Sunday, 9 March 2014

The Very First Stock Warren Buffett (And Other Famous Investors) Ever Bought

First stock Warren Buffett at 3 years old kid

Everybody has to start somewhere.
It’s easy to look at investing “gurus” like Warren Buffett and Peter Lynch, and feel as if you could never hope to emulate their success.
But the Buffett’s and the Lynch’s of this world were once naïve newbies. In this post we’ll take a look at the very first stock Warren Buffett, Peter Lynch and other famous investors ever purchased.
We’ll look at what their investing rationale was and how it worked out for them. Then we’ll see what you can learn from their successes or mistakes.

Peter Lynch

What He Bought and Why: As a teenager in the 1950s, Peter Lynch worked as a golf caddy. While he was carrying bags and handing out putters, he used to make a mental note of the stocks he heard people talking about, and looked them up later on.
When he was in college and had some money to invest, he started researching the air freight industry and “thought this air cargo was going to be a thing of the future.” He put his first $1,000 investment into a company called Flying Tiger.
Flying Tiger airlines Peter Lynch first stock
What Happened Next: Lynch’s research paid off, as the stock soared ten-fold and helped pay for graduate school. He acknowledges the role of luck, too: the stock’s spectacular returns were partly due to the escalation of the Vietnam War and the profits Flying Tiger made from transporting troops.
In 1988, Flying Tiger was bought by a younger, fast-growing competitor called Federal Express. Lynch was right about this air cargo thing having a future.
The Lesson: Do your research. Peter Lynch is famous for preaching the importance of understanding what you’re investing in, and you can see that principle at work in his very first investment. Luck played a role, but even at that early stage he’d done his research and formed a sound investing rationale.

Ray Dalio

What He Bought and Why: He’s known now for founding the world’s largest hedge fund firm, but Ray Dalio, just like Peter Lynch, started out as a golf caddy. At the age of 12, he used his earnings to buy his first stock, Northeast Airlines.
His investment thesis was not as sophisticated as those he’d develop later in his career. His caddying savings were limited, and Northeast was the only company he knew of that was trading for less than $5 per share.
What Happened Next: Northeast was on the verge of going broke, but Dalio got lucky: the firm was bought out by Delta Airlines, and its stock tripled. Dalio continued to trade stocks throughout his teens, quickly learning that it wasn’t always as easy to make money, and ended up with a portfolio worth several thousand dollars by the time he graduated high school.
The Lesson: Luck plays a part in investing, but successful investors don’t get carried away. Dalio soon understood that his success with Northeast Airlines was a one-off event, and developed better methods of picking his stocks in the future. Or perhaps the lesson is that teenage golf caddies make great investors?

Warren Buffett

What He Bought and Why: When he was just 11 years old, Warren Buffett pooled his savings with his sister Doris and bought six shares of oil company Cities Service (now called Citgo) at $38 per share.
first stock Warren Buffett bought CitgoFrom visiting his father’s stock brokerage and chalking in stock prices on the blackboard, he’d marked this out as an undervalued stock, and was confident he and his sister would make money.
What Happened Next: In the first few months, the stock dropped almost 30%, and Doris harassed him every day about the money they’d lost. When Cities Service finally recovered to $40 a share, he quickly sold to book a small profit.
But then the young Buffett watched from the sidelines as the stock soared to $200 a share. His original investing rationale had been vindicated, but it was too late.
As for Citgo, it’s no longer publicly traded. It was acquired by Occidental Petroleum in 1982, and is now owned by Petróleos de Venezuela.
The Lesson: The first stock Warren Buffett bought taught him the value of patience in investing. He got halfway there by not panicking when the stock dropped 30%, but missed out on big gains by selling too early. Spotting an undervalued stock is one thing, but often it can take the market a while to reach the same conclusion.

Seth Klarman

What He Bought and Why: Buy what you know. It’s age-old investing advice, and it worked for billionaire investor Seth Klarman on his first foray into the stock market.
As a 10-year-old boy, Klarman was always getting little cuts and scrapes, and putting Band-Aids on them. So he figured he’d invest in the company that made Band-Aids, Johnson & Johnson. He bought one share.
What Happened Next: Shortly after Klarman made his purchase, the stock split three for one, and he sold for a tidy profit. Johnson & Johnson has had five more stock splits in subsequent years, and Klarman’s single share would have multiplied to 144 shares if he’d held onto it, and would be worth more than $13,000. Not bad for a 10-year-old kid.
first stock Johnson & Johnson
The Lesson: “Buy what you know” is advice that’s stood the test of time for good reason. It’s simple, but it makes sense. The growth of Klarman’s single J&J share also shows the powerful wealth-building effect of buy-and-hold investing over the long haul.

Bill Miller

What He Bought and Why: Bill Miller’s Legg Mason mutual fund famously beat the market for 15 straight years, before coming seriously unstuck in the financial crisis of 2008. His stock-picking prowess started at 16, when he took $75 he’d earned from umpiring baseball games and invested it in long-established electronics firm RCA.
RCA first stock ever
The rationale was simple: it was recommended by his dad, who managed a Jacksonville truck terminal and liked to invest in stocks in his spare time. It was watching his father combing through the stock quotes in the newspaper that first got Miller interested in investing, as he realized he could make money much more easily with stocks than by mowing lawns and umpiring baseball games.
What Happened Next: RCA stock soared, giving Miller a $300 gain on his $75 investment. He blew it on a second-hand Triumph TR4 convertible. It’s just as well he didn’t hold – RCA fell on hard times in the 1980s, and in 1986 GE acquired it and broke it up.
The Lesson: When he talked about his RCA investment in a 2007 interview, Miller focused not on the gain but on the missed opportunity: “Had I reinvested that $300 in the market continuously, I’d have a lot more money. So, that was a really expensive used car that I bought.”

7 Reasons Why Those 90% Of New Traders Never Made It

1. They could not handle the losses. Some could not handle losing money at all, others chose to not manage risk and the big losses ruined them financially and they had to stop trading. Or the big losses ruined them mentally or emotionally for trading and they could not get back in the game after the damage was done.

2. They had a overwhelming desire to be right all time and could not handle being wrong. They could never grasp that trading is not about being right personally but instead simply being on the right side of the market price action.

3. They thought they were smarter than the market and all the other traders even though they were just newbies. The market showed them how counter-intuitive and irrational it can be.

4. They did not do their homework before they started trading money. Their education was in the moment and they were doomed from the start. If new traders are too lazy to read numerous trading books, study charts, study legendary traders, understand the risk of ruin, trader psychology, and test systems they will never make it. The hardest part of being a new trader is to even discover what you do not know and find out where to start.

5. If you enjoy the game of trading and the markets you may make it because you may not quit when you understand the work ahead. If you are doing this 100% for the money and think you will go take some quick easy money from all the professional traders with little effort, you are going to have a bad time. Passion for trading is the you must have to take you over the learning curve to profitability.

6. The new trader has to first focus on finding out what the right questions are then they have to go find the right answers from the right places.

7. Many new traders come from other professional fields and just can not get back to the beginners mind required to learn a new field of expertise. They want to be instantly knowledgeable and respected as experts and that is a long process that takes years of study and real time trading success.

What Trading Teaches Us About Life

Trading is a crucible of life: it distils, in a matter of minutes, the basic human challenge: the need to judge, plan, and seek values under conditions of risk and uncertainty. In mastering trading, we necessarily face and master ourselves. Very few arenas of life so immediately reward self-development--and punish its absence.

So many life lessons can be culled from trading and the markets:

1) Have a firm stop-loss point for all activities: jobs, relationships, and personal involvements. Successful people are successful because they cut their losing experiences short and ride winning experiences.

2) Diversification works well in life and markets. Multiple, non-correlated sources of fulfilment make it easier to take risks in any one facet of life.

3) In life as in markets, chance truly favours those who are prepared to benefit. Failing to plan truly is planning to fail.

4) Success in trading and life comes from knowing your edge, pressing it when you have the opportunity, and sitting back when that edge is no longer present.

5) Risks and rewards are always proportional. The latter, in life as in markets, requires prudent management of the former.

6) Happiness is the profit we harvest from life. All life's activities should be periodically reviewed for their return on investment.

7) Embrace change: With volatility comes opportunity, as well as danger.

8) All trends and cycles come to an end. Who anticipates the future, profits.

9) The worst decisions, in life and markets, come from extremes: overconfidence and a lack of confidence.

10) A formula for success in life and finance: never hold an investment that you would not be willing to purchase afresh today.


Quote for the day

“I know this will sound like a cliche, but the single most important reason that people lose money in financial markets is that they don't cut their losses short. It is a curiosity of human nature that no matter how many books talk about this rule, and no matter how many experts offer this advice, people still keep making the same mistake.” - Victor Sperandeo