Investing

What Buying Tesla Shares for $26 Taught Me About Investing

Buying Tesla Cheap
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Back in 2012, I bought 190 shares of Tesla when it was valued at just over $26. What happened in the days and months after I placed that order taught me more about investing than I could have ever imagined.

In this post, I’ll share a few of the valuable lessons I learned from the experience, explain why investing in stocks is so hard, and discuss the most effective way to build wealth over time.

Spoiler alert: I sold my shares long before they hit $900 (and I feel fine about it…).

What Happened After I Bought Tesla in 2012

I have a personal rule that says it’s OK to make an occasional bet with 5-10% of my available investment funds.

It’s hard — next to impossible, even — to beat the market by picking individual stocks, so the bulk of my savings goes towards maxing out my 401(k) and IRA, and into “boring” but relatively predictable investments like index funds.

But I enjoy investing and thinking about which companies will play a big role in the future, so this rule gives me a way to keep personal finance fun without gambling my family’s future.

Back on August 7th, 2012, I placed a small bet on Tesla and bought about $5,000 worth of stock in the company.

I couldn’t have timed things better. Looking at the historical price index, here’s what happened soon thereafter.

Tesla stock price history from 2012 to 2020

Since I don’t make very many of these types of bets, this was one of the few individual stocks I owned at the time. That made it fun and easy to track, as it wasn’t just a little outlier in my portfolio of dozens of holdings.

I still remember the feeling when the stock would jump 20% in a matter of hours and I would calculate how much my net worth had increased.

Fun stuff!

However, while I’m extremely grateful I made the decision to invest in the company, I was surprised by how mentally taxing it was to hold a stock like this. What started out as a little bet quickly transformed into a solid chunk of my net worth.

And the price volatility was stressful.

While the overall trend was up, there were plenty of downturns. And when you hold a stock like Tesla during a period like this, you’re checking it multiple times a day (at least I was).

There’s a behavioral science principle called loss aversion which says that losses loom larger than gains. I definitely experienced that phenomenon. Don’t get me wrong: watching the stock climb felt great. But watching it drop? That hurt. I went to bed on more than one night thinking about my losses. 

Another behavioral science principle is the wealth effect, which says that spending increases when someone’s portfolio value increases. I remember experiencing that as well; I started justifying expenses I probably wouldn’t have made otherwise just because my investment was doing so well.

Finally, one more behavioral principle I got to witness first hand was overconfidence bias. I actually started to think I had a skill for investing; that maybe it was even something I should do as a career.

Ironically, I had recently taken a deep dive into the field of behavioral finance. So I knew about all these biases. But, let me tell you… experiencing them first-hand was entirely different.

Three Lessons I Learned About Investing

As I write this, the price of Tesla stock is spiking beyond $900 per share. If you do the math, that means my little $5,000 investment would have been worth around $170,000 today.

And of course, I say “would have been worth” because I sold my shares a long time ago.

Of course I sold them! I realized pretty quickly that I wasn’t cut out to hold a stock like this for the rest of my life. And judging by the volatile trading activity, very few people are either.

I held on for 14 months, finally cashing out with a return of over 500%.

Tesla Sell Order

And while I’ve certainly wrestled with a bit of “what if, should have, could of” over the years, I’m actually not that depressed about selling early.

After all, if you would have told me, 14 months prior to buying those shares, that I would have scored a 500% ROI on a single investment?

I would have taken that deal in a heartbeat.

But another reason I’m not as disappointed about selling as you might imagine is because this experience laid a foundation for building wealth for years to come. The money I made was nice (really nice), but what I learned about myself and about investing is invaluable.

Lesson #1

Investing in individual stocks requires making two really good decisions: when to buy and when to sell. And both of these decisions take a combination of luck and skill to make.

My purchase of Tesla shares wasn’t the result of a deep dive into the company’s financial statement. I simply thought the company was going to be big in the future and invested in it.

I wasn’t skilled enough to have held the stock for long enough to get the maximum return.

And this is from someone who has read every single Warren Buffett biography and shareholder letter. I had probably read Warren Buffett’s quote, “our favorite holding period is forever,” dozens of times.

And I even remember telling people that I planned to hold the stock for the long-term.

But one day, after some more major price fluctuations, I decided to put a stop order in at a certain price. And a few days later, it triggered.

Lesson #2

Buying and holding an individual stock is hard for the average investor.

Say I didn’t sell back in October of 2013. It’s very likely I would have sold sometime soon after.

Most of the massive gains Tesla has experienced since then came during the last few months of 2019 and early 2020. So, I would have needed to hold on for another seven years — a period during which there were lots of price fluctuations and tons of uncertainty about the company’s future, but not exactly much in the way of long-term growth.

The bigger factor though is how my life changed over that time. Three kids, two moves, career changes, a house, a house renovation, and plenty of medical bills; life events like these play an important role for a smaller investor.

Large investors don’t have to think about things like liquidating their holdings to pay for unexpected medical bills. But for everyday people like you and me, something like that can certainly be a factor in our investment returns.

Since the majority of people don’t carry a fully-funded emergency fund, it’s often stocks that get liquidated at inopportune times. And selling at the wrong time is never ideal.

Lesson #3

I like to think of personal finance as a game. The end of the game is becoming financially independent — getting to the point where your income from investments exceeds your expenses. And that means winning the game requires winning over decades, not months or years.

The math is pretty simple. You have four factors:

  1. How much you make.
  2. How much you save.
  3. The rate of return of your savings.
  4. How much time you let your investments compound.

Many people are shocked by the next thing I’m going to share with you.

If you’ve ever read an investing book, you’ve probably read a chapter on the power of compound interest.

That chapter probably went something like this…

Let’s say you’re 30 years old, making $3,000 a month. You’ve managed to save and invest 10% of your income — which, in this case, is $300 a month.

It turns out that earning a 7% rate of return, you’ll have $153,000 by the time you’re 50.

That’s not so bad, right? But can you do better?

Well, let’s say you manage to earn 9% a year, saving that same $300 a month. You’d then have about $193,000 saved up at age 50.

A little better, right?

Of course, I should note that beating the market by 2% each year (i.e., going from a 7% return to a 9% return) is rare over the course of decades. There are very few people in history to have a track record of outperforming the market over a 20-year span. Most people who try fall well short of that goal.

So here’s where things get interesting.

Say you increase your savings rate by just 5%, to 15% of your total income. This has you saving $150 more per month. Assuming your investments earn 7%, in this scenario, you’d have $229,000 at the age of 50.

Save 20% of your income and you’d have $306,000!

In other words, you’re better off saving more than trying to beat the market.

Saving More Is a Sure Bet

What I’m trying to tell you, as well as what I want to leave you with, is that it’s going to be your savings rate that matters most when it comes to your ability to build wealth over your lifetime.  And that’s something you have a fair amount of control over.

Understanding this and putting it into practice over decades gives the average person, like you and me, a fighting chance to build a good amount of wealth.

Keep in mind, a rate of return of 7% is historically about how the market has performed. So, these types of returns are available to anyone who stays in the market.

Furthermore, investment companies like Vanguard and robo-advisors like Betterment have created funds like Target Retirement Funds or goal-based portfolios that basically take care of all the complicated stuff on the investing side — you can just worry about your savings rate, piling up as much money as you can.

Further reading: Betterment vs. Vanguard – A Financial Planner’s Comparison.

The Best Way to Build Wealth

I talk to a lot of young people about investing. And more times than not, they want to talk about what stocks they picked and how they’re doing. In a bull market like we’ve been in, my guess is they’re doing quite well.

But recently, I gave a talk at a local meetup about investing for millennials. And during the Q&A, one woman asked me something along the lines of, “Do you think it’s a good idea to just put my money in Vanguard’s Target Retirement Fund and just focus on increasing my savings rate over time?”

I wanted to give her a high five. She gets it.

In fact, if I were to place a bet on who will have a bigger net worth decades from now — the guy who can’t stop talking about how much he made on one investment, or the woman who chose to automatically invest 15% and then barely look at her portfolio — I would choose the latter every time.

Because it’s that simple-but-effective investment philosophy that represents the easiest way to get rich.

Yes, it takes time. Yes, it’s hard to brag to your friends about it. But it 100% works.

R.J. Weiss
R.J. Weiss is the founder and editor of The Ways To Wealth, a Certified Financial Planner™, husband and father of three. He's spent the last 10+ years writing about personal finance and has been featured in Forbes, Bloomberg, MSN Money, and other publications.

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