The SmallIvy Watch List


Searching around for investments when you have cash burning a hole in your pocket is a little like going to the grocery store when you’re hungry – not a good idea.  I keep a watch list of stocks.  Then, when I have some money to invest, I find a good candidate from among the stocks in my watch list and pick up a few shares.  As I’ve said in the past, about five years ago I changed my previous way of investing, which involved buying several different stocks that I thought would do well for various reasons and then selling if they increased by about $10 per share, and changed to what I’m terming serious investing.  In this new way of investing I buy stocks that I think will do well over long periods of time and then plan to hold them for several years to decades.  I plan to hold through the ups and downs in the economy, so long as the businesses I select continue to be well run, because I’ve found that good companies just emerge from downturns stronger since their competitors go out of business.  

I also tend to buy in larger amounts – 500 to 1000 share positions instead of the typical 100 or 200 share positions I would buy in the past.  This means that when I select well, I can make a huge profit that will really affect my life instead of just a minor profit that is nice to have but doesn’t compare to my work income.   Note that while I do concentrate in some individual stocks, I don’t put all of my money into individual stocks.  I already have mutual funds in my 401K account from work, and I also diversify into some mutual funds in my IRA and even my taxable account as the size of the portfolio grows.  But for the portion of my portfolio I’ve chosen to have invested in individual stocks, I tend to concentrate a lot more than I did in the past because that gives me the chance to significantly outperform the mutual funds and the indexes.  If I were just starting out and had a small portfolio, I would also start with individual stocks while I had little money and a long time to invest – while still squirreling money away into mutual funds in my 401k – and then shift over to more and more mutual funds as my portfolio got large enough to protect.

So what stocks have I selected for my watch list right now?  I’ll list them at the bottom of this post, but first a word of caution:  Just because a stock is on my watch list doesn’t mean it is something someone else should buy right now.  When I’m ready to invest, I’ll review my watch list and decide which stocks look good now and which have already had a recent run-up and look pricey.  If you want to start with my watch list as a starting point and then make your selections from the list, that would be fine (although note these are just my selections, which may be totally inappropriate for you and your situation – use at your own risk).  

Here is my current watch list:

IT/Technology: (I’m not big on IT and tech companies because their earnings tend to be all over the place, but here are a few that have shown consistent growth.)

*Cognizant Technologies

SEI Investments

*Fiserv

Venture Capital: (I usually see venture capital and hedge funds as great for the people running them but bad for the investors and shareholders who buy into them.  This one has been different, however, at least so far.  This one can make your taxes complicated because it is a partnership, however, so talk to an accountant before getting involved.)

*Blackstone Group

Retail: (I love retail because the company can grow just by adding more stores.  I’ve had Home Depot for a long, long time and it may be too pricey now, but it has had a great history.  The Container Store is just a new company with lots of room to grow that may not pan out over the long-term.  Walgreens is just really well run.)

*Chico FAS

*The Container Store

*Dicks Sporting Goods

*Walgreens Boots Alliance

*Home Depot

 

Restaurants:  (I love restaurants for the same reason I love retail – you grow by adding restaurants and franchises.  The danger is that tastes can change really fast – I found this out from Ruby Tuesdays.  BJ’s is my favorite stock right now on a long term basis, but pricey after the recent run-up from $30 to $50 this year.)

*Texas Roadhouse

*BJ’s Restaurants, Inc

*Sonic

Other:  (AFLAC and Rollins have been long-term holdings that have served me well.  American Towers used to be a cell phone tower company, now a REIT made up of cell phone towers.  Greenbrier makes railway cars and does well both when oil goes up or business activity picks up because oil prices are down.  LKQ is fairly risky, but has some potential.)

*AFLAC

*American Tower

*Norwegian Cruise Lines

*Rollins

*Greenbrier

*LKQ Corp

* indicates that this is a stock in which I have a current position of some amount.  I doubt I’ll make any money from my limited readership buying into any of these companies since I doubt the markets would notice, but wanted to be up front with everyone.

Have some Serious Investing picks of your own?  Got something to say?  Have a question?  Please leave a comment or contact me at vtsioriginal@yahoo.com.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why You Don’t Want Your Insurance to Pay for Everything


Stephescope

Many people are disappointed when their medical insurance doesn’t pay for everything.  They want their office visits completely covered, their prescriptions covered, and any type of tests or x-rays covered.  They even want things like birth control, which can be purchased for maybe $20 per month, included in their coverage.  “Free” preventative care sounds great – who wouldn’t want that?  Well, you probably don’t.  Here’s why….

Would you like to buy auto insurance that covered oil changes and tires, not to mention things like transmission fluid changes and that expensive timing belt change?  You probably would, but your auto insurance would cost an extra $1000 per year.  The reason is that when insurance includes something that is certain to happen, all you are doing is paying for it through your policy instead of paying for it separately.  When it gets wrapped up in that policy, there are fees and profit for the insurance company tacked on, costs associated with filing and paying the claim, and additional amounts tacked on by the place doing the oil change for the hassle of needing to file with the insurance company.  While you could go get an oil change for $30 (or do it yourself for $15-20), you’ll pay the insurance company $40 to pay for it for you.  Tires might be $100 each if you just pay yourself, but the insurance company will charge $150 each.  You have involved a lot of middle men, all of whom need to get their cut for providing the service, plus you’ve picked a really complicated way to pay for things, which adds to your costs.

In addition, it is in the insurance company’s best interest to try to control the transaction to increase their profits.  If they find a shop that will give them a break on what they pay for an oil change, they’ll require their customers to use that shop.  With medical care, insurance companies reduce their costs by limiting the doctors that you can see.  Don’t be surprised to see things like group visits to the doctor (several people with the same symptoms see the doctor at once and get a group diagnosis) or call-in and online office visits soon as insurance companies try to reduce the costs they pay and doctors try to still make money with the amounts they are reimbursed declining.  (Note also that the need for insurance companies to reduce costs is being driven by requirements by the Affordable Care Act to cover a wide variety of things and yet do so under specified premium caps.)

Insurance is designed to pay for things that are probably not going to happen, but you could not afford to cover if they did.  Most people would be in really bad shape if the home that they just started a 30-year mortgage on burned to the ground, so they have home owners’ insurance to pay for fires.  In fact, loan companies know that most people would never pay off a loan on a home that was destroyed, so they require insurance on the home while there is a loan outstanding, and they get paid by the insurance company before the homeowners see a dime.  Because the chances of your home burning down in any given year are very remote, the cost for insurance is fairly low.

For example, if you own a $200,000 home and live near a fire hydrant, the insurance company may calculate that the chances of your home burning down this year are 1000 to one.  They would therefore charge you $2000 per year plus a small amount for a profit ($2000 = the value of the home divided by the chance it would be destroyed by a fire this year).   Assuming they covered a thousand homes, on average one home would burn down in a given year, but because everyone is paying say $2200, there would be enough money for the insurance company to cover the cost of the fire and still make a $20,000 profit.  The insurance company also takes advantage of the fact that there are many years when nothing happens by investing the funds they receive until they need to pay out claims.  This is actually where insurance companies make most of their money.

So get home insurance.  Get term life insurance when you are young and the chances of you dying are low but the consequences enormous.  Get liability insurance so that when you have an accident you can pay for the medical bills of others.  Get major medical insurance that pays for the heart operation or the cancer treatments.  These are true insurance and are relatively inexpensive because the risk of the insurance company needing to pay you for a claim are remote, but cover things you probably will not be able to withstand financially if they do happen.  For the things that are certain to happen, however, skip the insurance and pay yourself, right from your pocket. You’re doing it anyway when “insurance covers it.”  You’re just paying the insurance company to write the check, and paying a higher price when you do so.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

How Stocks are Priced – It’s All About the Dividend, Even If They Don’t Have One.


A few years ago I got into a lengthy discussion of stock pricing with a reader.  Unfortunately the exchange ended up being by email (I’d much rather readers post comments to the blog – I get so few of them).  I contended that stocks are priced based on the dividend they pay, or actually, based on the potential future dividend.  The reader basically said that I was incorrect and that stocks are based on a lot of factors, the dividend being a very minor one.  (In actuality, we’re both right, and I’ll explain why in a minute).  In any case, he cited Apple as a company that would never pay a dividend; therefore, the idea that it was priced based on potential future dividends was ludicrous.  A few weeks after the exchange, Apple announced that it would start paying a quarterly dividend of about 2%.

How is he right?  Stock pricing isn’t like pricing at the supermarket.  You don’t walk in, pick up an item from the shelf and see a price sticker on it.  (Yes, I know that we’ve gone to bar codes now, and the price (might) be on the shelf, but bear with me – I’m from the 80’s.)  Prices fluctuate constantly and for a wide variety of reasons.  Some people look at earnings and decide what a stock should be worth.  Some look at how likely it is for the stock to have an earnings surprise and bid the stock up accordingly.  Some people sell shares and don’t care what the price is because they have a large profit and just want to unload it, or they need to pay for their daughter’s wedding.  Some people see a stock go up or down in price, and buy or sell it because it went up or down in price.  They figure that if the price is going up, they’ll be able to sell it at a higher price.

Very few of these people are probably thinking about the dividend that the stock is paying.  Heck, a lot of these stocks may not even have a dividend.  So I must be wrong, right?

Well, even though all of these people don’t know it, they are basing the price they pay on the projected future dividend.  Note that the “projected future” part is very important.  Note also that there are fluctuations int he price – the dividend just sets the price range.

You see, the amount that people are willing to pay for a stock depends on its potential future return.  This return must be enough to justify the risk that is being taken on.  If one can get a 5% return from a bank CD, one wouldn’t even think about buying a stock unless one thought a 8% return or greater was possible.  Why trade a certain return of 5% for a possible return of 6%?  You wouldn’t.  You would drop the price you were willing to pay for the stock until the potential return was at least 8%.

Also, the more uncertain the return, the greater the return must be.  If you are buying shares of McDonald’s, for example, you can assume that the amount of traffic at their restaurants won’t change by that much during any given year.  It isn’t like everyone is going to swear off Big Macs at once.  You can therefore predict with reasonable certainty how much the company will earn during the next year (or the next five years), and therefore you know about what the price will be.  (Here you’re also assuming that the price to earnings ratio will remain about the same, which isn’t too bad an assumption.)

On the other hand, if you are buying shares of a silicon chip maker like Cypress Semiconductor, the future becomes far less certain.  You don’t know if research and development won’t pan out, or the Koreans will dump a bunch of cheap chips on the market, or what.   You also don’t know if interest in electronics will remain, or if manufacturers will choose Cypress chips or one from their rivals.  Because they are somewhat of a commodity, the fortunes of a company can be pinned to a few cents savings per chip made.  Because of this uncertainty, shares of Cypress are priced cheaply relative to shares of a company like McDonald’s.  Note that the PE ratio for Cypress is 17.5, while that for McDonald’s is about 18.5.  People are willing to pay a little more for more certain earnings.

But wait, that’s earnings, and I was talking about dividends, right?  Well, let’s say that a company never, ever paid a dividend.  What return would a shareholder receive?  Another way to look at it is, what value would the company be to the shareholder if he never received any share of the profits?  True the company might be making a lot of money, but the investor would never see a cent of that.  Without a dividend, there is no return to the shareholder.  He would not even see capital gains because no one would be foolish enough to buy the shares from him. (OK, someone would be, but that’s beside the point).

So, when people are buying stocks, they are trying to figure out what the future dividend will be, and what their return would be based on that dividend, and then pricing the share price accordingly.  Granted, this is a Ouija board-type of pricing where people may not even know they are pricing it based on the dividend, but they really are.  The reason that people pay more for shares with growing earnings is that if the earnings of the company are higher, they will be able to pay a bigger dividend.  Many who price stocks based on earnings forget this fact, but that is what they are doing (that is why earnings matter at all).  It is kind of like how the main reason people paint houses is because if they don’t the wood will rot, but they are probably thinking more about how the house looks than wood rot when they decide it’s time to paint again.

Note also that the piddling 2% Apple is paying may seem small, but if you bought the shares back a year ago when the price was half of what it is now, you would now be receiving a 4% dividend on your investment.  If you continue to hold the stock and the dividend continues to increase, you effective yield will continue to climb.  You might be making 8%, 12%, or 20% in five years.

So, dividends do matter, even if many people have forgotten that fact.  When it comes to pricing, it’s all about the dividend.

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 Mistakes that May Be Keeping You from Success


 

Successful investing is probably 60% psychological and 40% technique.  Many teach various investing schemes and repeat the standard bromides.  The importance of diversification.  Minimizing taxes and transaction costs.  The power of compounding and why stocks will do better than bonds over long periods of time.  Some will relate the excitement of their various trades.  A few will relate stories of some of their failed trades and losses.  Few, however, discuss the psychology of successful investing.

Our emotions affect our actions and most people are very emotional about money.   Unfortunately, most people are wired exactly backwards to be successful at investing.  This is why Las Vegas and a thousand Indian casinos do so well.  We tend to put money into stocks when they are nearing a high and pull it out when nearing a bottom.  We tend to sell winners quickly, missing out on most of the appreciation, and hold onto losing positions for years, selling when they finally recover to where we bought them.

Because the behavior of the crowd is usually wrong public sentiment is actually measured as a negative indicator.  If public sentiment is high and most people are bullish it is time to sell because everyone is fully invested and there is no money left to push prices higher.  Conversely, if everyone is bearish there must be a lot of money sitting on the sidelines that can be invested and therefore it is time to buy.

Today I’ll discuss some common  psychological traps and how to avoid them.

Holding onto losers too long.  Many people will hold onto losing positions, or even average down into losing positions, when they really should just sell the stock.  For some reason, people don’t feel that they have taken a loss unless the stock is actually sold.  “It’s only a paper loss until you sell,” they’ll say.  Often people will hold onto a loss for months or years.  If the stock actually does begin to recover and gets back to where they purchased the shares they will sell out.  This is usually when the stock goes through the roof.

If you have a losing position, it is best to reevaluate the company.  See if there was some mistake in the logic you used when you purchased it.  See if something has changed at the company or there was some news of which you were unaware.  If you can still find nothing wrong, stick by your guns – it may just be market fluctuations and your stock will eventually recover.  If you do find that there was something you missed, accept the mistake, learn from it, sell the stock and move on.  If it makes you feel better, realize that you can offset a gain in another stock.

Holding onto winners too short.  Many people, when they have a stock that moves up 10 or 20%, will sell the stock.  People are fearful of seeing the gain evaporate and becoming a loss.  Another way of doing this is setting a stop-loss slightly below the share price and letting the market decide if the stock gets sold.  The trouble with this strategy is that stocks are sold just when they are starting their big runs up, so the investor misses out on most of the gain.  Because losers tend to be held much too long at the same time winners are sold, many traders never really make much of a profit.

To avoid this, only buy stocks that you feel will do well in the long-term and hold onto them until something at the company changes or the stock gets so outrageously overpriced that it would take years for the earnings to justify the price.  Remember that the idea is to make large profits over a period of years, not small profits over a period of months.

Holding onto winners too long.  A final mistake is to “fall in love with a stock” and hold onto it even after the business has changed and it will no longer continue to grow.  Often, if a stock has gone up and doubled year after year it is difficult to admit that the stock is maturing and it is time to move onto something else.

To avoid this mistake, reevaluate all holdings at least once a year.  Ask yourself if it still seems like a fresh young company with plenty of room for growth or if it has filled most of its market and there is little growth left.  See if demographics are changing or the company was on a rapid growth path and may have expanded too rapidly.  In particular, if a stock has grown substantially under a particular CEO and theat CEO is retiring, it is often time to sell the stock and move on.

 

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Catching the Dead Cat Bounce


dead cat bounce is when a stock or the market falls a long way, then becomes so oversold and cheap that value investors rush in and bid the price up a little.  The term comes from the observation by one trader that “if it falls far enough, even a dead cat will bounce!”  Trying to catch a dead cat bounce, however, is very tricky and not a good strategy for making your fortune.  Instead it should only be done under very special circumstances.  These are:

1) The stock is one of your long-term buys that you are planning to hold for years and years.

2) You are investing with money you can afford to lose.

3) You aren’t just averaging down to avoid dealing with a bad stock selection.

4) You are ready to see the price of the stock continue to fall as you mis-time the bounce and watch the stock fall further.

Unfortunately, I had the opportunity to take advantage of a dead cat bounce the other week in Oasis Petroleum (OAS). Please refer to the chart of the stock here as a reference.  Now the reason I say, “unfortunately,” is that I had originally bought the stock in the $45 range last September.  I had bought into Oasis Petroleum to broaden the types of industries I’m invested in, which had been concentrated in consumer discretionary (restaurants and retail stores).  Oasis is an oil producer, mainly focused on the northern US oil boom.  I liked Oasis because they have strong 3-5 year projected returns in Value Line and because they were in the energy sector – a sector to which I had little exposure.  In hindsight (and maybe a bit of foresight), I should have waited because I was buying into an area that had already had a big run-up in prices and was due for a correction.

Well, anyone delighting at two dollar gasoline knows what happened next, even if he doesn’t follow the stock market.  Oil prices collapsed, which caused the price of Oasis Petroleum to fall with the rest of the oil-producing sector of the market.  I sat and watched as the stock sank into the $30’s, then looked like it would hold in the high $20’s, then completely collapse into the low teens, finally bottoming out at $11 per share.  As it turned out, I timed the dead cat bounce almost perfectly, buying in again at $12 per share and then seeing the stock rally over the next few days.  It is currently trading around $17 per share, giving me a 42% profit on the new shares I bought, although I am still obviously losing money on the entire position since I have lost about $28 per share on the shares I had originally bought.  The nice thing, however, is that I only need to see shares increase to $30 per share to break even instead of going all the way up to $45 again.  That’s the advantage of averaging down when it is done for the right reasons.

So how do I have the right reasons for averaging down in this case?  The first reason is that I see Oasis Petroleum as a long-term buy that I plan to hold regardless of price movements as they develop and grow.  The second reason is that the entire oil-producing industry is falling through the floor, taking both good and bad stocks down with it.  It is nothing fundamental about Oasis Petroleum that caused the decline – it is the whole market.  It is times like this when an industry is in a free fall that really great buying opportunities emerge.  I just picked a really bad point to enter the first time.

The first danger of trying to catch a dead cat bounce is that the stock will often fall further than you thought it would.  I had looked at getting into Oasis Petroleum again when it had dropped into the mid-twenties since it appeared to have settled out there.  Then came a one-day drop to the $15 range, and on down to $11 per share.  If I had a trader’s mentality, I probably would have sold out when the price dropped to $11 – which would have been exactly at the wrong time.  Because I have an investor’s mentality, I know that I cannot time the market and cannot get the ideal price most of the time.  I just accept the fact that $12 per share is a lot better than $45 per share, even if the stock eventually goes to $6 per share before it finishes its slide.  This is why you need to buy stocks you’re interested in for the long-term, since that allows the stock the time to recover and grow.

The second danger is that there could be something fundamentally wrong with a stock that falls through the floor.  Some stocks never recover.  In this case, because the entire industry was falling and it doesn’t appear that there is anything about Oasis Petroleum’s management or prospects that is causing the issues, that is unlikely.  Still, this is why you don’t invest more than you would be willing to lose, no matter how good a deal it appears to be.  You also don’t keep averaging down, because at some point you’re in it for pride rather than profit.  Every investor takes a loss at times.  It is the best investors who know when to give up, dust themselves off, sell a losing position, and look elsewhere.  Poor investors sit on losses because they are unwilling to admit they were wrong.  They then end up with portfolios full of losers.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Some Big Winners and Big Losers in My Portfolio


I’ve had some spectacular winners and equally spectacular losers in my personal portfolio this year as we wrap up the final couple of weeks of 2014.  Among my big winners were restaurant stocks such as BJ’s Restaurants (BJRI) and Texas Roadhouse (TXRH).  Intel (INTC) and Norwegian Cruise Lines (NCLH) also did very well.  Finally, a long-term holding of mine, Home Depot, has done very well over the last few years, rising from the mid-thirties to almost $100 per share at this point.  My losers, including Oasis Petroleum (OAS), Enesco (ESV), and Greenbrier (GBX), have been weak mainly due to the recent weakness in the oil industry.

I’ve always liked restaurants stocks because they fit with my strategy of buying stock in companies that grow and expand.  It is easy to tell how much room for growth a restaurant has.  You just see where they are in the country or in the world.  If they are already on every corner, you know their growth prospects are limited and it is probably time to sell (unless you are just holding for steady income).  If they are only in about half of the country like BJ’s is (I’ve never actually been able to go to one of their restaurants because there are none around here), you know they have room to expand.  Likewise, while there are a lot of Texas Roadhouse Restaurants in some parts of the country, they aren’t everywhere.  Good restaurant stocks will see earnings grow years after year as they add restaurants and improve quality and service, such that more people go to existing restaurants.  You can look at the earnings growth rate to get an idea of the sort of return you can get since normally, over long periods of time, the stock price will roughly follow the earnings growth rate (as they will for any stocks).

I’d worried about buying Intel since it once was once the only real player in the processor market, but then AMD and others were able to move into that market successfully and take market share.  People are also moving away from computers into tablets and smartphones, which were not Intel’s original markets and it wasn’t clear if they would be able sucessfully enter these markets and have a place in this post-PC world.   There is always a danger of buying into a leader in a market that is vanishing – just ask those invested in buggy whip makers.  Value Line, a publication I use a lot in my stock picking, however, gave them good marks for Timeliness(TM) and earnings growth, so I went ahead and bought in.  They have done very well so far, up about 47% since I bought them about a year ago, so they are obviously becoming a player in the new mobile computing world.  Sometimes a great new growth stock is an old household name that just reinvent itself.

Norwegian Cruise Lines is a newer addition that I bought also as a Value Line recommendation.  They have been on fire over the last few months and my position is up over 25% in less than a year.  It appears that people are having some more money to spend since things like cruise lines, hotels, and restaurants are doing well.  I look at the long-term, however, and plan to hold on through future good and bad economies so long as the fundamentals of the companies remain the same and they have prospects to grow.  With a cruise line, that means adding more ships and more ports and cruises.  Norwegian is doing just this and looks like they can become a bigger entity in the cruise ship market.  Perhaps the large number of people currently retiring will also be a new source of revenue.  It is always been a good idea to buy what the babby Boomers are needing.

Oil has not been kind to me, but that is really my fault.  I still have a profit on Greenbrier, which makes rail cars and has benefitted greatly by the oil boom since one of their main products is tanker cars.  I actually still have a small profit there since I bought back before the big move up was completed, but that profit has declined mightily as the stock has fallen from near $80 per share to near $50.  Enesco rents deep water oil drilling rigs.  I have about a 45% loss on that position, reminding me of the losses I took the last time I invested in drilling rigs with Diamond Offshore.  That was right before Transocean and BP put a big hole in the bottom of the ocean and caused an oil leak that lasted for months, devastating the gulf coats tourist industry for a period.  Oasis petroleum, a more direct oil producer, has also done poorly, dropping to the point where I thought they couldn’t drop anyore when they were in the high $20’s, and then falling into the mid-teens last week.  That is why trying to buy a stock on the decline, called “catching a falling knife,” is so difficult.  Things go a lot lower than you think they will.  That position is down about 70% for me since I bought whent hey qwere up in the $50’s.

With all of my losers, I think I’ll probably stay invested after reevaluating the fundamentals of the companies.  There is no reason to sell just because a stock has declined in price – that’s closing the barn door after the horses have been stolen.  I also think that on a long-term basis oil will do well since there is no way to replace it for making plastics and a lot of other important products, not to mention it being the only available compact source of energy that can be easily used in passenger cars and trucks.  Plugging in may seem nice when you commute 10 miles to work and back each day and are then able to plug ion again, but there is nothing like gasoline or diesel when you need to drive all day or are travelling to a remote area where you can’t find a wall outlet.  (Note also that you actually use more energy per mile driven using an electric car than a gas car if you include all of the losses in making the electricity, transporting it to your house, and getting it into the car battery.)  The lesson here, however, is to be careful of buying into an industry after they have already had a few years of great growth.  Every industry gets overbought and needs to contract as some point even if long-term there is ample room for growth.  I’m not a fan of market timing, but still there are times when things are really overbought or oversold where you should just stay on the sidelines for a while and wait for a better entry point.  This was one of those times.

Overall it has been a good year because my winning stock have far outpaced my losing stocks.  That is the beauty of investing in individual stocks – your gains are limitless, while your losses are limited to 100%, so a couple of big winners can make up for several big losers.  It takes time, however, for really big gains (e.g., gains of 1000% or more) to be made.  I’ve held Home Depot stock for over 20 years, including during a period when the stock went nowhere for more than a decade.  I bought in at various points between $40 and $30 per share, so I’ve now made about a 250% gain.  Over 20 years, that is an annualized return of about 10%, but most of that gain came in the last few years.  This is why long-term investing is more effective than moving in and out stocks – you reduce your risk by allowing a long time for things to happen.  It is easier to spot companies that will do well over a long period of time than find stocks whose price will increase over a short period of time.  You can judge the long-term prospects by looking at the fundamentals of the business, while the short-term price movements are due to all sorts of seemingly random factors.  Investing is long-term.  Gambling is short-term.
Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Some Big Tech Companies Are Looking Strong


SmallIvy_1x1Dear SmallIvy,

Love your website for small and beginners. Are you planning on investing in Alibaba? I have about 100,000 and would like to get in on Baba. what are your thoughts? Also yahoo who has 24% in BABA. would you also buy some yahoo? I don’t know how many shares to buy at IPO but don’t want to buy to few as you mentioned in one of your articles. Thank you so much for your time and knowledge you are sharing with us!

Mary

Dear Mary,

Thank you for the kind words and for reading the The Small Investor blog.

I know that IPOs are exciting, especially since the 1990’s when we saw internet start-ups shoot through the roof.  That type of speculation, however, doesn’t fit the investing style I recommend.  First of all, with all of the hype and excitement, it is unlikely you’d be able to get a good price for the stock.  While stocks like pets.com went up dramatically during their IPO days, they also fell dramatically once the insiders were able to sell their restricted shares.  I would love to get shares of an IPO at the opening price, but not at the price of the second or later trades since it is very likely that I would be paying way too much.  I would rather wait for the fall from grace and then buy some shares if the company does have sound fundamentals.  Think about buying Amazon in late 2000.

Another reason I would not invest at this time is that I have no history from which to develop an opinion on how Alibaba will do.  I don’t know if their management team knows what they’re doing.  I don’t have any record of earnings and earnings growth.  I really don’t even know much about the markets they’re in.  I like to be able to have enough information to minimize the risk of a bad management team or a bad product.  That requires some history as a public company and the release of earnings over a few years.

Also note that since they are operating in parts of the world where the government could swoop in and nationalize them on a whim, there is a political risk as well.  I try to stay away from situations involving politics since that is very unpredictable.  You need to know who the favorites are of the government officials in power.

Now on the amount you’re talking about investing.  If you have several million dollars invested elsewhere, putting $100,000 on a single, unproven company might be justified.  It is just your gambling money that may pay off, but no great harm done if it vaporizes.  If that is most of the money you have, however, it is way to big a risk unless you are the CEO of Alibaba and therefore have a great deal of control over the company.  Even then it is risky and you would be better served spreading your money out into other companies.

Regards,

SmallIvy

 
Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. 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. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.