As a CPA and former Certified Financial Planner people often ask me for investment advice. Please understand any advice given on my blog should be run by your investment and tax advisors prior to implementation. Goes without saying, but I said it anyway. My favorite question centers on what the best investment I ever made was. My usual answer is Mr. Softy – Microsoft (msft). It’s my favorite because my wife and I made a substantial investment in the company early in our marriage and held on for over twenty years. This investment allows me to demonstrate risk and patience with the same investment.
In the early 90s not every desk had a computer on it and certainly most families had not yet purchased a home computer. Though unless you were living in a cave you knew something of the Bill Gates story and recognized that personal computers were being purchased for office workers like crazy. The reason I took the plunge was an article I read in a business periodical on hot Texas afternoon, more of a biography of Bill Gates really. In the article he described how he had no intentions of getting into the pc business but rather wanted all of the pc manufacturers to use his software. With every pc sold Microsoft would receive a royalty for its operating system. As he explained it, there might be a dozen companies that fight it out in the pc marketplace, but it really didn’t matter to Microsoft who the winners were because they would win with every sale. I bought his argument and a few days later purchased 100 shares of msft.
I was in my early 30s at the time and had been an active stock investor for a number of years. I sold some apple stock I had which was in a slump and purchased 100 shares of msft on June 17, 1992 (CPAs are somewhat anal when it comes to retaining tax records and I still have all of my old trade slips going back to the mid-80s). The next day I sold a covered call on the shares going out several months and picked up premium of $1,619 dollars. In writing a call you promise to sell the stock if it rises to a certain price by a specified date. This is where the story gets interesting as the stock had announced a 2 for 1 split a few days prior to my initial transaction which meant the calls I had written were trading both as a pre and post-split security. My broker entered the call incorrectly which resulted in me having written a call on 150 shares when I only owned 100 shares which resulted in me being naked on fifty shares (unlimited liability). To fix this I had to buy an extra 50 shares of stock, which ended up being my best investment ever.
As msft skyrocketed from the early 90s through early 2000 and the tech bust, it split 2 for 1 four times with my share count growing from 150 to 2,400. It would have been 2,400 except I sold about one-half of my position to diversify after the March 1999 split. That sale alone grossed me over $50,000 when my initial investment in 1992 was only around $9,300. So I had recovered my initial investment, had forty grand in the bank and still owned 1,200 shares of the stock. Best investment ever.
The key to successful investing in stocks is not just picking the next winner but behaving prudently as the stock moves through time. Buy more when it drops, sell to diversify if it splits or the value gets to be too much of your portfolio. All I had to do with msft is trim back after the splits.
The other way to look at an investment is to recast your basis in the stock. Last Friday the stock closed at $36.56, my basis in the shares remaining in my open purchase account is $1.93 per share. That’s a 19 bagger boys and girls and you too can do this in our more contemporary times. Look for a company that appears to have the ability to be a Captain of the Universe and then study its stock and SEC filings in greater detail. Amazon comes to mind as does Facebook. I’m not suggesting you buy those stocks, I’m encouraging you to study those types of situations and come to a position. Should I buy or should I look for a better opportunity – that’s the question to ask yourself.
If I would have held onto all my shares as they split (there were five 2 for 1 splits in total and my shares would have grown to 4,800) they would be worth around $175 thousand today and pay me about $5 thousand each year in dividends. If I would have kept all the shares and reinvested all the dividends my share value would be north of $225 thousand today. I feel like I did the right thing splitting the baby and selling some of the splits early on. Diversification is important and I definitely would have had too much invested in one company.
And I’m pleased to report that today, over 21 years since my initial investment in msft, I still have shares remaining in my account. Best investment ever.