Wednesday, June 26, 2013

Eat the Bear

My uncle, Marty, emailed to say that he was interested in knowing my theory and methods for managing my  investments.  It may have been kind of a dare, I'm not sure on that point.  There may be a few other members of my family who are also curious to know whether I am all preface and no manuscript or what...

So, here we go... You be the judge.

I set up a win-win situation. 

The reason why Warren Buffet can buy low and sell high is because he always has money in reserve.  His money isn't all tied up in the market.  He has quite a lot of it. 

You and I are not Warren Buffet, so we can't buy low and sell high in the same way.  We have to discipline ourselves to adopt a method that allows us to almost always have money in reserve.  That way, when the market is low, we have cash with which to buy low.  That sets up a win-win situation.

When the market is high, stocks rise.  But I can't afford to be greedy.  I'm not Warren Buffet. When a stock makes a good return, I have to sell it.  

In a bullish market, I sell a stock if it's made more than 10%.   

In a bearish market, I sell the same stock when I've made between six and eight percent.  

Sure, there will be times when I sell the stock at 11% and a few days later it goes up a few percentage points more.  Maybe I didn't make as much money as I could have.

But what point, regrets?   I've made a good return.  Chances are, if I hadn't sold that stock when I did, it could have hit the skids and I'd have lost that opportunity.  A bird in the hand, as they say...

Bad luck is the currency with which I buy good luck.

This echoes the point that I wanted to make in the preceding paragraph, which was that in order to set up a win-win situation, I have to accept that perhaps I will not make as much money as I possibly could in every single case.  I have to accept some bad luck to get  good luck.  

When the price of a good stock goes down, I might buy a little more of it.  If I can afford to buy $10,000 more, I'll buy $3,000 more.  That way, if the stock goes up the next day, I'm making money.  If the stock goes down, I can buy another $3,000 worth of shares at an even lower price.  Win-win.  Accept the bad luck (maybe I wouldn't make as much money as I would have if I had bought $10k worth at the lower price on a single day) to get the good luck (setting up a win-win situation).  

I wouldn't buy more than $10,000 of the stock in total over time just because the stock's value was going steadily down.  That's risky behavior.

I am opportunistic, but I am not reckless.  I stop buying when I have, over time, $10k invested.  And then, I have to wait.  If the price never comes up again, at least I didn't sink $13 k into it.  The conservative move is to cap off the investment at $10 .

On the 10 k model, above, having $10 k into one stock would suggest that I had at least a dozen or more stocks in my portfolio, with a cap of $10 k or so on each, and at least $30 k in reserve, so when the market goes south, I can eat the bear. 

Balance

Financial advisers have suggested that I ought to have all of my money invested in a portfolio that includes bonds, mutual funds, equities, etc.  They let me play with a pie chart.  If, with their help, I divide up the pie properly, I will  sleep well at night.   

I think the pie chart is their way of giving people the illusion of control.

We're all like, Oh!, I'll take a little piece of that, and a little piece of this!

And they're all like, Great!  That's a great-looking pie, kid!  Now we'll put that pie on the window sill to cool, and let's hope that the wolf doesn't get a whiff of it.

Screw the pie.  

Have a balance of Dow stocks and Nasdaq stocks.  

1. I try not to have too much money in any one stock.

2. I distribute money more or less evenly in my stock portfolio.

3.  I put less money in up-and-down stocks and more money in blue-chip and wedge stocks, those institutions of commerce that have proven staying power, whose share value steadily increases over time from time immemorial.  (Examples:  GE*, PG, JNJ, TM, TGT, DIS, EBAY, AMZN, CSCO, MAT.)  

Know Thy Self, Know Thy Stocks

How do I choose what stocks to invest in?

I look up a profitable mutual fund on Fidelity or E trade and find what their top holdings are in stocks/equities.  This is really easy to do; the websites are easy for any reasonable person to navigate.
Seeing what the successful mutual fund is invested in, I can then look up those stocks individually.  It's like looking over the shoulder of the smart kid in class.  

So I've got a list of the smart kid's stocks.  I research each stock.  By "research," I mean, I click the "research" button.  Up pops all the info I need.  

Profit Perspective

What have the returns on that stock been over the past three months?  Year?  Two years?  Three years?  Maybe it's up and down, like Apple' maybe it's more of a wedge stock, like Google.  What's the highest price it's been this year?  The lowest?  Is there a seasonal pattern evident?

Examples of up-and-down stocks for surfers who want to spend more time managing their money and riding the waves:  PAY, AAPL, FB, AL.  (Think hare.  Sell while it's running.)

The wedge-stocks listed above, (GE*, PG, etc.), are perennials.  The require pruning and weeding, but generally grow every year.  (Think tortoise.  Sell when he's made you 11%.  It might take a while.)

Values Perspective

The reason why I put an asterisk next to GE* is because I don't like their values.

Many of us wouldn't dream of not voting at the polls.  But we throw away our money vote.

Maybe you're invested in Enron.  Maybe you're invested in Walmart.  Maybe you're invested in some financial institution that you despise.

If you've got your money in mutual funds, chances are excellent that you're voting at the polls one way, and voting with your money another.

It's obvious what some of these companies are doing, but if you have pet issues or liberal politics, you'll want to take at least a cursory look at each company before buying shares.  Consider this:  Your money helps make the CEOs and majority shareholders of those companies very wealthy.  Think Dick Cheney.

You don't have to read the company prospectus.  You probably wouldn't be able to find the relevant information in there, anyway.  No offense--it's just that it's in tiny, tiny, tiny print that no one over 40 without deep-space magnification could possibly read.

If you go onto Fidelity, (I reference Fidelity not because they're paying me or because I work for them but because it's what I use), and you research a particular stock, (by which I mean, "click on research"), you will be able to see very clearly how that company is rated in terms of being environmentally responsible.  Green is good.  Yellow is ambiguous.  Red is bad.  GE is red.  Walmart, despite what you may heard, is still red.  

You might consider how you feel about prescription drug companies.  Or companies that produce a product that society does not need.  Like Coke.  And cigarettes.  And pork bellies.  The list is endless.

Beagle Exploitation...
Does the company test it's product on unsuspecting beagles?  Some do!  I don't know what you'd click on to find out, but you could Google it.  Or ask Amy Franks.

Point is, it's never been easier to get this information. 

I have to go do paid work now, so I'll have to continue this later.

Meanwhile, no pie for you!














Post a Comment