Lessons Learned about Stock Ownership

As I have grown in years, somelessons have been hard toignore, try as I might. One isthat life rewards delayed gratification.This goes hand-in-hand withpatience, a virtue that usually paysoff in the end. There is no truerexample of this than in the ownershipof tiny bits of publicly traded companies,the stock market.

It's easy to get excited about fastrun-ups, as we've all seen recently withGoogle. You know, get rich quick. As acautionary tale on impulsive speculationof a volatile stock, years ago Iknew someone who bought stock inDenny's restaurants when he was anintern, strictly on a tip.

Tempting Tips

Now what is it about a whispered"tip"on the stock market that inducescredibility? Beats me. Anyway, myfriend took a lot of grief for his impulsivebuy, and the stock immediatelyplunged in value. But contrary to alladvice and common sense, he decidednot to immediately sell his devaluedstock as a way of teaching himself alesson. As luck would have it, monthslater there was a brief rally in the shareprice and he quickly sold for a 50%profit, minus transaction costs andtaxes, of course.

Many folks in this situation wouldtake this windfall as a divine communicationthat they have the Midastouch and would feel compelled torepeat this behavior. But my friend waschastened by the whole adventure andlearned that acting on a hot tip was noway to run one's affairs. He wouldwait until he was better prepared toventure into the stock market.

Foolish Forecasting

After patience, the next mostimportant thing I have also painfullylearned about stocks is that ourinability to predict developments inthe market benefits from diversificationto minimize loss and maximizethe chance of gain over a long period.By diversification I mean buyingstock shares in two dimensions, spaceand time. For instance, large Americancompany value cycles don't usuallymatch foreign company cycles,small American company cycles, andso on. We've learned to buy some ofeach as a hedge against being in thewrong place even at the right time.These areas, plus real estate andbonds, are most commonly used todiversify holdings.

Physician's Money Digest

My friend has learned this lesson,too, and has humbly asked me topass on his recommendation to youall—diversify your stock purchases indifferent areas as well as on a regularbasis. Enjoy this issue's featured articleon stock investing, and have aHappy New Year from all of us at.