Category: Warren Buffet

How I survived the market collapse and outperformed the professionals

About 2 years ago, I got the upsetting news that my dear uncle had passed away. I was so devastated by the news, that I did not realize until I was in the airport that I had forgotten to put on shoes, and was wearing my slippers as I boarded the flight to attend memorial services. Eventually I learned that he had left me an inheritance.

But I didn’t need a new car. My old car worked just fine and had good gas mileage.
Besides, buying a new car seemed like a celebration of sorts, and I did not feel like celebrating. I was determined not to squander the inheritance and wanted to use it in a way that would somehow honor his memory.

My uncle was a brilliant man. Before going on vacation he would learn the language and study the history of places he was planning to visit. After 20 years as a physician, he wanted new challenges, so went back to school and became a psychotherapist . He had a life-long love of learning, so using the inheritance to learn something new would honor his memory.

That is how I began, for the first time in my life, to learn about investing. Talk about learning something new—before deciding to learn investing I rarely looked at the business section of the newspaper!

My education began with the purchase of “The Bond Book.” My inclination was to invest in bonds because I knew they guaranteed a return of the initial capital, and paid interest. But I learned that most bonds are sold on a secondary market and that the only bonds the average person could buy at face value were those offered by the U.S. Treasury. Although I later learned that a few companies issued bonds for direct purchase, bond investing appeared too complicated, so I continued researching, reading over 30 books before finally deciding to open an on-line account at a discount broker.

I started by buying several different mutual funds. Later I built a portfolio of stocks in socially responsible companies. At first my stocks were doing well, with my overall portfolio usually showing gains of about 15% at the end of each day. Then the market began its decline.

And as the market fell, so did my portfolio, losing 10, 20 and at one point over 30%. I knew the idea was to “buy low, sell high,” so I continued buying as stocks went down, far exceeding the amount I initially planned to invest.

I had no experience and virtually everyone was encouraging me to cut my losses and sell. But although I was beginning to worry, I did not panic and sell. Instead I waited patiently for stocks to return to at least the original purchase price, selling each time the market rallied. Because most stocks I owned were solid companies I knew they would eventually recover, but how long would it take and would they ever come back to their former level? Or would I suffer permanent losses?

I started thinking that despite all my study I had blown it. Then, one evening while watching the news, I learned Warren Buffet’s portfolio was down 30%. That sounded like a bigger loss then I remembered, so I checked my own portfolio. Imagine my surprise at seeing my portfolio was down by only 20%! Now it might have been just good luck, but I figured I was doing something right. It gave me the confidence to stay the course, continuing to sell on rallies, and pouring money back into stocks in solid companies at bargain prices.

Buying as prices went down turned losing investments into profitable ones. One stock I had bought at $110 a share plunged, eventually going low as $27 a share. By continuing to buy as it went down, I reduced my average price. As a result, that stock, on which I was losing thousands, today sits in my portfolio as one of my most profitable investments, despite the fact that the share price is still far less then $110 a share. But I had only so much money, and ran out of investment capital before the market hit the March lows, so I never was able to get the best bargains.

To be sure, I made mistakes. I should have reserved capital and brought heavily during the March bottom, and I missed some big gains by selling too early, sometimes for profits of less then 10%, because I feared they’d go down again. But I lost little, selling very few stocks at a loss, and more than making up for the losses in profits from other trades.

As I write this, my portfolio is showing a 4% gain. But even more fascinating is the comparison with the mutual funds. After all, I bought those funds because they are managed by professionals who supposedly know the market, so how does the 4% gain in my portfolio compare? A 4 star rated emerging market fund I own is down 17%; of two large cap growth funds I own, one with a 5 star rating, is down 9%, another with a 4 star rating, is down 14%.

So there you have it, my story of how someone with no knowledge of stocks outperformed the professionals.

Believe me, I am no genius when it comes to the stock market, I do not devote hours each day to it, and I am horrible at math, but with just a little effort to get good information, I believe most people can do this too. I hope this blog will encourage other people learn and earn more from trading and investing.

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