How Many Shares Should You Buy?

One of the best pieces of advice I ever got in a book came from Spooner’s Do you Want to Make Money, or Do You Just Want to Fool Around?  Spooner pointed out that a big mistake many people make is not buying enough shares of a stock they like.  They may do great research, pick a great stock, and buy at the right time, but they buy so few shares that what should have been a big winner turns into a nice but modest gain.

For example, they may buy 100 shares of XYZ corporation at $20 per share.  If XYZ does really, really well it might be at $60 within a year.  Our investor picked a great stock – up 200% in a year!  And yet, our investor made $4000.  Not really life changing.

Spooner instead recommends buying 500 shares or even 1000 shares.  This would be a large position in our $20 stock – now $10,000 or $20,000, but the same 200% gain would be a gain of $20,000 or $40,000.  Something that would make a difference when compared to other income.  A good stock pick could be a new car or tuition at a state university.  It could be a new kitchen or a boat.  (Boat = a hole in the water people throw money into.)

I looked at my portfolio and found that I was doing just what Spooner said.  I had several 100 share positions.  Whenever I made $1000 I would sell and be glad.  I would also have the occasional $2500 winner, but there were also some $800 and $1500 losers here and there.  At that point I decided to become more serious about my investing and buy larger positions.

Now I tend to concentrate my individual stock picks in a few, larger positions.  If I want diversification, I may then allocate a portion of my portfolio to index funds.  For example, if I had $40,000 to invest, I might put $15,000 into an index fund or two and then buy maybe 500 shares in three stocks in the $20-$25 range.  I would pick stocks in different sectors, for example, retail, technology, and healthcare, and pick what I considered to be the best stock in that category.

I would get into these stocks in stages.  I might buy 200 shares at first, then wait a few weeks or months, waiting for a good dip.  Then I’d buy another 200 shares, and then do the same thing for the final 100 shares.  I might be watching all three stocks, buying the one that looked the best during a given time period.  This way of wading in helps out psychologically since if I buy a stock and it goes down, I think “Great – it’s at a discount!” instead of “Whoa, did I screw up?”

I am then at an advantage to the mutual fund manager.  I can pick my top three stocks because I only have about $25,000 to invest.  The manager has a couple billion to invest so he needs to buy all kinds of stocks he really doesn’t like.  I can also sell a position when I want without worrying about effecting the price.  The manager may take weeks to unload a position since he has so many shares to sell.

Now before jumping in with both feet, realize the risks.  If I pick badly, like the CEO takes all the corporate money and goes to Mexico, I could see my $20 stock crater to $2 and lose $9000 of my $10,000 position.  Even if I just pick a stock that sits there for ten years, I may give up all sorts of appreciation that I would have gotten if I had just put the money in index funds and tracked the market.

I accept this risk, however, since there is a large potential payoff and I could sustain a loss of $9,000 without jumping off a building.  My rule of thumb, however, is to never have more in one position than I could stand to lose.  If I did well and saw a position grow to $40,000, I might very well sell half of the shares.  I would also keep saving money and buying more shares, adding additional stocks when the positions reached 500 or 1000 shares.

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.

Five Reasons NOT to buy a Stock

There are several different strategies when it comes to stock picking.  While I prefer to find companies that have a great business that can grow for years to come, and then buy and hold those companys’ stock for years, there are other investing strategies that people make money using as well.  There are momentum investors who buy shares that are increasing in price rapidly and then hold on for a while, trying to sell before the stock falls out of favor.  There are also those who find the beaten up stock and buy and hold until it recovers.  There are also those who buy into sectors that are hot, or maybe buy into sectors that are ice-cold and then sell when they are hot.

There are also a lot of bad strategies.  Here are five:

1.  Buying a stock based on a tip from CNBC.  When a stock is touted by a TV show or in a business magazine, thousands of people are hearing that tip.  This means that before you can press “buy” many other people have already done so.  Stocks usually will jump up a dollar or two before you can do anything and then fall back within a month.

2.  Buy a stock because it is very popular.  Remember that the stock bubbles are based on the greater idiot theory.  Buy a stock because everyone is doing it and you may well be the greatest idiot.  This goes doubly for gold.  If peopel are talking about how great a stock is, it’s probably about due for a tumble (as a recent example, Apple).

3.  Go “all in” with a lot of money.  Your chances of being in negative territory increase a lot if you buy a lot of stock all at once.  For example, if you bought near the peak of the 1920′s, you would need to wait about 15 years before you were back to even.  If there has been a substantial swoon (think 2008), it makes more sense to buy a lot at once that it would after a long climb (think 2007), but you still run the risk of buying only part of the way down the slope(this is called “catching a falling knife”).  Instead, split the money and buy in increments.  Make the initial purchase, wait a few months for a dip, then buy some more.  You won’t hit the bottom, but you’ll generally do better overall than you will if you make a big purchase.

4.  Selling after a big downturn.  After an event like 2008, it is tempting to just throw in the towel and sell everything.  This is exactly the wrong time to sell, akin to locking the barn door after the horse has been stolen.  (Actually, it’s like burning the barn down!)  Most of the time the market is back where it was within a year after a big decline.  If you have the cash, buy more.  If you don’t, just turn off the financial news and ignore the market for a while.

5.  Buying on margin.  If you are buying stock on credit, you run the risk of losing more than you have.  You also face the risk of needing to sell right when things are down and you should be buying.  The extra income potential is not worth the risk for stocks.  It may not even be worth the risk for houses, as 2008 showed.

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.

Stock Picks for February 2013

There are several stocks in this week’s issue of ValueLine that are worth a look.  This issue covers different areas of retail.  I’ve always liked retail because there are a lot of companies that see earnings grow year-after-year.  This is because companies are able to keep opening stores in new areas and bring in new customers.  Some chains open stores too fast, however, and then see a contraction.  This happened to Pacific Sunwear about eight years ago and they have yet to recover.

One stock of interest is Wal-Mart.  Obviously this company doesn’t have that far to grow – they have already taken over the world – but they are still seeing earnings grow in the 8-10% range and they pay a respectable 2.4% dividend.  This might be a good stock for a more conservative account that is looking for current income and some appreciation.

In the shoe industry, you could practically lie a ruler on the share price graph for Nike Inc. and Wolverine World Wide.  Both stocks have been growing steadily for the last decade with only a minor decline in 2008.  Wolverine is not as strong a company as Nike, but it is also seeing earnings growing faster.  Since share price tends to follow earnings, Wolverine would be the better pick of the two but either looks like a nice, steady growth stock.

In the hard-line retailers, Bed Bath and Beyond has had a great ride since about 2009.  I owned the stock a few years ago, but sold after I found the service dismal at the store in our area.  Obviously other stores are doing better because the stock has been doing well, with earnings growing in the 10% range.They also have an impressive 25% return on equity.

I recently bought some shares of Ulta Salon.  This is an unusual move for me, since I generally like stocks with a much longer history, but they are seeing 25% earnings growth and an impressive 20% return on equity.  The also have no debt, which says they are well-managed and have plenty of cash flow.

In the clothing retailers, I’ve held shares of Chicos FAS for a while and they have done well.  Earnings are expected to increase by about 20% and their return on equity is around 15%.  They also have no debt, which is a bonus (start to see a pattern here?).

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.

Investing with $2000

For some reason $2000 is a very common amount for people wanting to start investing.  I receive many views from people typing some form of “How to invest with $2000,” or “Where to invest $2000″ into search engines.  Perhaps it used to be the yearly limit on IRA contributions and still is the limit on educational IRA contributions.  Perhaps it is a nice round number people are able to scrape together.  Whatever the reason, I thought I would cover the topic in a bit more detail since there is so much interest.

So, is $2000 enough to invest?  Sort of, and it depends where and why you are making the investment.  If you are investing in a standard, taxable account, $2000 is not enough to interest most mutual fund companies, so you’ll need to save up more before investing.  It is enough to buy a single stock with the understanding that you are taking a fairly high risk by doing so.  Based on no solid statistics, but simply based on my experience investing, I would estimate that your chance of losing the whole $2,000 because of a company in which you’re invested going bankrupt might be one in fifteen or so.  The chances of it just sitting there and doing nothing for a few years, or maybe even declining a bit and then just sitting there, might be one in two.

The right way to invest $2000 is to use it as a starting point to a lot more investing.  You may not do well with your initial $2000 investment, but if you keep adding another $2000 year-after-year, when you look back in 20 years you will most likely have a lot more than the $40,000 you will have invested.  With common stocks you will have some losers, but you will also have some winners that double and triple and quintuple in price.  If you are very lucky you’ll latch onto the next Home Depot or Microsoft, in which case your $2,000 might be a million or more.  (Of course any sensible person would have been selling as he went, so you probably wouldn’t actually have $1 million in one stock.)

With mutual funds as well you will have some bad years, but you will also have some great years.  Overall mutual funds have returned somewhere between 10-15% over long periods of time.  This happens in spurts with some strings of 30% gains in some years that make up for the years when they return 5% or even -10%.

So, here is how to invest $2000 for some of the common scenarios:

Investing $2000 in a taxable account:  If you are investing in mutual funds, which should be the case if you can’t stomach the 50% drops you might see with common stocks or simply don’t have the ability to pick individual stocks or the desire to learn to do so, you’ll need to save another $1000-$3000 or so to meet the minimums for most mutual funds.  You might be able to get in with less money if you allow automated paycheck deposits into the mutual fund as well.  Find a fund with low fees, no load to buy in, and no load to get out.  Vanguard is a good choice.

If you are willing to learn to invest in individual stocks, $2000 is enough to buy shares in one company in the $10-$18 range.  Stay away from penny stocks, and ignore what the posters on company message boards say.  Look for a stock that you think has good long-term prospects – one that you think will expand and grow for years to come - and expect to own it for a long time.  You can easily open a brokerage account with any of the online brokers to make the trade.

A final way you could invest $2000 is to buy shares in an Exchange Traded Fund (ETF) through a brokerage firm.  These are like mutual funds with super low costs that trade like stocks.  You’ll pay a commission when you buy the ETF, however, which is kind of like paying a load for a mutual fund.  If you buy the ETF and then hold it for a long time, however, the effect of this initial purchase fee will be minimal.

Investing $2000 in an Educational IRA:  Investing in an educational IRA is more tricky because you only have 18 years at the most before the money will be needed.  This means that using mutual funds or ETFs instead of single stocks makes sense since chances are far less that you will have a major loss.

It might be worth picking a few single stocks, however,  when the kids are young if you have substantial resources otherwise to pay for college.  This is because the earnings inside the educational IRA will grow tax-free if used for education and you have the greatest possibility of huge capital gains with single stocks.  If you have a stock or two that do very well, you might get 30 or 40% extra to go towards college than you would have had if you had earned the money through work or in a taxable account by saving on the taxes.  Understand, however, that you may need to make up the difference if the stocks you choose fail to grow.

Once the child is 13 or 14, the time window is no longer long enough to have single stocks, and converting some mutual funds to CDs or at least moving from growth into income would be wise since stocks may very well lose money over shorter periods of time.  At that point if you don’t have enough in the educational IRA it’s time to start making other plans to pay for college.

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.

Food Stocks May Be Safe Haven

Once you have invested and built up a nice nest egg, attention turns from growth to stability.  It’s nice to have some nice little growth stocks that can grow 1000% over then next several years, but having a portfolio full of them can mean quite a wild ride.  Looking at the January 25th edition of Value Line, which included the Food Processing Industry, presents some nice picks to add stability to a portfolio.

Once of the standouts was McCormick & Company.  You know, the company that probably has a row of spices in your supermarket?  Selling parsley and basil may not seem as exciting as creating the next social networking site, but there are a lot of people who buy spices regularly.  Earnings have been growing at a respectable rate of about 10% per year, and the stock has been on a slow and steady uptrend since 2009.  With a 2.1% dividend, and a dividend growth rate in the 10% range, this might be a nice stock to balance out a set of growth stocks in a portfolio.

Another stock in the same group is Nestle SA.  This stock trades as an ADR (American Depository Receipt, which trades like a stock on the US exchanges and tracks the value of the European company).  Nestle makes more than just hot chocolate.  They make Gerber baby food, Poland Spring bottled water, Nescafe coffee, Dreyer’s Ice Cream, and Stouffer’s frozen meals.  Even if there is a slowdown in the economy, expect consumers to keep buying these old favorites.  The ADR pays a 3.3% dividend which is also growing in the 10% range.

Finally, Tootsie Roll company makes virtually every well-known candy on the market, including all of the Tootsie products, Andes Candies, Double Bubba Bubblegum, and even Junior Mints.  The price of the stock is as flat as a board, but it pays a 1.2% dividend and its earnings are expected to grow by about 10% per year after declining over the last several years, so it may be due for an uptick.  Even in a recession, you would expect people to keep buying their old favorite candies.

None of these stocks can be expected to suddenly shoot to the sky – the rate of earnings growth is too slow and they already have such a large market it is difficult for them to grow further.  Still, they are steady producers that provide a nice dividend at a time when banks are paying nothing.  One can also expect the value of their product lines to grow with inflation, so owning shares fo the companies is a good inflation hedge.  These may be worth a second look as an addition to a large portfolio.

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.