Some people get very lucky with their first stock purchase, and some end up losing big. Whatever the outcome, one's first (or first memorable) stock purchase always has some valuable investing lessons to teach.
We asked three of our analysts about their first stock purchase they can recall and what it taught them. Here is what they had to say, so you can learn from it, too.
Selena Maranjian: I can't recall which stock was my first, but a very early stock buy for me was America Online, now going by AOL (UNKNOWN:AOL.DL). At the time, in the mid-1990s, The Motley Fool had recommended the stock and bought it in its real-money portfolio. I liked the Fool's coverage of the company and its growth rate, and I was myself a satisfied customer. Over many years, AOL turned out to be a great investment for me -- in part because of the lessons I learned from it.
For example, I learned that you don't have to be one of the first investors in a great growth stock to make a lot of money. The earlier you enter the picture, though, the better you can do. For example, with AOL, I saw the value of my investment grow 70-fold! The key reason I was able to get such a return is patience. I hung on over many years, as the stock surged, then plunged, and continued to be rather volatile. Successful investors need to be calm and rational, and not panic and sell whenever there's a downturn.
I made mistakes, such as not selling before the Internet bubble burst in 2000, when my gut (and my mom) told me that the stock was wildly overvalued. Had I done so, I would have walked away with far more than I eventually netted. The company merged with Time Warner in 2001 and then struggled for many years, falling steeply in value. I was fortunate that I needed money for a down payment on a house in the early 2000s, as I sold a big chunk of my AOL shares before they fell further. The merger never delivered on its promises, teaching me yet another lesson: that though many mergers can be exciting, many also turn out to be regrettable.
A final lesson is this: Though I hung on way too long, since I'd bought so early and the stock had risen so much, I wasn't wiped out. If a stock starts at $10 per share and surges over many years to $200, even if it falls by 80% to $40, you'll still have a gain.
Leo Sun: The first stock I bought was Apple (NASDAQ:AAPL), for around $125 per share in 2008. At the time, Apple was one of the most commonly daily traded stocks in the market because of its high volatility. When the markets hit rock bottom in late 2008 and early 2009, I was stuck like a deer in the headlights, unwilling to sell my position or average down on more shares.
As the market recovered, so did Apple. But the financial crisis persuaded me to set trailing stops (which automatically sell a stock after a preset decline) under my stocks. That was a mistake, because the 2010 Flash Crash triggered a sell order on my Apple shares far below the 15% trailing stop I originally set. That was when I learned that trailing stops (and stop orders in general) will be executed at much lower prices if buyers can't be found. As a result, I prematurely sold my Apple shares at around $199, but the stock bounced back to its pre-crash levels minutes later.
I eventually bought back Apple shares, but here are the two key lessons I learned. First, to average down on fundamentally sound stocks during market meltdowns. Second, long-term investors shouldn't conflate short-term trading with a fundamental approach to investing. Mixing the two together, as I foolishly did with Apple stock, can cause you to prematurely sell promising investments.
Dan Dzombak: One investing lesson I got from my early stock purchases is that stocks can drop precipitously, but that if you've done your homework, it can work out well over the long term.
I bought Melco around $5 and Phillip Morris around $50. Melco had been dropping and subsequently fell to around $3, and Phillip Morris dropped to $33. I was steadily adding funds to my account, and while dismayed that both stocks were down more than 25%, after checking my analysis I was sure I'd make money on both over the long term, given the strength of their businesses. I added shares of both companies steadily over the next few months, and was rewarded over several years as both stocks appreciated substantially.
The key lesson is that you need to do your own due diligence and research the companies you are considering buying stock in. Too many people buy a stock based on a good story or a trend, only to sell out of it at a lower price when there is a mere hint of bad news. Only by doing real research can you have the confidence to hold on to -- or buy more of -- a business when the stock is being unduly affected for no other reason than that the general market is down. It's important for an investor to understand the two or three key drivers of the business, its competitive advantages, have an idea where it will be in 10 years, understand its balance sheet, and be able to calculate a basic valuation of the business.
Dan Dzombak owns shares of Philip Morris International. Leo Sun owns shares of Apple. Selena Maranjian owns shares of AOL and Apple. The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.