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.
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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.