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Investing Can Be a Dangerous Drug

Posted by : Premraj | Posted on : Tuesday, November 24, 2009

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This article comes from Michael, a contributing editor of the Dough Roller, a personal finance and investing blog.

When I was 10 years old, my Uncle bought me five shares of Pixar Stock for Christmas.  At the time, I had no idea what stock was, or for that matter what Pixar did.  But at 10, I was a sharp cookie and found out fast.  I learned that at $22 a share, my Uncle had just given me $110 as a Christmas gift, which quickly moved him to the top of my favorite family list.  After pleading and begging with my mother to sell the stock so I could be the richest 10 year old ever, I gave in and decided to keep the stock and hope it went up.

What my uncle and I didn’t realize was that I had an addictive personality.  At 10 my hobbies included playing baseball and collecting sports cards, and I wanted to do nothing other than these two things for the rest of my life.  When owning a stock came along, I was ill prepared to handle it and with my lack of self-control, things got ugly.

In my house, we did not own a computer, so the only way for me to get stock quotes was to wait for the newspaper every day, or watch CNBC and hope that PIXR scrolled along the bottom of the screen.  Every morning I would wake up and grab the business section, and move my finger down the Nasdaq “P” section, looking to see how many quarters or eighths Pixar had moved.  Then, as my laziness gene took over, I would make my mother watch CNBC from around 11am until 3pm (Summer months of course) hoping I would get that 2 seconds of glory when my stock scrolled across.  It rarely happened but the rush was amazing!

This pattern continued for a few months before I realized that I was too young to care about a few dollars here or there and did my best to forget that I even owned a stock.  It wasn’t until I was 18 years old that I remembered I owned 5 shares and quickly ran to Scottrade to find out what it was worth.  Once I realized I had close to $400 in stock, I smiled and sold it, again moving my Uncle up another notch on my family list.

I know that for the most part, my anecdote does not represent the masses when it comes to how they feel when investing money, however, I also know that I’m not alone.  My personality when combined with gambling or investing becomes a very dangerous mix that for the most part has kept me away from investing.  I feared that if I get involved again, I will let it take over my life, and I will live and breathe Wall Street no matter how little is invested.

That’s why I’ve decided on the short three-step plan below to ensure I stay cool and calm when investing.

(1) After finding a stock, pre-set a buy and sell price – Before getting involved, I need to know exactly what my goals are.  If I find a stock that I think would be a good investment, I set a buy price.  If the stock never reaches that amount, I need to have the self-control to move on.  Then, if I do end up buying shares, I set a low and high sell price.  Trying to predict when the pinnacle of a stock occurs is madness and usually leads to losses, so I’ve decided to take my gains when I can get them and move on.

(2) While I own the stock, stay away from it – With Pixar, I drove myself absolutely crazy checking quotes by the minute, and it monopolized my life.  I’ve now decided that I would simply set email price alerts so if my stock reaches the high or low value I determined, I would then sell.  Price alerts can be created using any online discount broker today and this feature has saved me a great deal of time.  In addition, I check quotes only for a few minutes once a week just to make sure I’m keeping on top of things.

(3) Only invest what I can afford to lose – I know it sounds cliché, but it’s the most important of any rule.  If you’re unfortunate enough to find yourself behind in the game, don’t think that you have to throw more money at the problem to fix it.  Chances are the stocks or system you are using is to blame, and no matter how much money you think can fix the issue, it will only lead to more serious problems.

Using these steps, I have once again decided to invest a little bit in a handful of stocks.  So far, I’m on the right track and have not let a few hundred dollars determine how I spend my days. I hope that the stocks I pick are winners but if their not, no biggie.

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