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Posts from the ‘Investing’ Category

25
Feb

Securities Investing: Keep it Simple

I’ve recently been looking at my stock portfolio.  I’m going to be back to work soon and I want to get a jump on what I want to buy when my full income kicks back in.  I’ve also been paying attention to the personal finance blogosphere again.  Nothing much has changed.  People who are talking about stock investing are really just talking about gambling or they’re talking gibberish.  So I thought I’d share a few details about my portfolio.

I started my portfolio around April 2010.  I spread $5,000 over six different stocks and have been making regular buys up until my layoff last December.  As of yesterday (Feb 24, 2012) I am approximately 13.5% up with an approximate 7.4% annualized rate of return on 10 individual stocks.  In an insanely volatile year for the market, I still managed to make a few bucks.  How did I do it?

I kept it simple.  I don’t get into options trading.  I don’t do forex trading.  I don’t do arbitrage.  I don’t do derivatives.  I don’t day trade.  I don’t speculate.  I don’t do any of the things that are really just gambling on the market.  I keep my risks low by being a strict value investor.

As a value investor, I follow the axiom of “Buy great companies at attractive prices.”  Of course, the trick is figuring out what a great company is and then what an attractive price is.

Figuring out the greatness of a company generally has a qualitative and quantitative component.  The quantitative component is the answer to the question, “Does the company make money consistently?”  The qualitative component is whether the company has an enduring competitive advantage.  When both of these components are affirmative, you’ve found a great company.

That leaves the question of what an attractive price is.  First, you need to find the intrinsic value of the company.  Once you’ve figured that out, you can figure out what discount you are comfortable with.  I generally require at least a 30% discount against intrinsic value.

In my opinion, this is the minimum amount of research you need to do when selecting individual securities.  If you aren’t willing to do this, you should just stick to index funds.

If you are willing to do that kind of research, take a look at the books listed in the Amazon affiliate box to your right.  Those are the foundational books I built my investment strategies around.

Thanks for reading.

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9
Feb

Paranoia is not an Investment Strategy

Warren Buffett:  Why Stocks Beat Gold and Bonds

Over on Y-Combinator, the gold bugs and liberterian survivalists are going bugnuts about anyone, even a seasoned investor like Warren Buffett, daring to say that gold is not the best investment opportunity since sliced bread.

In my opinion, based on nothing but my layman’s observation, the money has long been taken out of gold.  The growth rate of prices are more a reflection of political paranoia than any rational valuation.  Political opinioneers working at the behest of their paid sponsors have been whipping this paranoia up for years.  After all, who do you think is supplying the product that the gold bugs and libertarian survivalists have been buying?

If you’re buying gold because you think the price’s growth rate will be sustainable, I’ll just say that timing the market is a fools game.

If you’re buying gold because you think society is on the brink of collapse, cash out some gold to get therapy.  And it probably wouldn’t hurt to stop listening to people who are sponsored by gold companies.

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12
May

The Rule of Seventy-Two and You

Hey guys, how’s it goin’?

When a person is just starting out with investing, they may be wondering if the risk is worth it.  After all, they can get a high-interest (relatively) bank account at some online bank like ING Direct or a CD at their bank.  Sure, their money may not make the same returns, but it’s a lot safer.  If they have no risk tolerance, they will want to put their money in the most risk-averse vehicles and call it a life.  Of course, as the saying goes, “No guts, no glory.”

For the sake of argument, let’s look at the difference between the returns on no-risk instruments and more traditional, risky investments.  Let’s start by taking a look at something called the Rule of 72.  The Rule of 72 is a way to approximate how many years it will take to double your money.  It’s a simple formula:  72/(rate*100).

Let’s take a look at just how much you’re missing by staying in a low interest vehicle.

  • Scenario 1:  My portfolio is making an annualized return of 10.43%.  Using the Rule of 72, it will take 6.9 years to double my money. 72/(0.1043*100) = ~6.9
  • Scenario 2: I take my current portfolio and invest it into a 1 year cd at a rate of 3.25%.  Using the Rule of 72, it will take 22 years to double my money.  72/(0.325*100) = ~22
  • Scenario 3:  I take my current portfolio and put it into an ING Direct savings account at a rate of 1%.  Using the rule of 72, it will take 72 years to double my money.  72/(.01*100)  = ~72.

While I would like to live forever, I obviously won’t.  At 72 years, the best I can hope for is to leave my money to someone else to enjoy.  Even at 22 years, that leaves me with little time to enjoy the fruits of my labor.  While I may not be able to live high on the hog in twenty years with a 6.9 year doubling period, that’s still a pretty good chunk of change to help pay for things when I’m old.

If you want to be even marginally financially independent, saving is not enough.  You still need to save a significant amount every year, but you also need to find ways to make that money work for you and maximize returns.  For most people, that means investing.

If you found this post useful or know someone who can benefit from it, go ahead and pass it on.  Follow me on twitter, fan me on Facebook, sign up for the RSS feed.  Thanks.

Until next time, keep on saving!

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15
Apr

Get Ready, Get Set, Wait For It, Wait For It, INVEST!

Hey guys, how’s it goin’?

So you’ve got your emergency fund, you’ve paid off all of your debt (or a significant portion), you’ve made arrangements to pay your bills on time, every month, you’ve contributed as much as you can to your retirement accounts, and you are putting away a little bit of money every paycheck as pure savings.  You know you want to get in on that sweet stock market income, but you’re not sure what to do.

1.)  Read.  Read a lot.  Start with the Intelligent Investor by Benjamin Graham (psst, check out the Amazon widget in the sidebar.)  This is about as close as it comes to a holy book of investing.  Anyone who makes a lot of money in the markets will tell you that this book is the starting point.  If they don’t, get an autograph, because you are speaking to one of the luckiest people in the world.  This book will get you in the right frame of mind and give you all the knowledge you need to start investing.  It’s also a doorstop book and densely written.  If you can get through it, chances are you have the right temperament to invest.

2.)  See number 1.

I’m being dead serious.  Investing is not something to be entered into lightly.

Baseball is the only field of endeavor where a man can succeed three times out of ten and be considered a good performer.” — Ted Williams

Swap baseball with investing and you’re not too far off the mark.

There is an entire industry dedicated to picking stocks.  These are folks whose full time job it is to pick stocks.  They have the luxury of large pools of capital, research assistants, expense accounts, every resource you can imagine and the best of them can’t beat the market half the time.  Sure, there’s an occasional superstar like Bogle and Buffett.  But those guys are extreme outliers who will be the first to admit that their skills didn’t come easy.  They succeed because they work their butts off every day.

Until you’ve done your research and have come to a good understanding of how the market works, you don’t have any business picking stocks.

Now, that doesn’t mean you shouldn’t invest.  It means you need to gear your approach to appropriate investment vehicles.  If you don’t know how the markets work and/or you don’t have the time to spend researching individual stocks, then investing in individual stocks is the wrong strategy for you.  The good news is there are right strategies.

While you’re doing your homework, you can put your money into an index fund.  The same basic rules for retirement investing apply to regular investing.  Pick a fund with a low expense ratio (less than 0.5%) and start making regular buys.  Be careful that you don’t spend too much on trading fees (I never spend more than 2% of the buy on trading fees.)  Don’t get nervous.  Just keep pushing ahead.  There will be bad times, there will be good times.  The key is to not lose your head and let it ride.

By the time you’ve thoroughly absorbed the Intelligent Investor (psst.  See the Amazon widget in the sidebar,) you’ll have what you need to start investing in individual stocks.

Until next time, keep on saving!

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21
Mar

Barebones Retirement: The Absolute Minimum

Hey guys, how’s it goin’?

This will be my first post dealing directly with investing.  Before we begin, keep in mind that I am not a professional investor.  I’m not licensed by the appropriate authorities and you take my advice at your own risk.  I will not give information on specific stocks.  This is going to be general “common knowledge” type stuff.

Now that the legalities are out of the way.

Are you saving for your retirement?  Why the heck not?  Can’t spare any money?  Check here and here for a strategy to do just that whether you think you can or not.  Already have a 401k through your company?  Good for you.  Willing to take the chance that it will be enough?  Don’t know where to begin?  I’ll tell you.

First things first.  Outside of a 401k through your employer, you basically have two options.  A Traditional IRA and a Roth IRA.  The Traditional IRAs is similar to your 401k because it’s tax deferred.  That means you put off paying taxes on the contributions until you withdraw it during retirement.  A Roth IRA is the opposite.  You make contributions AFTER taxes and then withdraw the money tax-free in retirement.  For more information on the different kinds of retirement accounts, see here and here.

You can get an IRA account through just about any bank, credit union, or brokerage.  Your bank has the resources on where to go.  When deciding who to go with, pay attention to trading fees and avoid companies that smell fly-by-night.

Which IRA should you go with?  The conventional wisdom is that you should have a Traditional IRA/401k AND a Roth account.  If you’re already contributing to a 401k through your employer, you only need to open up a Roth.  Why?  Tax reasons.  You won’t know the tax environment when you retire.  If you only have a Roth, you run the risk that tax rates are lower when you retire.  If you have just a Traditional IRA/401k, you run the risk of tax rates being higher when you retire.  Mixing it up gives you the flexibility to minimize how much you pay in taxes when you retire.  Since you aren’t retiring yet, I’ll get into it in another post.

Now you’ve got one, what do you do with it?  First, set up regular contributions.  Much like paying your bills and building up a foundation, arrange to have some money transferred to your IRA out of every paycheck.  Then, invest it in something.

Okay, I have to be careful for the next part.  What do you invest in?  If you don’t know much about the stock market, it’s not a good idea to start picking stocks willy-nilly.  As a beginner, stick with index funds.  These are funds that consist of most stocks in an exchange, so it tracks with that underlying exchange (DOW, S&P, Russell, etc.)  They have the advantage of really low maintenance fees, which makes a difference over the years.  The disadvantage is that you’re giving up on opportunities for better returns.  That being said, if you haven’t spent the time to figure out what your doing, picking stocks is a lot like playing the slot machine in a casino.  For more information on Index Funds, look here.

Just to be on the safe side, I won’t name any funds.  But you can easily do the research yourself.  The main criteria you want for whatever fund you choose is the expense ratio.  This is what the fund manager charges to maintain the holdings in the fund.  Since index funds don’t require active management, their expense ratios should be less than 1%.  You shouldn’t have any trouble finding something under the 0.5% range.

Before I wrap up, I should mention ETFs and Mutual Funds.  You’ll notice that most mutual funds have a higher buy-in.  Exchange Traded Funds don’t.  When you’re starting out, you may want to pay more attention to your ETF options and move it over to a mutual fund when you have enough saved up.  For more information on ETFs and Mutual Funds, look here.

I hope you found this information useful.  Good luck on you retirement planning.

Until next time, keep on saving.

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