Everyone wants to put their free cash flow to work, one way to do that is through stock investing.
Creating your own stock investing strategy and managing your own money can be a very fun and rewarding task, much more than I had ever imagined it to be.
Just like many of you, once upon a time, I was frustrated with the returns I was getting from robo-advisors, mutual funds, and other investment properties. I had finally decided to take the leap into direct investing and wanted to find the most optimal way to have my money duplicate. But I was nervous, worried, and mostly scared that I didn’t know enough about the market and would lose my money.
In this article, I want to share my story of how I removed my fear of managing my own portfolio as well as my strategies and techniques for how I garnered a 20% return in my first three months of stock investing. Before I dive in, I will put out a disclaimer that you should invest at your own discretion and direct investing can be very risky so you should be ok with losing the money you are putting into the market.
Why I got started with stock investing
I first wanted to get involved with stock investing back in 2016 when I started working full time and had some sort of free cash flow. I didn’t trust myself thinking that I didn’t understand the market at all and instead needed to test the market. Due to this, I started an account with ‘Best Brokers’, a free stock market simulator and invested in two stocks, Adobe and Nvidia. This stemmed from a pretty bullish view on Adobe’s business model transformation going successfully and the growth in the chip manufacturing market. However, because I didn’t have any real money invested, I never really opened the app back up.
Fast forward a few months and once again, I was growing annoyed with the fact that my cash wasn’t making any returns for me, so I decided to research my options. I looked into the TD E-series funds and a few other options based on the model portfolios from Canadian Couch Potato, but I didn’t like the management fees. Wealthsimple at the time was offering a free $10,000 managed so I signed up and threw $1,000 into a high-risk profile. I was watching it daily to see how it performed. After seeing it fluctuate for a few weeks, I put more in and let it sit.
Wealthsimple is a great service for managing your money, but I realized that I was frequently checking up on my return and I knew in the back of my mind that a Robo Advisor was supposed to be for the investor that doesn’t want to actively manage their own funds. At this point, I decided to open back up my ‘Best Brokers’ account and saw that the two stock picks I had made actually did quite well, both well over 100% in returns. This was the tipping point for me to decide to manage my own funds.
Picking a brokerage
As I decided that I had made such good returns on the two picks I had bought months ago, I researched my options for a brokerage. There are many options available, you can go with your bank, for example, TD Direct Investing, or a third party like Questrade. Here’s a nifty article that outlines all the popular brokerages and their fees. Personally, I didn’t like TD’s standard $10 commission fee on buying and selling stocks and I didn’t want to open a new account at a different bank so I also crossed out CIBC’s Investor’s Edge even though it was only $7 per trade. I had found Questrade online previously and found that it was only $5 and the online platform looked intuitive. Getting an account set up and transferring funds took a few days, but the process was pretty straightforward. If you’re in the US, Robinhood is also a great platform with free trading, but unfortunately for us Canadians, we have to pay on transaction fees.
If you’re looking to use Questrade, you can receive up to $250 in free funds (dependent on how much you fund your account with) if you use my referral code 596107515419196.
Deciding on an investing strategy and your risk profile
When I first jumped into the Questrade interface, it only took me 30 minutes to get familiar with it, so I won’t cover that here. They also have really good customer support in any case you do get confused.
Now that you’re in, you will want to understand how risk averse you are and that will help you determine the type of stocks, options, or ETFs you should trade. In my case, for the money in this portfolio, I was very open to risk and losing significant amounts of money, if it meant that there would be potential for a high return. Due to the nature of the industry I work in and my personal interests, I was particularly drawn to follow stocks in the retail and technology sectors. In retail, I am pretty aware of the growing e-commerce trend and reading metrics related to that. In technology, I’ve spent 3 years learning about subscription businesses and understand the economics of such services.
The basic types of investing strategies are as follows:
- Value investing – popularized by Warren Buffet, where he looks for companies that he believes are undervalued in the market, then buys and holds their stock for the long run.
- Income investing – follows the use of securities that pay out over time in the form of following a fixed income security, or other items such as dividend-paying stocks, ETFs, etc.
- Growth investing – investing in companies that one believes has above average revenues and profits and was widely popularized by Peter Lynch. Generally, this is smaller companies that are in a growth stage.
- Small cap investing – investing in small companies generally under $2B in value that is very risky.
- Socially responsible investing – investing in companies that are socially and environmentally responsible in the way that they conduct business.
How I made my 20% return: short-term value investing
There isn’t really a specific word or phrase for the type of investing strategy that I’ve been using, but we can call it short-term value investing. I align closely with Warren Buffet’s strategy of value investing, but because of the size of my personal portfolio right now, I don’t play the market with a long-time horizon. Instead, I look for companies that are undervalued in the short-term and believe their stock price will rise within a maximum three month time horizon. The shorter timeframe the better as I can look for another company to bet on and benefit from continuous compounding.
Investing case study example: Facebook & Cambridge Analytica
An overview of the situation
To explain this strategy a bit further, one of the stocks that I’ve made a 6% return on in three days on was Facebook. As many are aware of, Facebook got hit with a data breach scandal in March due to Cambridge Analytica, the political consulting firm that worked on the Trump Presidential election campaign, where data of up to 87 million Facebook profiles was wrongfully accessible. While I won’t go into the specifics of the case, Facebook’s stock tanked roughly 18% from $185 per share on March 16th to $152 per share on March 27th and continued to face tons of negative light in the media for the scandal. Whatsapp Co-Founder, Brian Acton, even sent out a tweet with the hashtag #deletefacebook.
It is time. #deletefacebook
— Brian Acton (@brianacton) March 20, 2018
No material drop in user numbers
Facebook’s executives, namely Mark Zuckerberg as the face of the company were in a lot of light, and he proceeded to testify in front of Congress. I watched this to see what Facebook’s roadmap would be to improve their privacy and data security as it impacts their stock price. In the meeting, Zuckerberg made it clear that there had been no dramatic drop-off in user numbers, which told me that this could be a good buying opportunity. Here is a full clip of day 1 of Zuckerberg in front of Congress if you’re interested.
Buying and selling within 72 hours
A few days after this, knowing that Facebook is made up of roughly 73% institutional ownership and that they were reporting earnings on April 25th, I decided to buy the stock. The reason institutional ownership matters is that they generally will look towards standard metrics like revenue growth, user growth, average revenue per user, and such, all of which I felt like Facebook wasn’t going to drop in given the hint that there was no material fall in user numbers.
Here’s a picture of how that turned out.
Going long vs. short term
Within three days, I profited $10/share on Facebook. I could’ve continued to hold my shares of Facebook for a bit longer, but I was worried about new scandal information that would’ve sent the share price back down. If I had continued to hold to today ($188/share), I would’ve been up 14%. However, due to my short-term investing strategy, I used the funds from the liquidated Facebook position to make another bet in another stock – which gave me a 19% return over the next month, so it all worked out.
You win some, you lose some
You might be wondering how come I only made a 20% return when I had a 6% profit on Facebook and 19% returns on another stock in the following month. The reasoning for this is that my shares didn’t encompass my entire portfolio, I made multiple bets. Some of these did go down in the short term (especially around earnings releases) and those became stocks that I’ve held until they went back up.
The other thing to stay aware of is exchange rates, as I lost a significant amount of money converting money from CAD to USD to start trading. By monitoring when the currency you’re converting from has a good exchange rate can also help give you another source of gains. It just so happened in my case to be a loss (but a good lesson as a new investor).
That’s all for now, stay tuned for my next post as I go more in-depth on my investing strategy and other stocks that I’ve cleared profits (and losses) on.