanced, with each stock representing an equal percentage of my portfolio, the loss would not have been as painful.
2014 - Knowing when to sell
I took more losses in 2014.
When I looked back at the trades it wasn’t necessarily because these were bad investments. There were points in time where they had gains. The mistake was I didn’t know when to sell.
A dilemma exists. When an investment has gains you hope it gains more. When an investment has losses, you hope it reverses it losses. This hope makes selling hard. You get attached. You get emotional.
At some point you have to sell. I mean that literally. Closing your position is the final step of any trade. Any gain or loss before then isn’t real. Maybe the investment will go up, but it may also go down. Being able to make the decision to sell, especially for a loss, is a critical part of investing.
2015 - Know your options
Until 2015 I only traded stocks. In 2015, I started trading options. Options are relatively complex. I’m going to take some liberties and use insurance as an analogy.
You pay premiums to the insurance company to have coverage for a certain period of time. If something happens during that time, you have the right to claim reimbursement from the insurance company. If nothing happens, the coverage expires.
Options function in a similar way. You pay a premium for the right to shares at a certain stock price for a certain period of time. If the stock price goes higher during this time, you can purchase the shares at the predetermined price. If the stock price goes lower, you can let the rights expire and you only lost the premium.
So why trade options? The answer is leverage. Options represent a larger amount of shares. Often the ratio is 1:100 (1 option = 100 shares). This means small moves in the stock price can create big moves in the premiums (options prices).
I’ll emphasize this through an example. Last week, Tesla’s (TSLA) stock price gained 5%. On its own, an impressive gain for the week. But many of the options had 200%, 300%, and even 400% gains!
2016 - Hedging
After trading options for a few years, I determined a strategy I liked best - hedging. When I hedge, I open a new position against an existing position. The new position is often an options position. So I collect the premium and take on the risk.
While I don’t like to parallel investing with gambling, the ready analogy for hedging is a bet. I bet my existing stock position against a new position. If I win the bet, I earn the wager. If I’m wrong, I forfeit my existing stock position.
Let’s look at a real world example of hedging (technically, selling covered calls).
Say I own shares of AT&T (T). As a dividend paying stock, I want to keep these shares. However, the stock price increases gradually. To improve my gains, I sell options against the shares I own. I determine a stock price that is high enough they won’t reach it, but close enough to still collect enough premium to make the hedge worth the risk.
The process is rather meta. I’m basically investing against my investments. This comes at a risk. However, it’s considered a low risk since I control the terms and have the assets to offset any loss.
2017 - Getting naked
Hedging seems to work for me. While I have lost money in options trading, I rarely lose money hedging. With more experience under my belt, I’m currently trying a few naked option positions. This is a form of hedging, but let me be clear it’s the extreme form and incredibly risky.
With a naked option position, I don’t have an existing position. So I open the new position against nothing. Hence the term naked. So I need to be right! Otherwise, I must invest in the new position.
Why take the extreme risk? Well, admittedly I’m still learning. My goal for the year is to build more investment capital. This is one way. Under the right market conditions it can yield big gains. As such, it’s another tool in the investor toolbox.
Aside from a few tweets, this is the first time I’ve written about investing. I mostly write about programming. I have more I could share about investing. If you found value in the article, please let me know.