Why I Can't Own Individual Stocks
Investing in individual stocks can be exciting. Especially when you earn over 100x your original investment purchase.
We call that a “100 Bagger”.
I’ve seen people who have become millionaires or made a few hundred thousand from investing in an individual stock.
I’ve also witnessed those who thought they found a winner and lost a large amount of their money…
This game is hard. There is no right or wrong answer and these astronomical gains are rare.
I’ve found that the strategy that works best for me is keeping the majority of my investments in ETFs and Mutual Funds.
I’ll speculate here and there, but I’m too emotional (shocker), and just want to own the market.
But for those that do like to speculate, you may appreciate this conundrum of owning individual stocks.
A good friend of mine is in his mid 30’s, married, no kids, and lives out on the west coast.
They both work solid-paying jobs, with their combined income probably around $200,000.
He has established great money habits over the years, saving around 50%(!!) of their income every month, has little to no debt, does not like to splurge, and understands the risks associated with investing.
But he does like to speculate.
In 2017, he heard Tesla talking about autonomous driving and how that would be the next revolution in the auto industry.
He didn’t want to buy Tesla like everyone else at the time. Although that trade would’ve certainly played out well for him…
Instead, he was more interested in investing in the companies providing Tesla, and the other companies, the technology and infrastructure needed to accomplish this.
In other words, invest in companies selling the ‘picks and shovels’.
This led him to Nvidia.
Over a four year span, from 2017 - 2021, he invested around $60,000 total into Nvidia’s stock, excluding dividends being reinvested.
For those that are unfamiliar, Nvidia is up ~3,500% over this time period, turning his $60,000 into around $250,000.
Now, that’s a lot of money, especially to have in one stock. But we’re supposed to let our winners ride, right?
Not to mention he has put up with the temporary declines when Nvidia’s stock price fell by 50% in a year. It hasn’t been THAT easy…
Now here’s the kicker. Him and his wife want to buy a house.
Where they live, and for what they are looking for (nothing overly lavish), the property will probably cost them around $1.2 million.
Given their monthly income, they need to put down around $500,000 - $600,000 to be able to manage the monthly mortgage payment of around $3k - $4k, given where interest rates stand.
This is certainly not cheap, and you can pull out the worlds tiniest violin if you would like, but buying a home has been a life-long goal of theirs, and they have been diligently saving and preparing for this.
Besides using his cash savings, which stands at around $200k, he’ll likely need to sell a large chunk, if not all of his Nvidia position.
Will he psychologically be able to? Would you?
Keep in mind this is one of the first individual stocks he’s ever owned. It has been an absolute home run for him, and the future looks bright, so the stock certainly could continue to go higher.
But when you hit big on something like this, it can devour you. The movie ‘Dumb Money’ does a solid job highlighting this.
You begin to think about the company more and the stock market in general. You check the stock price daily, anxious to see how much you’ve made.
I’ve recommended he start to take some money off the table, given that the real estate purchase ideally occurs in the next 12-months.
“What if it continues to go higher?” is the response I’ll typically hear, “it’s like a drug”.
He’s certainly been right, the stock now stands at around $920/share. I was recommending he start trimming at around $700/share.
What the f*** do I know?
I want it to keep going for him - hell, I own Nvidia too via my ETFs!!
But remember - money is simply a tool to help us live the life we want and achieve our goals.
What if the stock falls 30% this year, the ideal property presents itself, and they can’t afford it all of a sudden because Nvidia is down?
I’d personally lose my mind.
That’s why I recommend saving into cash when preparing to buy for real estate. Sure, you may not get the highest returns, but you don’t have to put up with the stress and worry along the way.
There will be plenty of that regardless…
My focus is on helping people set and achieve lifelong financial goals and achieve financial freedom.
If you find a winner, or can use your investment gains to achieve something you’ve always wanted to do, don’t be afraid to let it rip.
Not many have gone broke by taking profits…
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
All indices are unmanaged and may not be invested into directly.
All investing includes risks, including fluctuating prices and loss of principal.