Investing for Growth in the Stock Market

​​NICK'S STORY (Stock Market Investing Case Study 4 of 8)

Influenced by his cousin who worked for Berkshire Hathaway, Nick first became interested in the stock market when he was 12 years old. He started to learn about mutual funds with a paper trading account at that time.  He remembers how he idealised powerful people.

​Building wealth came to be top of mind for him. As he grew older, he always knew he wanted to make money, but he didn’t have the passion to build a business. The stock market seemed like the best option to him. He started to use his real money at age 18 with mutual funds (stocks a few years later). Five years later, he withdrew his funds to purchase his condo. He started investing in the stock market again in January 2014. 

A way to build his retirement fund
Nick also sees his investing as a way to build his retirement fund. To that end, he met with a financial advisor who advised him that he could achieve his retirement goal with a seven percent annual return.  In his first full year since he began again, he achieved a 12% return.

When Nick first started investing, he thought it would be easy and consistent.  He went in blind.  He didn’t know where to look for information or which sources of information he could trust. On his second-time around, he learned to do his homework before making a purchase. He has since developed an understanding of how the macro-economic forces affect the market and he learned how to analyse a company. This is the easiest part in his opinion – it is intuitive to him.

Conservative by nature and determined
Nick is driven to look for undervalued stocks of solid companies with growth potential.  He doesn’t have a problem buying a stock that dropped in price if it was precipitated by an external event unrelated to the company (and when his analysis tells him it will bounce back). For example, if there is an airplane crash halfway across the world and airline stocks drop in unison, he’ll buy his favorite airline.

Nick wanted to be self-made and he always liked the idea of having his own business, but he also realized that he didn’t have the drive to build one. In any event, he didn’t have the passion for a particular business idea. He says the stock market is the closest thing to having his own business since stocks represent part ownership of several businesses. He loves making money and what he likes best about the stock market is that it is the purest form of capitalism. 

What he likes least however are the fluctuations that go against his expectations. There are times when there is no rational explanation for the price to drop. It just doesn’t make sense. Sometimes a good stock drops due to an external event that has nothing to do with the particular company and he ends up losing money through no fault of his. Everything indicated that the price should have gone up, yet it went down. When Nick loses a good chunk of money, he takes a break and he evaluates the situation.

He’s been frustrated at Mr. Market, often enough. Yet, he comes back to it because it is the only thing that makes sense to him. In his mind, there is no alternative. He is very passionate about it, so giving it up is not an option.

Nick learned that it’s more important to sell the losers than to capture the gains.  On the other hand, he’s held a particular stock, and bought more of it, as it continued to drop over the course of one year, making him a fortune at the end of the year. 

It’s about conviction, Nick says
You have to know why you are buying, why you are holding and why you are selling. You may not always be right.  It comes with the territory.  Nick learned to accept that the market is hardwired to react as it wishes. He recalls in 2008, when even the greatest companies in the world lost a good proportion of their market value.

He believes he is successful because he is intensely passionate about the stock market and because he is analytical.  The stock market makes intuitive sense to him. He also credits his ability to think long term. It is what enables him to withstand the short term fluctuations to the downside.

On the personal side
Nick strongly believes that he is responsible for his own financial well-being and that he is accountable for his own actions. His greatest inspiration is his mother who did a fantastic job of raising him in an environment where money was tight at times. It was through these times that Nick learned at a young age that financial independence is critical to freedom and peace of mind. This lesson gave him the drive he needed to become a diligent investor.
 
His insights based on his experience are:

• The most important thing is to understand why you are buying a particular stock and to do it with conviction. If you have conviction, you can weather the storm. If the price goes down, think of it as an opportunity to buy something that’s just as good as it was yesterday, at a lower price (on the condition that you did your homework and you determined it was a strong stock). This conviction will give you the peace of mind to acquire more of a beaten down stock rather than sellout and realize a big loss before the market has a chance to recover.
  
  
• Do your research to find something that will fit your style.
  
  
• Remember that it’s a constant process of learning.

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* Case study based on April 5, 2015 interview conducted by Y. Gagnon
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