My Stock Got Creamed Today. Now What?

Today my shares of BJ’s Restaurants Incorporated got obliterated by the market, losing more than 15%.  The opinion on the Motley Fool is that the stock should be avoided because the sector has slowed.  I have a relatively large position in the stock that I have been acquiring little-by-little for a while.

What will I do now?  Call my broker in a panic and sell everything?  Buy more to average down?  It is times like this that rattle the confidence of even the most seasoned investor.  Everyone knows what to do when the market is going up.  What about when it’s going down?

The answer is that I am going to stand pat.  The news on the stock is that earnings increased – the shares only fell because the earnings were not as strong as the market was expecting.  The company is still expanding and doing well.  The whole restaurant sector is just doing poorly – probably because the “recovery” is not really a recovery, and increases in gas and food prices are starting to take their toll on the restaurant going public.  Everyone is having trouble – not just BJ’s.

There is no reason to sell just because the price fell. I didn’t feel it was overpriced at $38, so there is no reason to think it is overpriced at $32.  I wouldn’t sell my home just because someone offered me $20,000 less for it than I paid.  Unless I’m looking to sell, the current price really doesn’t matter.

Likewise, I have as many shares as I want to have, so there is no reason to buy more just because I want to lower my cost basis.  Who is to say also that it won’t fall further?  Buying when a stock is falling is called “catching a falling knife” for obvious reasons.

I think the company still has a lot of room to expand.  Because I am buying the business, and not trading the stock, these fluctuations don’t bother me.  So long as I still like the company, I’ll hold on.  IF BJ’s is strong like I expect, it will last through any sector weakness.  When the sector rebounds, it will have fewer competitors and be in an even better position.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

What is Wealth?

A few days ago I heard on the news that because home prices were starting to rebound, people were feeling wealthier and therefore were spending more.  While I’m glad to see home prices rebounding a bit (although now more people can actually afford a home), the fact that people were “feeling wealthier” shows that there is a misconception of what wealth is.  Your home going up in value does not necessarily make you wealthier, and it certainly is a bad reason to start spending more money.

Wealth is the ability to create income without personal labor.  A large stock portfolio is wealth.  A successful business is wealth.  Even a large amount of cash, because you can invest it and create income, is wealth.

Home prices are a bit different.  In general, home prices increase with inflation and replacement cost.  This means that if your home goes up in value, so do home prices everywhere.  Just because your home is now worth more therefore does not make you wealthier because you need a place to live and therefore cannot really use the value of your home.  It is locked away and while the value may be interesting, it really doesn’t affect the amount of money you have available to spend.

There are times that increases in the value of your home can make you wealthier.  For example, if you live in an area where prices increase more than elsewhere and you are willing to sell and move to a lower cost area, increases in hme values can increase your wealth.  Another example is if you are in a large house which goes up in value and are willing to sell and buy a much smaller house and invest the difference.  You can then free up some of the equity you have and use that money to generate income.  Most people will not do this, however, so increases in home values do not cause their ability to generate income to increase.

My main point is that just because your home increases from $250,000 to $300,000 doesn’t mean you should go out and spend more.  Your income did not increase just because your home’s value increased, and because of this the amount you will have for investing to build wealth will decrease if you do so.  For “normal people” who spend all they take in normally, doing so will cause then to go further into debt and actually make them less wealthy.  (Taking on debt makes you less wealthy because you need to generate more income before you have any money to spend.)

It is good to own a home since it allows you to reduce your monthly obligations (the amount of money that is already allocated before the month begins), which is particularly important as you enter retirement and see your income from work disappear.  Spending levels, however, should be guided by how much income you have from different investments and not by the value of your home.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

What Wealth Building and Weight Loss Have in Common

Getting out of debt, and then building wealth, and weight loss really have a lot in common.  Most people weigh more than they want.  They also have a lot less money and a lot more debt than they want.  It isn’t that they don’t want to have a healthy weight or have financial security.  The problem is that their lifestyle doesn’t match their goals.

People know what causes them to be overweight.  They eat out too much.  They eat too much when they eat out.  They have that large soda with dinner instead of a glass of water.  They eat desert when they aren’t hungry.  They don’t exercise as much as they should.  And yes, some have a harder time than others due to their metabolism.

To maintain a healthy weight requires a lifestyle in which you take in only as many calories as you need and get exercise.  Your meals need to be the right size.  You can’t be getting a lot of extra calories at happy hour or at potlucks regularly.  You can’t be stopping for 1500 calorie coffee drinks twice a week.

People also know how to build wealth.  At the very least, you spend less than you make and put some into savings.  You put money into your 401K (at least 10%, 15% would be better) and you spread it across 4-5 mutual funds.  You know that the kids are going to want to go to college, so you drop $2000 per year per child into an educational IRA or a 529 (just put $340 per child away each month like any other of your bills).  If you are able, put a bit more for college in a separate savings account because you know college will be expensive.  Maybe even create mutual fund accounts that you will give to your kids when they leave the home to help them get started with an emergency fund (check with your accountant to get the tax planning right).

If you’re a bit more motivated, you put some money into an individual IRA.  If you’re really motivated, each time your savings account reaches about $15,000, you send $5000 off to a mutual fund, or even start buying a few individual stocks of solid growth companies that have shown they can make money and have lots of room to expand.

With weight loss, many people go on diets, maybe lose some weight, but then it all comes back again within a year or two.  The trouble is they stop exercising and go back to their old eating habits.  There is always an excuse.  To keep weight off and live at a healthy weight you need to have the lifestyle that will maintain that weight.  You can’t just go on a crash diet and expect to keep the weight off.

Likewise, you can’t stick $50 in a savings account one month but then pull out the credit cards each time there is an excuse.  You can’t take out more and more debts each year and then expect to work overtime for a few months and have enough money to last you through 30 years of retirement.  You need to plan and budget your expenses so you can see where the money goes and make sure you are doing the things you need to do to reach your goals,  You need to live below your income each month, not just during the fall or spring.  You need to be putting money away religiously since it is a lot easier to grow wealth when you have interest on your side instead of against you.

For keeping a healthy weight or a healthy fiscal life, you need to change the way you live.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Saving is a Pond, Investing is a River

One of the more difficult concepts to grasp for new investors is what to expect in the way of investment return when investing in equities.  Those who are extremely cautious may get discouraged when they have been investing for a year or two and see the value of their investments decline.  They are used to the steady growth of a savings account.

Likewise, other investors sell stocks when they have achieved a small return – say when a stock goes up by 10% – because they figure a 10% return is good, once again compared to what they would get in a bank account, and they should lock in the profit. While a 10% gain may seem like a good return when compared to a bank CD, it is a small gain for a stock position that can easily return a thousand percent or more over a period of several years.  If you are constantly selling stocks when you get gains of only 10%, regardless of the underlying fundamentals of the company, you’ll sell off all of your winners and end up with a portfolio of losers.

The concept of return from equities is very different from that from a bank CD.  Buying CDs is saving – putting money away and trying to preserve its value.  You know that the money will be there when you need it and you receive a small but predictable amount of interest to help keep up with inflation.  Because CD rates never actually keep up with inflation, you could also choose to buy something like gold if you wanted to preserve the value of your savings for a long period of time.  For example, if you wanted to bury wealth for your great-grandchildren to dig up some day in the backyard, there are few better ways to store the wealth than in a bar of gold.

Saving is like putting a stick in a pond.  It just sits there, perhaps being blown around now and then but it never really goes anywhere.  It is predictable and boring, but it is safe.

Investing, on the other hand, is not predictable, at least for short periods of time.  You can never really predict what the value of your investment will be on any given day, week, or month.  One day you may be up a few percent, the next you may be down a bit.  Unlike the bank CD where you can calculate out the interest you’ll receive to the penny, the best you can do with equity investing is predict your return over long periods of time based on what returns have been in the past.

Investing is like throwing a stick into a river.  Some rivers are more docile like the Mississippi, where your stick will travel slowly but fairly steadily downstream.  Others are like the Colorado coursing through canyon land, filled with rapids and eddies.  At times your stick will shoot lightning fast through a jetty between the rocks, and other times it will drift slowly through a deep pool.

All rivers have eddies, and sometimes your stick will actually drift upstream for a ways.  If you were to throw your stick into the stream near one of those eddies and then pull it out again quickly, you might think that the river flows upstream and you would be better off leaving your stick in a pond where at least it would not lose ground.

While you cannot predict where your stick will be at any given time, you can do a fairly good job at predicting how far it will travel over long periods of time.  This is because while there are various eddies and rapids in the river, such that the speed changes frequently if you focus in, if you move far away from the river you’ll see that the water is always being pushed downstream at a fairly regular rate.

Likewise, if you purchase a stock or a mutual fund and watch it from day-to-day, you’ll see all kinds of fluctuations.  Sometimes it will even decline in value – sometimes by quite a bit.  If you back away and look over long periods of time, however, you’ll find that the value always tends to go up and by rates that far exceed what you can get through saving.  This is because while businesses have good and bad periods, and while the price people are willing to pay you for a share of stock fluctuates depending on the mood of the buyers, businesses that survive always tend to grow and expand.  If you buy a mutual fund, some companies will fail and be removed from the fund, but the others that survive will grow and drive the value of the fund as a whole up.

The other way in which the market is like a river is that most of the progress is made during very short periods of time.  In a river like the Colorado there are deep pools that may stretch for miles in which you would think you are not moving at all if you were floating in a raft.  Every so often, however, there are short stretches in which the river becomes shallow and, because the flow rate of water is constant, you speed up to several miles per hour and shoot between the rocks.

Likewise, stocks tend to trade within a narrow range for a long period of time and then suddenly shoot up by several points.  This is the reason you don’t want to try to time the market and jump in and out.  If you miss one of these rises your return can drop from 15% to five percent or less.  Big gains are made quickly.

So stop looking at returns like bank returns.  Even looking at percentages is not really appropriate.  Instead, watch the flow of the river and realize if you get stuck briefly in an eddy, the water will all make it downstream at some point.  Just stay your course and hold on for the ride.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Photo by Mihai Tamasila  Website http://mihaitamasila.blogspot.com/

The Right Mindset for Stock Investing

An important aspect when investing in stocks is mindset – the way you think about your investments.  Many people who are new to the investing world are used to looking at the interest rates paid by their bank accounts and think that the 10% return they see on their mutual fund is equivalent.  It is absolutely not.

The correct mindset to have when investing in individual stocks is that you are buying ownership in a company.  The correct mindset to have when buying into a mutual fund is that you are buying ownership in several companies at once.

 

Think of buying ownership into the pizza parlor down the street.  Let’s say the owner is a friend of yours and is looking to expand.  You see that he does a good business and think that you could make some money if you gave him some of the money he needs to expand in exchange for a cut of the profits from the expansion.

Now you know from looking at his past sales that it should be a good investment.  Sales have been growing at 20% per year, so you think your ownership stake might grow in value by 10% per year or more, using a conservative estimate.  This is not a hard-and-fast number – there is no written agreement that you will receive 10% per year.  It is just the average return you expect based on looking at the past.  You also have money to invest that you could afford to lose if things didn’t go as you planned.

You have no control over the economy, locally or nationally.  A big recession could hit and cause fewer people to dine out.  There could therefore be quarters where the pizza parlor loses money, so your ownership stake could decline in value.  Someone else could also open a better place across the street and your pizza parlor could lose a lot of business.

The point is that, based on what you knew, you felt there was a good chance of earning at least a 10% return.  You knew that some years the return would be greater, and sometimes it would be less.  You were also willing to allow the time, however, for your investment to pay off.  You didn’t expect the expansion to instantly add a huge amount of business.  You didn’t need the money for a considerable amount of time, so you could allow time for the business to grow.

When you’re buying individual stocks, you’re doing the same thing although you don’t typically know the managers personally.  The price of the stock is just what people are willing to pay at any given time, and this will go up and down based on how the business is doing at a given time, how the economy is doing in general, artificial factors cause by people doing various trading schemes, and other factors such as tax rates.  Over long periods of time, if the business keeps growing and making more money, the value should go up.  Stocks have typically returned substantially more than inflation over time, and therefore you can also expect to make more than inflation.  The return in any given year, however, is up in the air.

If you buy a mutual fund, you’re reducing the fluctuations due to any particular business since one will be doing well when another isn’t.  This is like buying ownership stakes in 100 restaurants rather than just the one pizza parlor.  There are still fluctuations due to the overall economy and factors such as tax rates.  The level of fluctuations will be less, but there will still be fluctuations.

So when buying individual stocks or mutual funds, you should buy as if you were making an investment in a local business.  This means checking the books and buying a company that you feel will do well and not getting all excited about the fluctuations in the price of the stock.  After you buy, you should expect good days and bad days in both the fortunes fo the company and the price of the stock.  Sometimes the stock will decline in price even though the company is doing great.

That’s just what happens.  You should not be selling just because the price drops a bit or just because you have a small profit.  Making money in stocks takes time.  If you’ve chosen well, however, given time, you should get a good return.

Please contact me via vtsioriginal@yahoo.com or leave a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Picture Credits: Pierre Amerlynck , Downloaded from stock.xchng