The thing with writing about politics is that statistically you’ll piss off half the people all the time. So I thought I would go to something more controversial – writing about investments. Nothing gets people going as when they have an economical stake in something. If you’re right, you’re on top of the world. If you’re wrong, you’re a bum and no one listens to you. That’s one thing I love about the markets, it cuts out all the b.s. and boils it down to what matters and what doesn’t.
Speaking with Jonathan, there aren’t many blogs about investing. Ventureblog is a good one, but it’s not very actionable unless you are also a venture investor. There are plenty of “model” portfolios out there, but they’re not very actionable either unless you have a cool million or at least $100k to throw around. To me, it always looked like a cop out since the writer can always point to the high performers in the portfolio. They can say, “Well Joe, if you had invested in ABC like I said on 1/1/95, you’d be doing pretty well.” To which, someone might say “gee thanks a-hole, I invested in XYZ like you said on 1/1/96 and lost my shirt.” Diversifying is well and good, but you gotta have enough assets to diversify in the first place. Way back when, when I first started investing, I’ve always wondered what an average Joe like me can do with a few thousand bucks scraped together.
So let’s start a little experiment. I will personally invest $5,000 in the market and keep an online journal of what happens. It represents my entire liquid net worth, so it will definitely have my undivided attention versus some academic exercise without consequence. Who knows, it may be the shortest investment journal in history – ie blow it all on one trade and call it a day. Otherwise, it’ll be a good learning experience all around.
Let’s go get’em. Ding ding ding…
Very cool. I think this will be interesting, and I hope it is profitable for you as well.
Thanks Lex, believe me, I hope so too = )
Good fortune to you.
Thanks Jonathan.
I hold in the highest regard anyone willing to put their neck on the chopping block. Best of luck to you.
Good luck, infidel strongman. Will you comment on money management techniques (e.g. stop losses and how to place them)?
Thanks Andy.
Thanks Mahmoud. Sure, I’ll comment on money management techniques if they apply.
Very cool, in-cog. –s
Thanks Scott.
Cool beans.
Mahmoud, stop-losses are exit rules; you shouldn’t place a trade without one. Money management is much more about expectancy and position sizing, imho. Stop-losses won’t prevent you from going broke, no matter how close and fast they are, if you can’t size your trades and understand your odds and risk-reward…
As to how much it cost me to learn the obvious…let’s say somewhere between Cog’s budget and Jonathan’s personal aircraft carrier…
Okay, cool, but what are your investment goals? Are we going for longterm gain with few trades? Because, that is often the wisest, though most conservative way, to invest. Or, are you attempting a day-trader like high volume trading kind of thing where you maximize gain by trading on short-term gains and losses?
And, my I humbly suggest Exxon. It is in the top three in company size, but is consistently the most profitable company of the big ones, and I believe it pays dividends.
XOM’s a great company, but with only 5k the dividends on the 115 shares you can afford would total about $115 annually. That’s great for a portion of your soon-to-be-much-larger portfolio, but as long as you’re working and don’t need income, sacrifice the dividend for growth.
PSFT’s cheap right now, and prospects are good for that industry.
This is not to say XOM won’t pop with earnings, but that’s a pretty stodgy investment for a “watched pot” like this one. Shoot the works–baby needs new shoes!
AnotherScott, why is that the “wisest” way to invest ? Says who ? Why ? When ? I know this is conventional wisdom but that doesn’t make it true. I’ve done both and from my experience, it is not so clear it is the wisest; not for me at least. It totally depends on your goals, risk tolerance, expectations, style and opportunities. And your own time too. There is something to learn from every style.
In the end, I think these exercises are misconstrued and misused. Nobody should trade by following what somebody else does. It’s not Food TV. But it’s quite useful because you get to see part of someone else’s thinking process from the outside; which gives you a distance that is extremely hard to achieve with your own trades. And so you get to see the good and bad of your trading through others…That’s my take anyway.
It isn’t as complicated as most make it out to be. Invest in good businesses. Good businesses are defined as those where the business earns cash in excess of its cost of capital, and can do so for an extended period because of its competitive advantage. And then you need to buy it at a reasonable valuation level, preferably at less than intrinsic value. I would consider intrinsic value the level at which the entire enterprise would sell for in a negotiated, arms’s length transaction between informed parties. Or at least at a valuation level that assumes the free cash (net income plus depreciation minus capex and working capital considerations) pays you back in a reasonable period.
If you don’t want to go that deep, just buy stocks in companies that raise the dividend every year. EVERY year. The correlation factor between that and the company having the economic characteristics mentioned above is very, very high.
This isn’t a joke. And it didn’t cost you a dime.
AnotherScott,
My goal is to make money. I’ve always believed that it doesn’t matter how you get there, as long as it works. With that said, the thing with trading is that you really have to know yourself – what your pain tolerance is, level of patience, etc. Looking over what I’ve done historically, my patience with stocks is usually a few days to a few weeks. Although I must say the most money I’ve ever made is when I held a stock for 7 months. However, this was also during 1999-2000, when you could do no wrong buying and holding. It was also during this time frame that I made my bones in the market, so bear that in mind. I’ve also bought and held the wrong stocks at the wrong time, so it can go both ways in buy and hold. I’m not good at picking stocks like Ebay that go from zero to the moon. But I understand leverage very well. I also have a good sense of timing. After college, around end of 98, beginning of 99, I knew enough to see that the market was the place to be. I didn’t know what stock, but I knew I had to be in the market. I knew also that I wasn’t going to make much money starting small. So I took the $2,000 I scraped together, and leveraged that to the hilt. Not being content with it, I took out a $15,000 loan from my credit card, and leveraged that to the hilt. Net net, I started with my little $2k, put on a lot of leverage, and took it to $250k. That’s my claim to fame. I also rode the tech market down, so the thing I learned is to be flexible.
Spongeworthy,
Funny name, I take it you watch Seinfeld?
Yes, I’m in the shoot the works camp for the simple reason that I’m not rich. I don’t have the assets to diversify and wait. Although, again, I’m not good at picking the stocks that go from zero to the moon, so keep that in mind. One thing I have a knack for is pairs trading, which is to go long a stock and short a similar stock at the same time. The idea is to remove market volatility and pick the winner. I think in this market, market neutral is a good thing. But we can go into that later when I do put a pair on.
Sylvain,
Agreed, I’ve been burned by buying and holding tech stocks from the top down. Flexibility is very important in this market.
Rick in NY,
Good businesses indeed. If y’all are looking for a good buy and hold, check out VIP and MBT, #1 and #2 mobile operator in Russia. I did a writeup on it last September that I should probably post here.
Good comments. I love investing.
Sylvain:
‘Wisest’ for amateurs. It would probably not surprise you to know I am in real estate, thus naturally suspicious of stocks (and unnaturally blind to the risks of development). I was also in SF during the the whole dot com thing (1997-2000). My friends were either investment bankers or worked for start-ups. Some of the techniques for putting value to companies for IPOs that my friends were using then were hair-raising. Finally, I saw many try to be day-traders on the side and run up some good numbers because the market was nuts and then lose it all (and still have big taxes to pay). So that’s the reason for my conservatism toward stock investing, though by no means is it set in stone, unless they’re experts I tell people, “slow and steady gets you there.”
In-cog-nito:
Making money is a laudable goal. Obviously you know what you’re getting into because you’ve done this before. I hope you make a ton, it will be fun to watch.
I hope you were able to cash out some of the equity you built up the first time.
I had friends during the dot-com bubble counting the worth of their as-of-then unvested stock options reveling in their ‘wealth,’ only to watch it all flitter away. It sucked, (I know a couple of successes, though).
Sadly, I have no good “hot” stock tips, but I’ll keep my ears to the ground.
AnotherScott, I am an amateur too. So what ? I disagree it is wisest for all and in all cases. I don’t believe in these one-size-fits-all rules. Moreover, it looks like your judgment of day trading is based on an entirely abnormal period. Sure, anyone could be a day trader back then. But anyone could be a good longer term investor too. Everything went up. Given that both made a ton of money, why prefer one to the other ? I know people in both categories and it is mighty hard to figure out who lost most.
“Slow and steady” is not any more likely to get you “there”, whatever “there” is than anything else. People justify this belief based on longer-term charts of the S&P 500; but the composition of the index today has nothing to do with what it was at the beginning of the usual 30-year chart. Weak companies were kicked out, strong ones were added in. In other words, the index itself has an upward bias. So if that’s what you want, go for an S&P 500 fund. “Slow and steady” investing in individual stocks based on the opinion of others is no better or worse than most other strategies. Sure, a lot of people will tell you otherwise. But they usually have a vested interest in you believing so…
AnotherScott,
Thanks for the well wishes. The smartest thing I did back then was to buy a car and a nice watch, so I got something out of it. That and writing a thank you check to my mom. In hindsight, I should have bought a Ferrari and called it a day. Or, more pragmatically, a house. That’s not the worst part. I literally sold everything the day afer Nasdaq peaked, had a gut feel to stay out, and was sitting on cash at the start of the crash. Good timing again right? Not quite, greed is a bee-itch. I got back in… Oh well, the market is build on regrets eh?
I actually looked into buying a Ferrari ones. Just for fun. It sort of stopped when I realized that depreciation, insurance and maintenance the first year alone totalled about twice my income at the time. And were the equivalent of a brand new BMW m5. Put things into prospective.
Yeah, no such thing as a “sensible” Ferrari eh?
Actually, we had a contractor at the time who drove an older one. It was used and cost him about $50k. If you’re good enough with engines and cars to do your own maintenance, that’s probably the more affordable option. I don’t think they get cheaper than that. And long term and assuming you take good care of it, it can then turn into an investment.