Free Enterprise Requires Freedom

Free enterprise provides the greatest opportunity for people to pull themselves out of poverty and to transition from the middle class to financial independence.  Part of the reason is that it creates the most wealth because it creates an incentive to create wealth.  Want food to eat?  Spend you day making things rather than spending the day in bed or out fishing.  Want a house in which to live?  Get a job in which you are providing services to others and keep that job long enough to pay for the home.  

A free enterprise system also provides opportunity to all who are willing to create things and provide needed services to build wealth.  Unlike Socialist systems in which those with the connections to the individuals controlling the distribution of wealth, or those either accepting bribes or making bribe are the only ones who become wealthy, an individual in a free enterprise system has the opportunity through hard work and smart decisions to go from abject poverty to great wealth.  Those stories may be rare, but there are a lot of stories of people who do so in two or three generations.

It is also the most fair and benevolent of economic systems.  A system that is truly free rewards those who meet the needs of others and compensates individuals in proportion to what they do for others.  A short-order cook in a diner may think they are just there to get a paycheck, but in actuality they spend their day feeding hungry people.  An individual who opens a restaurant and employs enough cooks to feed even more hungry people earns more money because he is providing for the needs of more people.  An individual who builds a restaurant chain and feeds thousands of hungry people each day becomes very wealthy.  Your income is in proportion to the number of people whose needs you meet and how critical those needs are.

While it is not part of the DNA as it is in Socialist systems, free enterprise can become corrupted if people let it.  While this corruption can come in the form of collusion among business owners to stifle competition for both goods and employment, this type of corruption will be dealt with by the market itself provided that barriers to entry are minimized such that others can open competing businesses to those colluding.  The most dangerous form of corruption comes from government officials who collude with business owners to stifle competition.  This is often done through regulations passed in the name of safety or market “fairness” designed to raise costs to the point that few can enter the markets.  It also comes in the direct outlaw of competing products, tariffs and taxes to keep out competitors, and wage and benefit laws that drive small businesses out of the market.  In some cases, governments fund businesses directly and create unfair competition.

Free enterprise will work and work well if it is truly free.  Barriers to entry into markets must be kept to a minimum so that new competitors can enter the market and challenge existing companies who are not providing fair deals to their customers.  Employees must be free to move from company to company in order to ensure wages are fair for the value of the work Employers must be free to offer the wages they wish and the benefits they wish.  The use of regulations or taxpayer money to benefit specific corporations cannot be allowed to stand.

Often those who are the most productive choose to focus on running their company or working their job and lose sight of the effect of government actions on the free enterprise system.  Unfortunately, constant vigilance is needed to prevent crony capitalism and discriminatory regulations from creeping in. 

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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.

When Investing, We’re Often Our Own Worst Enemies

About five years ago I changed from my normal style of investing, whatever that was, to what I call serious investing.  I now find only the best companies – those that make me really excited because they have a strong history of earnings growth, little or no debt, good prospects for future growth, and a great management team in place.  I then buy a significant position – 500 to 1000 shares – over a period of time, buying on dips and stalls, and plan to hold indefinitely as the company grows and matures.  I’ll often find just one or two stocks in a given industry and concentrate there, rather than spreading out to several companies in the same sector.  I do this in addition to being invested in a diversified set of mutual funds in my 401K and to a lessor extent in my IRA and taxable accounts, just in case I do badly at stock picking in my taxable account.  In 2004 I had probably 20 stock trades to list on my tax return.  For 2014, there were none because I’m buying and holding, letting the money compound tax-deferred.

This strategy has paid off well over the last several years.  Rather than lagging the markets by unknown amounts as I did before (I never really checked that hard), I’ve been beating the market, and by sizable amounts in some years because I’m putting my money into only the best choices.  I’m sure that some years I’ll lag the markets since some years my picks may be taking a pause, having run up in past years, but over long periods of time I’m hoping to pick a couple of stocks that grow like Microsoft or Home Depot and provide 1000% or 10,000% returns over a decade or two.

Another thing I’m doing is buying larger positions.  I found that in the past I would selects a good stock, but 100 or maybe 200 shares, see the price go up maybe 20 or 30 points in a good pick, only to make a few thousand dollars.  Now when I pick well, I can make life changing gains.  I then shift some of that money into mutual funds to diversify and keep the gains I have and let the rest stay with the company that has done well (assuming it still seems like a great company).  Sure, I’ll have some bad picks, but a 100% gain on one stock will wipe out a 100% loss on another (which almost never happens – a 50% loss is more likely).  A 500-1000% gain on a stock will do a lot to make up for bad choices.

In the past, I would also sell fairly often.  If a stock gained enough so that I had made a $1000 profit, I would sell out, telling myself that I was “selling high.”  What I was really doing was selling my winners and keeping my losers, leading to a portfolio full of losers after a period of time.  Now when I buy I plan to stay invested unless the company fundamentally changes and I don’t like the change.  I don’t worry about the economy or the markets because I know I have the best companies that will just emerge stronger than ever.  I plan to let my money compound over years and decades and grow into truly sizable positions.  If something gets too big (meaning that it would hurt me significantly if it went to zero the next day) I’ll sell a few shares and cut the position back down to size.  I might also sell covered calls for a period, although I’m finding that doing so just sets me up for the risk of seeing a big fall in the stock.  Plus, I usually find I would be better off just selling the stock since it may go well above the strike price before the expiration date comes and the shares get purchased.

Given that things are working pretty well with this strategy, you would think that I would be sticking with it, and for the most part I am.  Still, I find myself sometimes reverting to my old ways.  I might see that an old, stodgy company with little opportunity for growth that has a good dividend and buy some shares.  I might buy a hundred or two hundred shares, planning to come back later and pick up more shares until I build up the position, only to forget about it.  I then see the company double in price,  leaving me wishing that I had kept building the position.  

Probably the worst thing I did was my actions last summer, when I decided that I would try to add “protection from inflation” by adding oil and other energy companies.  Never mind that stocks are natural inflation hedges in themselves because stock prices will go up as dollars become less valuable.  These oil development companies were doing well only because the price of oil was high.  I’m not sure how I expected to protect myself from inflation by buying into companies that produce a product that was already highly inflated in price, but there I went.  Most of those positions have seen a drop by 50% or more as oil fell back down to earth and worse yet – the Saudis have made fracking unprofitable and clearly show they plan to keep prices this way until all of the frackers have left the market for good.  Because I diverted from my standard plan, I ended up buying into an overpriced market.  The only good company I bought was Greenbrier, a producer of rail cars, including oil tanker cars.  Because they are more diversified, they have other businesses to support them even if oil shipments from the Dakotas cease.

Another place where people often do themselves in is in their 401k accounts.  If you put 10% of your paycheck into your 401k, invested it split between a large cap fund and a small cap fund, and did this for your whole career, you would never need to worry about retirement.  Unfortunately, a lot of people tap into their 401k accounts after ten or twenty years, end up spending it all, and then complain that 401k plans aren’t as good as pension plans once were.  Note that pensions only provide maybe 5% returns, but people aren’t able to take the money out until retirement.  People are actually far better off in 401k accounts, which can easily provide 8-10% returns, but only if they leave the money alone instead of spending it at 40 or 50 and then starting all over again.  It is the last five years, after investing for 40 years, where the real gains are made.

Got something to say?  Have a question?  Please leave a comment or contact me at

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.

I Just Can’t Buy Bonds

Bonds and income stocks are an important part of a portfolio.  While bonds won’t provide the returns that stocks will over long periods of time, when there are falls and crashes in the stock market like in 2008, bonds will usually hold up in price while stocks will fall.  Indeed, in 2008, those who were 50% in bonds, say, might only have seen their portfolio’s decline by 5% or 10%, while those 100% in stocks were looking at 40% drops.  Some bond holders even made money while everyone else was seeing their portfolios decimated. 

A rule of thumb is that you should invest a percentage of your portfolio equal to your age in bonds.  If you are 20, you should be 20% in bonds and 80% in stocks.  If you are 80, you should be 80% in bonds and 20% in stocks.  If you are 100, you should be thankful you’re alive and be 100% invested in bonds.  If you’re 110, I guess you need to short 10% of your portfolio and invest the proceeds in bonds or something.  This is the conventional wisdom and we should never doubt the wisdom, right?

Except I do.  I am in my 40’s, so I should be 40% in bonds, but instead I’m 100% in equities.  (OK, maybe 97% in equities and maybe 3% in cash.)  I plan to be the same way when I’m in my 50’s, and I hope that I can be the same way when I’m in my 60’s and 70’s, although I may diversify into real estate at some point by buying some vacation homes, just for the fun of it.

I know that buying bonds (and income producing stocks) reduces risk, and I know that the additional reward that I can get for being 100% in stocks is just a little better than it is for being 70% in stocks and 30% in bonds, say.  But that’s just it.  By putting money into bonds that could be in stocks, I’m giving up a few percentage points of return that I could be getting from a 100% equity portfolio.  I know that over a long period of time, like 20 years, the difference between making a 12% return or a 15% return and a 10% return is huge.  You see, at a 15% return, by portfolio value will double every 4.6 years, while at 10% it will double every 7.1 years.  In 20 years, 100,000 will be worth about $400,000.  At a 15% return, the same $100,000 will be worth more than $800,000.

Now what is the consequence of not owning bonds?  Well, in years like 2000 and 2008, I’ll see a big drop in portfolio value compared to a portfolio with more bonds.  A portfolio with about 70% bonds and 30% stocks will be lowest risk of all, meaning swings in portfolio value will be substantially less than a portfolio that is 100% stocks or even 100% bonds.  During years like 2008, people who had 60% bond/40% stock portfolios may have even seen an increase in their portfolio values while those with 100% stock portfolios saw 40% declines.  During the next year, however, the 100% stock portfolio saw a 30-40% increase, and another 20-30% increase the year after that.   You risk having big drops in the value of your portfolio, but you’ll also see recovery if you can just stick it out or, better yet, invest more while prices are low.

Having a 100% stock portfolio when you are a few years away from  retirement can definitely be a bad idea.  Certainly there are a lot of people who were ready to retire in 2007 after seeing the value of their 401k’s increase from 2003-2007, only to see their plans of spending time on the beach put on hold after suffering substantial losses in 2008.  In 2008 they were still heavily invested in stocks, hoping to get one more great year to feather their retirement nest.  Instead they saw a bear market for the record books.  

Many advisers propose being very conservative going into retirement, having maybe a 60% bond and 40% stock portfolio, and then actually getting more aggressive as time passes.  There are studies that show starting very conservative right when you retire but then being more aggressive later in retirement increase your chances of outliving your money.  The idea is that when you are just starting out in retirement, a big loss would be devastating, but it becomes less significant as you get older and no longer looking at as many years of life.  Someone who is 70 might be 70% stocks and 30% bonds again. 

Despite the risk of suffering a big setback, I would still like to be mainly invested in stocks even going into retirement, however.  I know that I’ll enjoy much better returns in equities, and therefore have more cash flow to enjoy life, if I’m in stocks instead of being heavily in bonds.  Even at age 65, I still have about 20 years to invest and I know that for periods of 10 years or longer, I’ll have returns on the order of 12% in stocks before inflation.  

Staying fully invested in stocks is not an option, however, if you have just enough money for retirement, which today is somewhere in the $1M to $3M range.  In that case, if you had a large, 50% portfolio loss, you would run the risk of running out of money,  This is because, after a large drop, you’ll need to take more money out of your portfolio for expenses than it can withstand.  Once you reduce the balance of the portfolio enough that it no longer produces enough to regenerate itself for the amount you extract, it becomes a vicious cycle.  Each time you take more out, you reduce the amount of income it can generate.  Next thing you know, you’re moving in with your kids.

I’m hoping (and planning) to have more that I need for expenses, however.  If I have a $6 M portfolio, I can set aside a relatively small portion in bonds (or even just put five years’ worth of expenses in cash) and keep the rest invested in stocks.  If the market takes a tumble, I can just wait for it to rebound since I’ll have expenses covered.  When the market does well, I can sell some shares and build up my cash position.  When it does poorly, I can sit pat and use the cash I have.

The other advantage of building up a bigger portfolio than the bare minimum is that I can stay mostly fully invested even as I approach retirement.  When you are just starting to invest, the return on my account was relatively small (maybe a few hundred dollars a year.  When I get to the point where I have a few million dollars in my account, however, I would be making a million dollars or even two million dollars during years where the market goes up 20 or 30%.  Most people miss out on these big gains because they need to start transitioning to bonds just as their portfolios start to get large because they can’t withstand a big downturn.  They cross a million dollars when they reach 60 years old or so, then transition half of the portfolio to bonds and limit themselves to maybe a $50,000 gain in a given year.  If I have two to three times the minimum needed, I can stay invested in stocks because I know even if I lose 50% in a given year, I’ll still be set for retirement.  I can then take advantage of the opportunity to have really big gains.

If you want to stay fully invested in stocks and get that extra return like me, you don’t start when you’re in your fifties or even your forties.  You need to be putting money away regularly when you are in your twenties.  If you can find a way to put $5000-$10,000 per year into investments when you’re in your twenties, by maybe buying a smaller home when everyone else is buying big homes, or buying older used cars when others are buying new, you can set yourself up to have much more than the minimum to retire.  Then you won’t need to give up return by putting a bunch of your portfolio in bonds either.

Got something to say?  Have a question?  Please leave a comment or contact me at

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.