Why You Should Not Invest in Individual Stocks

Many people start investing with buying an individual stock. I certainly did, my very first trade was Bank of America stock, I purchased it with my scholarship leftover funds. That was back in March 2009.
People typically buy stock they know or like the company, or they work there, or they got a recommendation from a friend, or they feel it’s a great company and therefore should be a great investment.
Let’s walkthrough one example. Most people would agree that Amazon is a great company. On Thursday, October 28, 2021 during the earnings call they reported quarterly revenue of 110B!
Imagine, a company posted 110B in quarterly revenue! Great news, right? Wrong…
Their stock dropped 4% after this announcement because both revenue and EPS were below analysts’ expectations. Revenue was off by only about 1B.
You would not have been a happy camper if you bought Amazon the day before, on October 27.
From here, it gets more exciting, the following day, Friday the 28, Amazon revealed 20% stake in Rivian
So, let’s see what this did to Amazon stock price over the period of three days. You see this huge drop, thats what happened after the earnings call. And after the electric vehicle announcement, the stock gradually started to recover.
Currently, Amazon’s Rivian stake is valued at about $3.8B. For a company that earning over 100 billion per quarter, is not even material. Amazon’s current Market Cap is $1.7T
Rivian is supposed to IPO in November. And this is what gets investors excited.
Most likely Rivian price would appreciate after the IPO and Amazon’s stake would increase. If Rivian stock goes “to the moon”, Amazon stock would most likely also appreciate.
Now, in the long run this might have huge potential. What if Rivian becomes a new tesla? What if Rivian reaches 1T valuation at some point? Than yes, Amazon’s stake would definitely be material.
But there are a lot of challenges and uncertainties ahead. Amazon ordered 100,000 vehicles by 2030, Rivian have not delivered any vehicles yet. First deliveries are not expected until next year.
With “everything shortage”, we should not be surprised if there are further delays. And there are also many players in the Electric Vehicles and competition is heating up.

So, lets reiterate everything we just discussed. Amazon records 110B quarterly revenue. Gets punished by the market. Then Amazon discloses a small investment in Rivian and market is cheering.
So, this may be enough to have Amazon stock rising again. In the long run, this may really help Amazon’s stock price.
Perhaps if you bought Amazon on Wednesday, October 27, you would be a happy camper after all.
Guys, my point is…There is just so much going on with any one individual company. So much information to process. A typical investor just does not have the time, patience, and skill to process and analyze every headline that is coming out.
Keep in mind, there are tons of Money Managers on Wall Street that have teams of super smart analysts trying to beat the market and make their bets and even they get it wrong half of the times.
According to article published by Forbes Magazine, last year 60% of actively managed funds underperformed the S&P 500. And these fund managers charge hefty fees.
This is why on this channel I advocate investing into board index funds.
Exchange traded or mutual funds. With broad index such as VTI, you completely eliminate any one company risk, you are well diversified, and you will receive quarterly dividends as many companies pay dividends.
My rule is, if your portfolio is less than 100k, I would not suggest you experiment with any individual stocks.
Most importantly, remember, investment is a long-term commitment. If you are not prepared for the long term, you should not be investing. Remember, your portfolio will face a crisis at some point. The only way to weather this crisis is to be prepared for the long-term commitment.