Monday, April 4, 2016

Shoulda, Woulda, Coulda

I have a small brokerage account at Robinhood that I use occasionally for very small stock trades. I like it for small trades because it wouldn't make sense to buy just a few shares of a stock if I had to pay $7-10 to buy it and then again when I sell. I don't like that I can only manage the account from my phone and not a regular computer and I have noticed some delays in trades being executed, so I don't intend on using the account for anything other than small trades where I don't want to pay brokerage fees.

A few weeks ago, I noticed that Tesla Motors ($TSLA) had dropped a lot and I decided to buy. They had dropped from around $200/share down to under $150/share in a matter of weeks. I've been following the company for a while and am a big fan of what they are doing, I even have some friends who work there. I only had enough cash in my Robinhood account to buy 1 share and bought it at $151.00.

Now, let met say that I would NEVER have bought 1 share of ANYTHING in my normal brokerage account (okay, maybe $BRKA, but I don't have that much money yet). Because I would pay ~$16 to buy and sell, the stock would have to go up by $16/share just for me to break even. Not only that, but because our investments total several hundred thousand dollars, I would need to invest several thousand dollars in anything for it to make a meaningful impact on our overall portfolio. I treat this Robinhood account as a teeny tiny play account. If I lost everything it would not be the end of the world, and my long-term goals don't depend on the account in the slightest.

So, I bought a single share of stock. Now, just a few weeks later, the stock is up almost $100/share! The only problem is, I already sold it for $202.50. I didn't need the cash for anything and I didn't buy anything else, it just felt like I had a good gain and figured, why not lock it in. Sure, it could have gone either way after I sold, so I'm still pleased with the 34% gain I made in less than a month, but it's sometimes hard to keep that in mind when I see it continue to climb and climb.

It's not the end of the world that I am missing out on more gains, but I learned some interesting lessons about my own behavior.

I learned that:

  1. I behave differently with my money when the amount of money I'm dealing with is relatively small

  2. Even though trading commissions are low, when they are eliminated I think less before acting

I also find it interesting what I mentally consider a 'small amount' of money. When I think about investing money, $150 doesn't feel like much. When it comes to spending money though, $150 seems like a lot more. I'm guilty of letting things sit in my Amazon cart for days or weeks deciding whether something is a want or a need and whether I feel I can delay the purchase. At the same time, I don't think twice investing thousands of dollars where I could make or lose $150 in an instant.

Numerous studies have come out and shown that the more active an investor is in trading, the worse their long-term results. Critics of Robinhood argue that just because they've found a way to eliminate trading costs, doesn't necessarily mean that it is a win for the consumer, and I tend to agree. Even though trading costs aren't dragging down investor performance, poor investor behavior is amplified. I'm glad I have my fun little account and it's enjoyable to play around with, but I know I wouldn't have been able to amass the funds we have so far if I were constantly churning my account and hoping to find the 'next big thing'. Instead, my real investments are primarily in much more boring index funds that I rarely touch. Having a big win like this may seem tempting to allocate more of my account to risky trades, but I have no plans of doing so since I know that I won't be able to replicate this type of trade on a regular basis (and neither can you, so please don't try with anything you can't afford to lose).

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