This is the launching of The Small Investor Blog, a blog to give advice to those interested in investing in stocks and other securities in their own account. Note that I am not a certified investment advisor — I am an individual investor with almost 30 years experience. This experience includes stocks (long and short), equity options, index options, bonds, hard commodities (gold, platinum, silver), REIT’s, limited partnerships, and penny stocks. Note that investing does involve risk (a stock isn’t a bank account), so one should choose investments carefully and realize that any individual stock could disappear overnight.
Now that the formalities are complete, let’s get down to business. This blog is for the small investor with a long time to invest (20-50 years) who has little money and wants to grow funds. It therefore does not present the typical investment spiel about diversification, proper balances of stocks and bonds, etc…. It is not that diversification is not good, it is that diversification is designed to preserve capital, not grow capital. If capital preservation is the goal, funds should be placed in a variety of index mutual funds and spread over hundreds or thousands of stocks. Funds will grow at about 10-15% over the long hall, beating inflation by about 5-10% per year. One will never beat the market (because you’re buying the market), but then again a manager of a large mutual fund will never beat the market either because he has billions of dollars to invest, so he needs to buy the stocks he likes and several others he doesn’t like as much just to get the funds invested. He will make the market return as well, and then charge a fee and therefore your return will be less than that of the market.
Instead, the strategy presented is to invest concentrated amounts in a few stocks that we believe are going to grow for years and years, and then hold them for years and years. We want to catch the next Microsoft, IBM, Cisco. We understand that we may get a few losers along the way, but one big winner will make up for a lot of losers . The strategy is therefore:
- Start investing in two to three stocks, adding to the positions if the price drops, until the amount in those stocks is more than we are willing to lose. At that point, another stock is chosen.
- If a stock goes up in price substantially, such that the amount invested is more than we are willing to lose, we sell part of the position to trim it down, reinvesting the funds in another stock.
- If a stock loses the characteristics for which we bought it (more on what those are in a future newsletter), we will sell it. Otherwise, we hold onto it indefinitely.
The purpose of the long hold are two-fold. First of all, it is easier to pick stocks that should continue to grow year-after-year than it is to predict short or medium-term trends. I can easily look at a company’s history, see that it has grown and that the business should continue to grow. I can also easily look at demographics and trends and decide which industries should do well. Even when all of this is in my favor, I cannot predict what traders in the market will do over the short term. I just know that eventually the stock will move to a price which is based on the intrinsic value of the business. If this is growing, the price should be higher in the future.
The other reason is that there are no capital gain taxes until the stock is sold. By holding long-term, capital gains taxes are delayed, which allows the funds to grow tax-deferred, which any accountant will tell you will greatly add to returns.
Well, that’s the first installment. As the days pass I’ll be adding more details of the strategy, explain how to pick a stock, make commentaries on the conditions of the market, and hopefully post other good advice. Check back soon.