"Have You Ever Owned a Stock?”

This is the question I enjoy the most when speaking to a young person who is looking to enter the investment business. I rarely penalize a person for not having owned a stock, but I am always more interested in those who have. In my opinion, there is no better way to prove one’s passion for something than by actually doing it. I mean if I tell you that I really enjoy fly fishing (I grew up in Montana after all), but then I tell you I’ve only enjoyed by reading about it or watching “A River Runs Through It” a couple of times, are you really going to invite me on your next jaunt to The Bitterroot or Rock Creek?

I think the same thing applies to equity investing. All the “book learning” in the world cannot compete with the education one receives by actually buying a stock. Granted, the more knowledgeable one is about the stock market, the more likely the experience of buying a stock will actually be a positive one.

I remember very clearly the first time I bought a stock as a professional portfolio manager. I had been a sell-side analyst for several years and could tell you everything about how to value a stock, how to write a research report, how to identify an attractive stock and how to convince others that my opinion was the “best” one. Then I landed a job on the buy-side managing the US equity portfolio for a Japanese bank. All of a sudden, I was the decision maker for a large portfolio containing about 50 stocks. I recall thinking to myself, “Wow, this is more complicated than I thought.” This thought came despite my years of Wall Street experience and an advanced degree in finance from a prestigious Ivy League school. Within a few weeks I got up to speed on all the holdings in the portfolio and finally felt I was prepared to take over full responsibility of the portfolio.

Even then I felt a bit anxious as I decided on my first trade as the new portfolio manager. I ended up buying a tiny, incremental position of an electric utility already in the portfolio. I think my trade had absolutely zero probability of impacting the portfolio one way or the other, but the deed was done! I remember my boss (who had no trading experience, but had some “book learning”) saying, as he signed my trade ticket, “Ah, Mike-san, you are bullish on interest rates, no?” I’m sure I nodded and gave some vague answer, but what I was really trying to do was avoid making a big mistake on my first trade.

Since that fateful day, I have made thousands of trades, some great, some not so great, but for each one, I knew 1) what I was buying or selling, 2) why I was buying or selling and 3) how long I needed to wait for the trade to be proven successful or not. Investors who trade or invest in stocks without being able to answer those three questions are more likely than not engaging in an exercise of randomness.

Ultimately, the stock market is not one thing; it’s a collection of many things. Each stock price represents: 1) an entire company and all of its resources trying to successfully compete in its market place and 2) the collective opinion of all shareholders about this company’s prospects. When we hear the media mention the “stock market” it is easy to forget that it’s not some kind of powerful monolith, but the collective and combined effort of thousands of companies, millions of workers and millions of investors, both big and small. The general public may hate Wall Street right now (please see Jeff Korzenik’s blog for more on this topic here) but eventually, we all need to understand that what is good for the stock market (strong economy, rising profits and stable interest rates) is ultimately good for all of us.