How I Began

Mar 27, 2007 by

In April 2000, I bought shares of Apple (AAPL) in a custodial account. As I was an Apple fan as a child, I wanted to support the company. I read websites about unreleased developments like AppleInsider, and felt that I had the inside scoop on the company. When the shares underwent a 2:1 split shortly thereafter, I became excited. By the end of 2000, Apple’s stock had decreased substantially from the value at which I purchased it. A loyal Mac enthusiast, I chose to “stick it out” and wait for the price of the stock to increase. In mid-2004, Apple’s stock began to pick up. After having waited for four years, I finally sold my shares in August 2004 at a loss. If still had those shares in 2007, they would be worth 4x what I sold them for in 2004.

¬†When Apple continued to rise in 2005, friends and family made things even worse for me by saying, “Didn’t you know that the iPod has been a smash hit?” As someone who had been following Apple closely for a decade, those comments seemed a bit naive to me. The iPod was released in 2001, but Apple did not experience any recovery in its price until the end of 2004. Apple finally released its iTunes software for Windows in October 2003, expanding the market of its music store. Besides, changes in stock prices are not determined by facts that are common knowledge, but instead by changes in expectations. People had been expecting that Apple would release iTunes for Windows for months before October 2003. Thus, the stock could have risen during that time if it was going to do so. Ultimately, the rise in Apple’s stock was likely due to the successful promotion of the 4th Generation iPod.

The Historical Performance of AAPL

Cash and hand and dejected, I stayed out of the market until April 2005, at which point I chose to wade back into the market by buying some ETFs. I spread about $3,000 over seven different stocks. While I was pleased with the performance of the stocks, I later realized that my investing strategy had been foolish, as a large percentage of my profits were being eaten by commissions. For instance, I initially took bought seven shares of GLD at $42.38/share. I then sold it six months later for $47.01/share. While I made a 10.9% return on the stock, after accounting for commissions, my gain was only 6.2%, not accounting for capital gains taxes.

Retrospectively, this made me realize that small volume investing is generally unwise. When a small investment is successful, it has a substantially lower rate of return. Furthermore, a small investment must have a higher rate of return to have a positive payout than a large investment. After selling my initial portfolio of ETFs, which consisted of assets held in all sorts of random small quantities, I committed myself to only buying in larger volumes. Thus, the $2,000 rule was born. Only in rare circumstances will I invest less $2,000 in any given investment, as if I do so, I will be paying a large proportion of the return in commisssions. The name of this blog, “How would you invest $2,000?” is based on this observation. Anyway, the portfolio that I created in April 2005 has matured and evolved into the holdings that I have today. I will celebrate the second anniversary of my renaissance in investing on April 15th, 2007. (No, this is not coincidental; I wanted to create my initial portfolio in fiscal year 2004 and procrastinated a bit.)

2 Comments

  1. jacob

    It is quite noteworthy that higher investments lead to lower costs. But don’t you think that investing in ETF’s or mutual funds is a better alternative for small investors who may have less than $2000 or for that matter any investor who cannot track the markets or have the expertise to research a company in dept before investing?

  2. janet g

    It’s true that commissions and spreads will eat up your profit if you try to diversify with a small investment through a broker. But why not use the DRPs that many companies have established for your first steps in the investment world. It’s not as liquid, but you don’t really want to be jumping in and out anyway. The only problem(and it’s a big problem)is keeping careful records so you’ll know your cost basis when you sell. I’ve been very happy with my Proctor and Gamble dividend re-investment plan, and there are many many others. Just Google. And don’t use any that have fees!

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