So yeah, I do want to encourage my teenager to buy stock in individual companies. Mostly because he doesn't have a lot of money to lose, and its a great way to learn.
Here's what really happened: He bought a bunch of kooky stocks because he "liked the name". That did predictably terribly. Then he bought a couple blue chip companies, lost interest and drifted into the black. If you buy individual stocks and hold them, on average you will make money. You would usually do better with an ETF too. I think it was a good lesson that patience is better than trying to outsmart markets.
I started investing in middle school when the social studies teacher enrolled all of his classrooms into a virtual stock market simulation. Everyone starts with 100k, must own a minimum of 20 stocks on any given day, and tries to make the most within a set amount of weeks. Short-selling is included. I don't remember how well I did but I got an ornate Dominos Pizza gift certificate (which I never spent because it looked so beautiful) so I must have done well. That was 13 years ago. Today, I have a 40k Robinhood investment account which is enough for a home down payment and I plan to use it to buy a modest ~200k home in a few months.
I outperformed significantly in my early 3 years of investing with real money with a 38% return. However I have underperformed in the last 1 year and thus underperformed the market overall with an 18% overall (4-year) return not including dividends. This is because my favorite investment data app, StockGuru Pro, that cost $10 was discontinued and I don't have a suitable replacement (at all). I expect to underperform in the future unless I find a well-priced replacement or cough up the hundreds of dollars for better investment data. The ICE buyout of the NYSE has caused the price of market data to skyrocket which lead to that app's discontinuation.
The wins I experienced at a young age were very positive because it gave me a reason to save my money instead of spending it on all the things I wanted. Savings account interest rates of 0.01 to 2% interest isn't motivating at all to save because it takes more than 36 years to double money at that rate. If it weren't for learning to invest at an early age, I'd be just like the rest of the average Americans. The 50th percentile for my age (27) has a net worth of $5000 and I would be average with $5000 too if I didn't have that reason to save!
It also provided a good learning experience from which I have formed 5 principles:
1) Take calculated risks
2) Protect your principal but it's okay to risk the interest. (Phrased another way: don't lose money.)
3) Don't put all of your eggs into one basket. Diversify!
4) Don't use margin if you don't know what a margin call is.
5) Options are for viewing, watching, and analysing but not for trading (even if Robinhood makes trading them free). 90% of people lose money trading options.
Overall, an anecdotal positive experience here that I'm happy to share but with a small sample size of one.
To paraphrase Warren Buffett's investment advice, if you have a high IQ, donate the extra points to someone else because what you need more is a strong stomach (for gut-wrenching volatility).
If emotions are a part of your decision, you've already lost the game. I get that humans are emotional creatures, but if you start making investment decisions based on panic and emotions, it doesn't matter if you've been buying index funds or individual stocks; you're going to perform poorly and likely lose some money either way.
I agree. Hacker News readers are more logic based but the rest of the world is more emotional based. For most people, the emotional half of the brain dominates the logical half of the brain. I think we can agree that being invested in a diverse basket of 20+ stocks with 5% or less of the portfolio invested in each is regarded as a pretty safe bet. I also think we can agree that anyone who invests will do better in the long run than people who don't invest.
The news commonly sells convincing chichen-little fear that the sky is falling, the market's gonna crash, and we should all flock to gold. But I know with higher certainty that Amazon will keep shipping packages, Target will keep selling merchandise, Apple will keep selling more iPhones, and VISA cards will keep collecting interchange fees.
We can debate though whether it's better to hold an index fund you might panic sell or individual stocks that you plan to hold forever.
People need to be allowed to make mistakes with low risk.
Mainstream personal finance advice is pitiful.
There's wide consensus that ETFs are a bubble. On the other hand, the notion that buying an individual stock is equivalent to gambling is nonsense.
Beating the index is a zero-sum game, for every winner there must be a loser. Of course you can make educated choices based on the fundamentals but the same is true for sports betting too. Unlike sports betting, you are directly competing against a large number of pretty smart people who play this zero-sum game as a full time job. And some of them even have inside information.
Not that it's impossible to win of course. I can easily imagine someone with deep expertise in a certain area having a key insight about a specific company that others don't, or someone who analyzes company balance sheets and business fundamentals to come up with an independent valuation being above-average at that. It's hard to imagine that either of these groups represent the average person who will trade fractional shares on Robin Hood though.
(This is not hypothetical it is actually happening)
