Great Lessons from an Investment Failure - Case Study

Case studies are a best way to gain knowledge on investing and learn about the do and don’t for the investors.

Here, I am sharing my own experience of investing which start in the end of 1990’s when I was having very little knowledge about stock investing.

This journey shows you how I turned myself to a capable stock investor.

"Every Successful Journey Starts with a Trouble!" 

Yes! That’s right! Success never find in the first step.

I have got attracted to the stock investing at the end of nineties and I thought, I will buy some stocks. As a beginner investor, I was not aware anything about the stock market and how it is working.

"I was not able to identify the stock purchase timing, stock market challenges and changes. I was totally blank on the stock selection criteria."

When decided to buy, I was following those who was investing in stocks at that time and blindly believing the words of brokers.

In the beginning of year 1999, filled with lots thrills and expectation to become wealthy fast, I have purchased 20 shares of an IT company in India as its share price was booming day by day because of huge trading activities involved to that scrip.

"I have put all my hard-earned money to that stock. I have not realized that I was not doing any investment but was involving to trading activity." 

I hold those stocks about a year without monitoring.

At the beginning of 2000, I have realized that all the money I have invested to that stock has been vanished. It was a total erosion of 99% of the invested capital! 

"Being panic, I have visited the broker office and informed about the loss and their response to sell the stock and pay their brokerage!"

I was really upset and left their office red faced and never went back to them and never attend their calls to inform invest more money to get back the money I lost.

"They didn’t even forget to give an advice to borrow some money to invest."

Tone of their advice was a warning signal for me and anyway I have never went to the  again and this was my first investing story and the big failure.

"I totally disappointed". Because the money I lost have made through collecting small amounts from my earning and for long time.

Lessons Learned from Investment Failure:

Lesson 1: "Never invest on the word of others but learn to gain necessary knowledge."

Lesson 2: "Never invest your entire money to a single stock."

Lesson 3: "Always keep a portion of money with you"

Anyway, I was desperate for some time because I was not able to digest the failure as well as the behavior of the stockbroker.

When time passed, I forgot the pain. However, the interest to invest on stock was in my mind intact.

This passion leads me to read the books from some of the great investors like Benjamin Graham, Warren Buffet and Philip Fisher.

"Ideas from Buffet was simple to understand and attracted me a lot."

Energized by their idea on how to find and invest on best stocks along with the lessons learned from my first investment tragedy, I re-entered to the stock market after couple of years.

The Lessons Learned from Years Long Research was:

    1. Identify the best companies and wait for the time to come to purchase shares.    
2. Have enough patience.
3. Never fear stock market up and downs but believe the strong fundamentals of your invested company.
4. Stock market is not for those seeking to be wealthy in a fortnight!

My first references were Benjamin Graham’s “The Intelligent Investor” and “The Security Analysis”.

Intelligent investor was easy to read and understand but Security Analysis was tough for me to understand. I read and re-read all the necessary advises and ideas in these books.

Graham’s allegory on ‘Mr. Market’ attracted me a lot. This allegory still helping me to identify the right time to invest.

Prominent Investment Books I Have Read and Recommend:

1. "Common Stocksand uncommon profits" by Philip A. Fisher
2. "The Warren Buffett Way - 3rd Edition" by Robert G. Hagstrom
3. "The Essays of Warren Buffett: Lessons for Investors and Managers" by Lawrence A. Cunningham
4. "The Little Book of Common Sense Investing" by John Bogle
5. " The New Buffettology" by Mary Buffett

These books and further references led me to know more and more about the legendary investor Warren Buffet and his investing styles. 

Finally, I have prepared my “Personal Intellectual Framework for Investing!” It’s my own, personal framework to select and invest on the best companies.

Core of this framework is its focus to 3 important factors of a businesses:

1.   "Business Factor"

2.   "Management Factor"

3.   "Financial Factors"

How I Set My Investing Goals

When entered again to the world of stock market, my first action was to set investing goals.

I know this will help me to find the right companies and invest for the period I willing to.  

Investment Goals and Duration Settings - How I set my goals ?

1.    "Short term goals - 2 to 5 years"

2.    "Medium term goals – 5 to 10 years"

3.    "Long team goals – 10 to 20 years"

My First Goal – "A Sweet Revenge"

Yes. That was my first goal. To get back the money lost once in the stock market! It was a goal with only 2 years duration.

In the beginning 2004, with this specific goal in mind, I have made my first investment to a product-based company through confirming its growth potential by next two years. Yea, I have done enough research and homework to identify this company.

I have invested 25k to the share of this company by believing the below points from my personal framework:

1.    Company with one or more products or service, that have unbeaten monopolistic position in the market. Such eminent position and improving quality eliminate space for competitors to enter with similar product or service.

2.    Company should lead by efficient management team, capable to introduce innovative ideas for the business to maintain its leadership position in the market.

3.    Company should be with zero or very few manageable debt burdens. Total debt of the company must be under or equal to its yearly net profit and not more than that.

4.     Company should have long history of registering consistent per share earnings growth year to year, at least for last 10 years without any drop in any year.

5.    Finally, when buying, the stock price should project a rate of return of 7% or more.

The Result of Thoughtful Investing

Quite natural, that investment clicked. Because, I have done enough homework to pick that stock.

I have invested in the right time using the bottom fishing method. Selected time for the investment was perfect.

Stock price of the company appreciated to triple within 2 years, and I sold that.

It helped me to capture double than what I lost in the stock market few years back! My goal done!

Also my successful investment journey was beginning from there.

"What was My Next Investment Plan?"

I got influenced to the methods legendary investor Warren Buffet was using. I read all the best books about him and his letters to the shareholders. 

His principles attracted me to a great level, and I started following his methods of selection and investing on business.

In order to start a successful investment journey, I set my long term goals first.

I decided to build a portfolio of 15 stocks to meet that goal. Today, after 16 years, I have included only 12 stocks to my portfolio and there are room for another 3 stocks.

Yes, my investing activities was not regular. I have a self-made habit of putting money aside and waiting for the time to invest.

As mentioned in the article, I have invested on two companies I was monitoring for long time through an app in my cell phone.

Yes, it was a well planned, clean bottom pick which made even before the above mentioned article got published in this blog. I can easily say, if I sell these stocks with the current market price, no doubt, I will get a blind profit of 25% instantly!

"Successful Investment Secrets"

My investments were not happening frequently. However, researches to find the best business is an ongoing process as well as monitoring such stocks.  

I have set all necessary alerts to my cell phone to know each and every details of the companies I am monitoring.  

Know when to buy and sell stocks - Ideas I believe on:

1.    "Once if found the performance of a business is not as per my expectations, stocks would  be removed from my portfolio immediacy."

2.    "I never care or bother the stock market up and down nature. I strongly believe the fundamentals of the companies where I have invested."

3.    "Investing and holding the stocks of ‘right’ companies for long term, would certainly make you wealthy." 

To find such companies, just learn about their business and product or services and ensure the company will be in the market even after 20 years with its products and services. It called the durable advantage.

4.    "Once you set a selling price and when the stock reached to that price, evaluate the company performance by comparing with its current price. If the price is not justifiable, Just sell it."

Conclusion:

Readers, time to conclude the blog post. I never conclude my investing activities. Do you have any similar experience in your life? If so, why don't you post in this blog. Visit 'Contact' in this blog main menu and send me the details. I will post it for you.