I remember talking to a friend who had invested in some Microsoft (MSFT) stock in 2007. He had recently received a good dividend and we went to a restaurant to celebrate (he was paying). We had some minor discussions about stocks and dividends but nothing serious. As I was quite a novice in this area, I did not understand much. But the thought of letting your money work for you, as a passive income source, stuck with me.
Fast forward to 2009, I had recently arrived in Switzerland and now had some income which I could invest. So, I picked up my first book on investing. This was Malkiel’s "A Random Walk Down Wall Street." The thing I got out of the book was pretty simple. Beating an index is a hard thing to do. Not many money managers can boast beating the S&P500 for a long period of time. Hence, I decided to start small and invest in an index fund.
My bank, UBS (NYSE:UBS), had a very easy system which let you buy stock from the same account as the one I was holding. They charged CHF40 up to an investment of 4000, then they charged 1% of the invested amount. The bank also had assigned me to my “personal financial manager.” So I went to him for a chat. He gave me the usual talk on investing in bonds and shares and blah, blah ... but I asked him to buy the ETF-SLI (Swiss Leader Index, consists of top 20 or so stocks on Swiss stock exchange weighted according to the cap). I in my small wisdom bought CHF5000 worth of SLI because I thought that paying more than 2% as brokerage is a waste of money (buying plus selling). So, I had a lower limit of CHF4000 to get a brokerage of 2%.
This was my first mistake. Going for a broker with such a high commission is good when you are investing for the long term but not when you are learning and prone to pick wrong stocks or right stocks at the wrong time.
The second stock I picked was Credit Suisse (NYSE:CS). Why did I pick this stock? The reasons are very superficial. Somehow I got the idea that being contrarian and sticking with your picks was going to reward the investor on the long term. CS was trading at CHF51 down from CHF60 with a P/E of less than 10. It had a good deal to run before reaching the pre-crisis levels of CHF95. CS had come out of the economic downturn comparatively unscathed (compared to UBS). CS also had a very good dividend yield, and so I started with CHF4,000. I would probably have started smaller if the brokerage was not so high. But well ...
CS started its see-sawing. It went up to CHF58 and then fell to CHF44. It then vacillated between CHF43-CHF52, at which time I bought at CHF44 again. This was an investment of CHF4000. CS then vacillated between CHF40 and CHF50 and I bought again at CHF40. My average price was CHF44 and I owned 269 sthares. Meanwhile, I had collected a dividend of CHF1.3 in 2009 and CHF0.845 in 2010 (after a 35% withholding tax).
This same thinking of being contrarian got me into some excellent stocks too. I bought Roche (RHHBY) which had gone down from CHF187 to CHF137 and selling at nearly the same price levels as in 2009 at the worst of economic crisis. The dividend yield was 4.2% (before tax) and the P/E less than 10. I also bought Holcim (HCMLF) at CHF61. Looking back now, both of these were excellent value choices. I later sold a part of Roche (RHHBY) and the whole of Holcim (HCMLF) at a small profit in a panic selling. This was my second mistake and I will discuss it in the next article.
Looking back, I would not have invested CHF12,000, a substantial part of my portfolio (almost 40% of my investable money), into CS if even one of these had not happened:
- The brokerage (NYSE:UBS) charged less than 1% as commission. If it was small as say Interactive Brokers (NASDAQ:IBKR), I would have invested in smaller sums and would have diversified more.
- I was better at investing and did not invest in an industry I did not understand. Superficially, CS looked cheap but seeing the EPS now it was a lot expensive then. I bought when CS had recovered from its CHF25 lows in 2009 and was selling at CHF51. The year I invested I should also have looked at the management pay which was around CHF65 million for the CEO Brady Dougan. When the management starts ignoring the shareholders for short-term gains, it is never a good sign.