Tuesday, July 10, 2007
Piping off Tony Blair; Investing part 1
|Before revealing more about my investing tactics, I wanted to note the final Prime Minister's Question time for Tony Blair, the week before last, and last week's first for Gordon Brown. By the way, you can see Prime Minister's Question Time at the crack of dawn on Wednesday mornings on C-SPAN, but it makes more sense to watch the rebroadcast Sunday night at 9 or 12 midnight. The sendoff for Mr. Blair was quite impressive as the members of all the parties rose above their political differences to honor him, culminating with a standing ovation. Mr. Blair moves on, as we had hoped, to take on the role representing the Group of Four to try to complete the unenviable task of negotiating peace between the Israeli's and Palestinians.|
As expected, Mr. Brown's first session was much less entertaining than Tony's typical 40 minutes, and one wonders whether Question Time can possibly maintain its popularity in the face of his droning monotonal responses. However, what he lacks in charisma, he might make up for in competence. We'll see.
So the time has come to explain how it is I come to buy and sell decisions, and in the face of all logic, performed as well investing in individual stocks as many do in mutual funds. First, let's start with the mandatory disclaimer. My selections, tactics and strategies do not constitute investment advice as I am not an advisor, and they may not be suitable for anyone else (or even for me).
Now with that out of the way, let's stipulate that if you are going to invest in financial assets, the first thing you have to consider is what mode of investing is going to make you comfortable. This is not a hobby you want to stress about. Quite the opposite, you are seeking financial security and peace of mind. That is why for most people, who have neither the time, inclination or temperament to do their own investing, professional money management through mutual funds is the right answer. However, those folks should understand they are going to pay for this service. The cheapest stock picking mutual funds will run up at least 1-2% of your assets as annual expenses. Index funds are a little cheaper, but you will not outperform the index. Variable annuities are even more expensive, since the mortality costs charged by the insurer represent an extra layer of expense.
Personally, if I was a fund investor, I wouldn't be happy to buck a 2.5% or 3% annual expense nut. The grossest expense nut of all is in the hedge funds that charge 2% of assets PLUS 20% of profits. A lot of rich people have gravitated to hedge funds on the basis of out sized returns, but no one can buck that level of expenses for very long. Believe me, hedge fund investors have no chance in the long run. Think of what an expense formula like that motivates a hedge fund manager to do. Rather than actually hedge, it is in the manager's interest to follow the most aggressive strategy possible. If it works out, he's a hero, collects the extra 20% of profits, and tries (against all odds) to repeat next year. If he busts, he still has the 2%, and then he can close the fund and start all over again with a new strategy. As they say on the Street, the pigs get slaughtered, and that's what is going to happen to hedge fund investors.
So I have never been a fan of fund investing. Besides the expenses, there are other downsides to fund investing. You can't be sure that the strategy that is advertised will actually be followed or that the fund manager will stay in place. Worse, you are going to be stuck with the tax effects of the transactions that the fund manager executes. He is not going to consult with you about taking gains, or whether you need tax losses. So funds are for those who are not really interested in investing and are willing to pay the price for someone to take that burden off them.
What makes it possible in this day and age to pick your own stocks is discount brokers. There is no way you can pay 75 cents to a dollar per share per round trip to trade stocks with a full service broker. Unless you buy and hold forever, your expense nut will be similar to that of fund holders. But with a discount broker, you can hold your transaction costs to about $10 per transaction. That means you can properly diversify, which is important. Forget Jim Cramer's theory that you can be properly diversified with as few as 5 stocks. You need a minimum of twenty. I own about 60, effectively managing my own fund. That would not be practical if I didn't use a discount broker. And when I reveal my formula, you will see it would not be practical to execute the trades it requires except with a discount broker.
But working with a discount broker means you will make your own decisions, as I do. That means time. The time consists of reading, reviewing your portfolio frequently, and making your trades. So you'd better be interested in this hobby. Again, Cramer says you need an hour per week per stock you own, so that's a minimum of five hours. I don't think you need to spend an hour per week per stock, but I guarantee that I spend more than 10 hours a week to maintain my portfolio of 60 or so stocks. Most of that time consists of reading. What do I read? The WSJ as you know, Forbes, Barrons (quickly) and that's pretty much enough. I also look at CNBC in the morning before the market opens, and I'll watch some of Cramer. What really saves time though is the Internet. I use Yahoo Finance, and it is fabulous in terms of keeping track of portfolios, researching and analyzing stocks, and picking up news updates on your stocks and the economy, all for free. I probably check Yahoo Finance at least three times per trading day (it only takes a few minutes to see what's moving if anything) and use it to help determine my trades. I also get great on line information from my discount broker, E-Trade. Though I am not a subscriber, I would also recommend WSJ.com.
We'll go into trading strategies in the next post (sorry for the cliffhanger) but here's a word about what makes my buy list. Historically, most of the stocks I have owned have come from my Forbes reading. I want to feel good about a company's management and culture and get an inkling into their core values. You don't get that very often from any article, but when I do, I will investigate that company further on Yahoo. Then I'll decide whether to put it on my buy list. When I actually buy is determined by the formula that you'll get next time. If something happens, and I don't trust the company's management anymore, or if the company changes strategy and the reasons I put it on the buy list no longer exist, then I'll take it off the list and sell my whole position. I have done that with Tyco International, Saks, Torchmark, BP and others. By the way, the company or stock may still do very well after I sell it, but if I am no longer comfortable, it's gone.
In fact, that's really my philosophy about investing - do what makes you comfortable. I know a bunch of people who have done very well in the market. Usually it's because they understand the industries they invest in, they understand their limitations, and they work from there. Each one has a different system that works for them, but would be foreign matter in my hands, just as my system probably would not work for them as well as their own.
Why do I own the stocks I own? Pfizer, Schlumberger, Devon Energy, Barnes Group, Standex, Kaydon and many others came from Forbes. Newmont Gold came about because I think we might be beginning a secular bull market in gold, and I wanted to replace the stock I had, which was all hype and little production, with the best of breed. Conrad, Petroquest, Shaw, and a few others were on a recommended list from a Tulane Professor I heard, all companies from the Gulf area, and all companies he knew well. I took his list and invested in the companies with the best balance sheets. It has been a home run. In short, each stock I own has a rationale and a story. I like conglomerates so in addition to the ones I already mentioned from Forbes, I have GE (best of breed) and I had Alco Standard, which was my original winner that got me started. Today, Alco is Ikon Office, and it's no longer a conglomerate. So it's not on my buy list.
Next time, more about maintaining the list and the criteria for buys and sells.
Last Thursday, I sold 200 more shares of Conrad (CNRD) for 13.00 that I had purchased back on 11/2/04 for 1.95. On Friday, I sold 100 shares of Lindsay Manufacturing (LNN - thank you Forbes) for 44.75 that were purchased for 29.71 (split adjusted) on 4/24/98, a long time to wait for 50% by the way. Today I bought 200 shares of Avistar (AVSR) at 1.36 and 1300 more for 1.37, nice execution by E Trade since I only was charged one commission.