A Tale of Two Stocks

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By jtallenmd
December 21, 2006

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Lessons Learned From Investing

I first started investing in individual stocks in 2000 when I opened an IRA at E*Trade. I bought two stocks that year. Within just a few months of my purchases, the stock market had made different assessments of my two choices, strongly favoring one and punishing the other. In both cases, I bought more. In both cases, the market was wrong. When I went with the market, I lost. When I went against the market, I won (big time).

The first individual stock I purchased was Viropharma (VPHM), purchased on 18 Jan 2000 at a price of $64.69. Viropharma had announced their work on a drug, Pleconaril, that showed promising results in treating the common cold. They had completed stage 3 trials and were only waiting for FDA approval. Within two months, the market had bid the price up into the mid $90's. "Hey, this is great," I said to myself. "A 43% gain in less than two months. This must be a really good stock. I think I'll buy some more." So I did, purchasing on 8 Mar 2000 at a price of $95.00.

At the end of May, the share price had dropped to $15.13 and my investment had lost more than 80% of its value. In 2002, the drug was finally reviewed by the FDA. They did not give the company approval for Pleconaril. The FDA reasoned that colds are relatively benign and self-limited, so any medication used to treat them would need to show tremendous benefit to overcome even minor risk. The stock dropped like a rock. In October 2002, the share price dropped below a dollar, reaching a low of 89� and my investment had lost 98.9% of its value.

I held onto the shares, but only because it wasn't worth the commission price to sell them. Fortunately, this stock is showing some signs of life and is now back around $15. If only I had bought more when it was selling for 89�.

The second stock I bought was Apple (AAPL) purchased on 25 July 2000 at a price of $24.97 (all prices are split-adjusted). By the end of the year, it was trading for a price of $7.44 and my investment had lost more than 70% of its value. Because all of my investments were in an IRA account, I could not add more money.

Fast forward to 2002. Apple stock was beginning to make a come back. The iMac was doing well and the iPod was going into its second year on the shelves. On 17 April 2002, the price climbed to a 52 week high of $13.09 and my investment had climbed back up to 52% of its original value. Analysts were beginning to recommend Apple as a "Buy".

I was ready to purchase more, but was waiting for my July bonus for an influx of cash to my IRA. By the time I had the cash, the stock was trading at about half its 52 week high of just a couple months prior and analysts had downgraded Apple. Most of the price decrease had come with the announcement of bad news from Intel, which brought down the whole tech sector. But wait!!! At the time Apple didn't use Intel chips. It didn't make sense that Apple was being punished with the rest of the computer makers, especially since things were starting to improve in Cupertino.

That left me with a problem. I was optimistic about Apple's prospects, but both the market and analysts were telling me that I was wrong. It was one thing to go against the stream and buy Apple computers, but it was another thing entirely to go against the stream and buy Apple stock. After debating for several weeks, I finally purchased more shares of Apple on 29 Jul 2002 at $7.37. Apple's price at the most recent market close is $84.76 for a healthy 1050% gain.

Lessons Learned
1. Invest with your mind and not with your heart.
When Viropharma initially went up, I invested with my heart. I let my initial exuberance in short term performance sway my investment decisions and I made a bad investment decision.

When Apple was punished in 2002, it didn't make sense. I didn't let the market and pundits sway me from making what turned out to be an excellent decision.

2. Buy what you know.
I really didn't know Viropharma. Yes, I knew a little bit about the stock and about the product. I had read about the development of the product and, given my background in both biology and medicine, it made sense both medically and scientifically. However, where I fell short is that I didn't look closely at the clinical trials, which showed limited benefit, and then only if the medication was started within 24 hours of initial symptoms. Also, I did not know the FDA's mood concerning this drug.

I know Apple. I have been a Mac user since my very first computer purchase, a Mac Plus in 1987. I was emotionally invested in the company before I was ever financially invested in the company. I had followed the company's triumphs and travails for years because, as a Mac user, it affected me personally. In 2002, there was light at the end of the tunnel and I knew it wasn't an oncoming train.

3. A significant price drop is a reason to reassess--not a reason to panic.
When Viropharma dropped it was for a very good reason. They only had one product in the pipeline and the FDA had not granted approval for that product.

When Apple dropped in 2002, it had nothing to do with the company. The company was still a good company. When the stock of a good company drops, that stock is "on sale" and represents a good opportunity to buy.

These are just a few of the lessons I learned from the purchase of my first two stocks. I think I have learned my lessons reasonably well, although I am still learning. I currently subscribe to HG and am amazed at how much I have learned through the newsletters and board discussions. Even without the stock picks, I think it has been worth the subscription price.

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