Why You Should Be Cautious When Investing In Individual Stocks

Welcome, everyone. My name is Tan and I am an independent CERTIFIED FINANCIAL PLANNER™ practitioner. Today, I want to go over why you should be cautious when investing in individual stocks.

First, the risks.
- The company can go out of business at any time.
- Examples of famous companies that no longer exist or have filed for bankruptcy are: Blockbuster, Circuit City, Compaq Computers, Enron, Lehman Brothers, Pets.com, Tower Records, Radio Shack, Toys 'R' Us.
- Here is a video I took of a Toy ‘R’ Us store in San Mateo going out of business.
- When I was a kid, I took all of my red envelope money and used it to buy a Sega Genesis at Sears. Sears was a big and successful company when I was a kid. Now, Sears has closed over a hundred stores and they could be out of business in the future. We just don’t know.
- Amazon, Apple, Google, and Facebook can all go out of business. No company is safe.
- A stock has systematic risk (undiversifiable market risk) and unsystematic risk (diversifiable market risk).
- Examples of systematic risks are interest rate risk, inflationary risk, political risk.
- Risks that all companies are exposed too and cannot be eliminated.
- Example of unsystematic risks are business risk, financial risk, operational risk.
- You can eliminate unsystematic risk by diversification, having a diversified portfolio.
- If the stock price falls, you lose money, and you could be out of a job.

Some investors stated that they have beaten the stock market.
- The questions I have are:
- Are you beating the stock market on a consistent basis?
- What index are you using because if you have a couple of individual stocks that are in different investment categories, you have to compare your portfolio to a weighted index that matches your portfolio.
- For example, you have 50% of your money in a large company and 50% of your money in a small company, then you should compare your large company with the S&P 500 index and your small company with the Russell 2000.
- Are your beating the market on a risk adjusted return?

The biggest advantage in investing in individual stocks is the potential for high returns.
- An example, is buying Amazon at $2 per share in 1997 and it’s $1,600 per share in 2019.
- (New - Old) / Old then X 100 = ($1,600 - $2) / $2 = 799 then X 100 equal 79,900% in total return. You do not get that type of return by investing in an index or a diversified portfolio for 22 years.
- The number looks good because we are cherry picking a successful stock, but that is not always the case in real life.
- Let’s look at a bad investment like Kodak.
- Kodak at $30 per share in 2014 and it's now $3 per share in 2019. That is a negative 90% on your money.
- To put it into perspective. If you invested $1,000,000 in Kodak in 2014, 5 years later, your portfolio balance would be $100,000.
- If you want to break-even going from $100,000 to $1,000,000, you will need a 900% return.

Wealth perspective
- Of course you can invest in individual stocks, just be careful when doing so because the market does not compensate investors for taking unsystematic risk.
- You are going against the big companies that have millions of dollars, hundreds of employees, and a supercomputer. Their job is to go to work everyday to extract profit from other investors by buying and selling stocks against them.
- We like to say, “who is on the other side of the trade?” If you are buying, who is selling? If you are selling, who is buying?
- When the elephants fight in the room, the ants get trampled.
- How do we win? Invest in low cost and high quality diversified investments then rebalance.

Thank you for watching. This is Tan. Your trusted advisor.

This material is for educational use only and does not constitute tax, legal, or investment advice. Information may be changed or updated without notice. Consult with a licensed professional regarding your personal circumstances.

Please do not excerpt or copy this information without prior consent from TAN Wealth Management.