Investing attitude

When I was a child, I distinctly remember my Dad discussing the stock market with friends and family. He always owned a few blue-chip stocks like General Motors, Caterpillar and Ingersoll-Rand but he very rarely traded. He’d gush about his stocks, market newsletters he’d read, and his favorite TV show – Wall Street Week with Louis Rukeyser. He’d never miss an episode. Old Louis made the stock market seem funny with his dry sense of humor.

So I grew up thinking it’s perfectly normal to own stocks and hold them for a long time. Didn’t every Dad in every family buy and discuss stocks? Not really, but I didn’t know any better.

In 1985, I graduated with an MBA, got my first real job at Scott Paper Company, and had a little extra cash to put into the stock market. Plus I could kind of read corporate financial statements – being a freshly-minted MBA and all – so I figured I could be a stock market genius!

I also was a total geek because I’d immersed myself in the first IBM and Compaq PCs as soon as they came out. The Compaq was “portable” even though it was the size and weight of a suitcase. I loved it! I’d read PC Week every week to keep up on the latest technical innovations like modems, laser printers, and, of course, new PCs.

The super “portable” Compaq computer. I got to use one of these babies!

So given all that, it shouldn’t be a big surprise that my first stock investment was – ta da – Microsoft (MS). Yep, I used the MS operating system everyday and it seemed like MS had a super-bright future. I bought $1,000 worth of MS stock and, believe it or not, a year later it was worth a whopping $10,000! My first stock pick had gone up 10x in one year! I remember telling my Dad this stock investing stuff is easy. Little did I know how hard this would be to repeat.

My Dad advised me to sell $1,000 worth so that I’d recover my original investment. He was worried this new-fangled MS stock would crash and burn. I ignored his advice.

Instead, I decided I wanted to switch careers to programming. I caught a break when Scott Paper announced a voluntary downsizing that included 6 months severance. I volunteered in a hurry. I took the cash severance, sold the MS stock, got a job at Unisys, and made a down payment on our first house with the pile of cash. If I’d been smart enough to keep that MS stock, I would have become financially independent MUCH earlier. But hindsight is always 20/20.

I went on to buy a few other individual stocks like Borland, a software company, and Today’s Man, a men’s clothing store. Have you’ve been to Today’s Man? No? That’s because it declared bankruptcy in 1996. But I managed to sell it before losing my shirt. Anyway I never made much money on the other individual stocks I bought. Picking individual stocks turned out to be really hard for me so I stopped buying individual stocks.

I finally read a great book on investing called A Random Walk Down Wall Street. Ever heard of it? Be Freaky Frugal and check it out at your local library.

Anyway the book espoused the Efficient Market Hypothesis – which I don’t completely agree with – and a sensible asset allocation into mutual funds for the long haul – which I agree 100% with.

I realized successful investing has a lot more to do with patient, long-term investing in low-cost index funds than it does with trying to hit home runs by picking individual stocks. I’m not Warren Buffet so I’m happy hitting investing singles and doubles all day long. It’s so much easier and less risky. And I can sleep at night.

The right attitude

I also realized that investing is all about the right attitude. And what’s that? The right attitude is to be completely rational and remove emotions – like greed and fear – from your investing decisions. You have to be willing to invest for the long-term even when it causes you short-term emotional pain.

The best tool to help you maintain the right attitude is an investing plan. It keeps you on track and your emotions in check when Mr. Market starts acting bipolar. In particular, you need to make a written, sensible, investment plan and stick to it. No. Matter. What.

Part of my investment plan consists of a regularly scheduled reallocation of my assets to maintain a fixed percentage of each asset class. For example, I rebalance my portfolio every April so that I have 45% of my assets in bond funds and cash, 45% in stock funds, and 10% in a REIT fund. My plan is more complicated than that, but that’s the general idea.

Really Stupid Comic #9

You would think it’s easy sticking to an investment plan like this no matter what, but it’s often hard. When the 2008 Financial Crisis hit and everyone was frantically selling stocks, I was nervously selling bond index funds to buy stock index funds during my annual asset reallocation. Buying stock index funds felt horrible at the time, but I gradually felt better as the stock market recovered. And buying then ultimately allowed me to FIRE in 2012. Yep, you heard right – the Financial Crisis helped me retire early. Crazy, right?

This last April I did my annual asset reallocation. I had to sell stock index funds to buy bond index funds when everyone else was buying stocks during this long bull market. Selling felt stupid but I did it anyway because it’s what my investment plan called for – no matter what!

I have no idea what Mr. Market will do next, but I can guarantee at some point you’ll feel greed or fear trying to take over. Don’t take the emotional bait! Hang on to the right investment attitude backed by a solid investment plan and you’ll do well in the long run.

Thanks for reading! Do you have an investment plan? Do you have any great investing stories? Do you invest in individual stocks, mutual funds, or both?

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  1. Hey, I used the “portable” Compaq computer too! Sounds like sage advice regarding mutual funds versus single stocks. Thanks Mr Freaky Frugal.

    1. Hi Jan! It’s great to hear from you and I hope all is well.

      I loved that “portable” Compaq computer even though it had a tiny screen and weighed a ton. I could drag it to meetings and impress everyone with my technical prowess. 🙂

  2. I’m confused. First you said that you weren’t very good at investing in individual stocks but you did make $9,000 off of Microsoft. Then you said you invested in index funds. Finally you said you were able to retire early by investing in individual stocks during the Great Recession. Sounds like you are advocating buying stocks of great companies at low prices. This should be everyone’s objective. Index funds are a good investment (I have plenty in my 401k), but they will not make people rich.

    1. Jeff – I’m sorry for the confusion. I modified the post to hopefully make things clearer.

      The Microsoft stock was the only stock I ever did really great at because almost all the other stocks I picked afterwards were losers. I gave up on individual stocks and switched to index funds. The buying I did during the Great Recession was stock index funds – not individual stocks. I had to sell bond index funds to buy more stock index funds which seemed crazy at the time.

      Some people are successful with individual stocks – Warren Buffet quickly comes to mind – but I’m not one of those people. I’m FIREd primarily off of my investments in index funds, so I guess your comment that they will not make people rich depends on your definition of rich. 🙂

      1. Don’t beat yourself up about Microsoft. Even for those of us in the tech field, determining who the winners would be was really difficult, given the constant turbulence therein. (Yep, I used one of those ‘portable’ Compaqs too!) Although it seems so obvious now that Apple, Microsoft, Google, etc. were predetermined to dominate, that was far from conclusive back in the day. What seems so clear in retrospect was not at all so in prospect. Remember, Apple went from great to near bankrupt to great again. Was there any way to know that during their dark days? I’m very annoyed by articles that insinuate how it was obvious that XYZ was predestined to take over the world. Except that it wasn’t. Microsoft was a good bet when they went public, but in no way the sure thing that it later appeared to be.

        1. Stevie – Those Compaqs are classic, aren’t they?

          I couldn’t agree more – lot’s of tech trends and company successes seem obvious in hindsight. Heck, I thought Borland was going to become as big as Microsoft because they had great software development tools that were way ahead of the competition. Microsoft ultimately crushed Borland.

          Things are murky when you’re in the thick of it. It’s why I gave up trying to pick individual stocks. I just felt I would have to devote unbelievable amounts of time to it compared to just using Index Funds and then using the extra time to make more money to pour into Index Funds. 🙂

          Now that I’m retired, I have more time to look at individual stocks, but I fear the downside risk of picking a loser. So I generally just stick with Index Funds.

  3. Thanks for clarifying! By “rich” I mean having a lot of extra disposable income (multi millionaire). Someone can be FIREd and not be rich. For example, if you are in the MMM crowd and living off of $30k per year that is not rich. They don’t have to work anymore but they have to be careful with their spending. When you’re rich you have even more freedom to live however you want.

    1. Jeff – Thanks for the detailed definition!

      I may think of it slightly differently than you. I think of it as if you retire and wish you had more money then you’re not rich. If you retire and you feel you have all the money you need, then you’re rich. The exact amount will depend needed to feel rich will vary greatly from person to person.

      I’m definitely a disciple of MMM aka Mr. Money Mustache. But I’m a veritable spendthrift compared to MMM since Mrs. FF and I spend around $60K per year. We could afford to spend $35K more per year, but don’t because we’re happy with our current lifestyle. We try to be Freaky Frugal instead of Stupid Frugal. Anyway I feel rich. 🙂

  4. In the beginning (mid 20s), I invested in individual stocks right before earnings and sold a few days after – HIGH risk strategy. Won some and lost some. Then I moved into fortune 500 stocks that pay dividends (still have them – MEDIUM risk strategy). Now I’m slowly selling off and moving into ETFs (less work and reading and upkeep involved – LOW risk strategy). I think the biggest mistake I made was making a bet on a solar company – due to greed, that went bankrupt. I’m fortunate and thankful that I made it an an early age and it didn’t involve a lot of money. 🙂

    1. SMM – That’s a wise progression from High risk to Low risk investing. Great work!

      I look at any crappy individual stock investments I made as a necessary education on what not to do. The worst thing that could have happened to me would have been for my first three stock picks to be lucky home runs. I would have figured I was a stock market genius instead of just lucky. Then I would’ve made bigger losing bets and lost a ton of money before I learned better.

      Thanks for sharing!

  5. Awe man sorry to hear you sold Microsoft! That’s cool you grew up with a dad who was into investing, not all of us are lucky like that. For me, my dad never bought any stocks except for Manulife (an insurance company), he was only into real estate (talk about diversification lol). I still like to buy individual stocks but my portfolio is mainly the index.

    1. GYM – I tell myself that at least I made some money off Microsoft before I sold it. That makes selling a little easier to swallow. 🙂

      Sometimes I get jealous of real estate guys and gals. I’ve owned a couple homes as primary residences, and I now own a Vanguard REIT, but I might have enjoyed owning rental properties at one point. That point is long past now.

  6. I prefer stock picking to indexing for various reasons although I do hold index investments in our tax deferred accounts.

    Everyone has examples of failures even the Oracle. As long as you are right much more than you are wrong, I believe you will be successful. It only takes one Microsoft to change your fortune. If you have 20 or 30 singles and one home run it could be lift altering.

    Indeed your S&P 500 is loaded with future failures. 25 to 30 companies per year are displaced. Not saying they are all bankruptcy situation but you get the point.

    PS. Random Walk Down Wall Street is one of my favorites and was recommended to me during from my investments professor during my MBA.

    1. Turning Point Money – Cool! Some people have the emotional makeup, analytical skills, and interest to pick individual stocks. You’re obviously one of those people. Mr. Tako Escapes is another IMHO. I no longer have the interest and my analytical skills are suspect.

      My investment plan allows me to invest up to 5% of our net worth in individual stocks or ETFs just to satisfy my desire to tinker, but I rarely even do that. My latest less-than-genius investment is in ERUS (a country specific ETF that invests in Russia) which has only made a little money. I would have been better off just leaving the money in an International Index Fund. Oh well. 🙁

  7. I definitely agree with the random walk down wall street’s premise (I’m a statistics guy so this might get a little technical) but basically if the market is going up, then you will have winners and losers. But holding a basket of stocks will perform better because some will be winners and some losers. In expectation though, you should expect the 7-8%!

    Thanks for sharing MFF

  8. Excellent job on your Microsoft investments. I wonder which broker did you use back in the days of your Microsoft investment. I remember the times I was a client of TD Waterhouse in the early 90’s. Anyway, I totally agree with you about attitude and removing emotions when trading individual stocks. Easier said than done though especially during my younger and aggressive days. As I get older I realized the importance of being in control of your emotions when it comes to investing. I only trade now when I feel that I’m in the relaxed state of mind. Only if I knew then what I know now. Hey, FANG stocks are still doing really well and with the exception of G and A, NFLX and F are still part of my portfolio. Hope for the best.

    1. Bernz JP – I don’t exactly remember which broker I used way back then. I think it was either E*trade or Merrill Lynch.

      Yep, keeping emotions out of investing is no easy thing. I almost panicked in 2008, but Warren Buffet give an interview and I heard him say the same thing he said in 1974 “I feel like an oversexed guy in a whorehouse. Now is the time to invest and get rich.” 🙂 That gave me some solace that I was doing the right thing by buying.

      Great work with the FANG stocks! I’m a little envious.

      Thanks for sharing!

  9. I love this article. Honestly, I have nothing more to add because I invest the same way. It is hard to take emotion out of the equation. but you need to do so to avoid short-term knee jerk reactions . If you are confident you have found a great stock with a long-term history of success, it is easier to put you investment into auto pilot and ignore what is happening in the short term.

    Thanks for the read!


    1. Bert – Thanks for the kind words!

      “Auto-pilot” is a perfect term for what a solid investment plan should force you to do. If you have confidence in your investment plan, it’s much easier to follow when the market goes crazy. But I sometimes still have to grit my teeth. 🙂

  10. Is the 45-45-10 allocation the same that you had while you were accumulating your nest egg? If not, what asset allocation did you have while you were still working? 45% in bonds seems very high given the low-interest rates currently.

    1. Zack – Good question! I will eventually write more posts about investing.

      To answer your question, I generally followed the age-dependent allocation described in “A Random Walk Down Wall Street”. I think a couple of years before I retired I had about 60% in Stocks and 40% in bonds. I had no allocation in REITs because I already owned my house and I felt that was enough exposure to real estate.

      You’re right though – bond interest rates suck! What is your current allocation?

      1. I have recently “discovered” the FIRE community. I have no idea how it took so long to find all of these like minded people with the rate that I devour investing and financial content, it amazes me I hadn’t stumbled on it earlier.

        As far as my portfolio, I tried many strategies and read everything on investing available and ironically am pretty close to my original strategy. Which was and is 100% stocks.

        This is slightly untrue as I am readjusting from my previous/short-lived investment plan following the Ray Dalio, and Ivy Portfolio strategies of extreme asset diversification. I agreed with their message that the future is unknowable, but I was uncomfortable with how that strategy had me invested in stupid things like extremely low yielding bonds and gold.
        So, I am sticking with 100% stocks because I have successfully done so for the two biggest crashes in my life and am confident I will make the right decision. So, I sold off a bunch of bonds, REITs, commodities that I accumulated for the previous strategy, which built up my cash too high, so I am dumping 100% of my paychecks into my 401k to draw down my cash balance from those sales.

        1. So, I am sticking with 100% stocks because I have successfully done so for the two biggest crashes in my life and am confident I will make the right decision.

          Impressive because not many people that have 100% in stocks can say that. If you can handle the volatility, then your approach is likely to yield the highest returns. I need less volatility because I’m retired and living almost 100% off our portfolio.

  11. you know what’s worse than making some bad stock picks? not investing and spending it all.

    i have about 40% of the portfolio in individual stocks as i really enjoy that. it’s a basket of about 40 of them. after years of struggling with getting this right i broke down and bought a well known newsletter. cost me 360 bucks for 3 years and after 2 years could not be happier. i realize this isn’t for everyone but and i don’t blindly just buy the recommendations but consider them. they advised to buy nvda at 25 and mtch at 15 a couple of years ago. the reason i like some individual stocks is the math behind one outsized winner that could have you in retirement soon than later. like what if you bought netflix or lending tree back in 2005? those are up about 1600% in that time.
    the rest of our stuff is indexed in stocks in a 401 and about 15% in preferred stock etf’s, which i used to replace shitty yielding bonds.
    a lot of people might say this is all terrible and dumb and that’s ok with me. i’m not using their hard earned scratch to execute it.

    1. Fred – Yep, not investing and spending it all is definitely worse than a few bad stock picks. Way worse!

      A basket of 40 different stocks is pretty good diversification plus you have your ETFs. And wow, you really killed it with Nvidia! You bought at $25 and the latest price I just checked is $209!

    1. Excellent advice! I prefer Buffet’s advice: “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful.”

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