It’s always good to see first-time investors take a stab at the stock market, especially since it has tripled in value since 2009. But sometimes they are over-eager to go “all in” on one company. A caller on my WSB radio show this week told me she was ready to invest in a company that makes body-cameras because she had heard that President Obama wants a camera on every cop.
For my part, I made a decision a long time ago to not buy individual stocks, even though I made a lot of money that way in the past. Here are three reasons why.
1. I have a real problem with the way big companies keep their books. Companies are supposed to report in terms of GAAP, generally accepted accounting principles, but in reality there is a lot of room for manipulation. And companies will include non-GAAP figures or use their own custom built earning measurements so it can be difficult to sort out the fact from fiction.
2. Don’t put all your eggs in one basket. I’m a big fan of good ideas but I also strongly believe that the vast majority of your retirement shouldn’t rest on one good idea. If you want to invest in individual stocks, only put a small portion of your investment there.
3. I have a full-time job, and it’s not managing stocks. I own a digital marketing company, host a radio show, write syndicated columns every week and frankly don’t have time to do all the research necessary on individual companies to make sure they are being managed wisely. Technology is changing so quickly. If you throw all your money into body-cameras, what happens when robo-cops come along with cameras built in? I know that’s a little far-fetched but it’s how you have to think when you’re investing.
If you’re ready to put your hard-earned money in the stock market, I think you may be better off with an indexed mutual fund. Instead of buying individual companies, you will buy an index, such as the top 500 companies. It’s safe, inexpensive and will beat managed mutual funds (where a professional picks companies for you) about 85 percent of the time.
If you have your heart set on a company, make sure you do your research. Read about their performance, and the performance of any competitors, in the New York Times business section or the Wall Street Journal and stay as informed as possible for as long as you have the stocks.