Become a Lazy Investor


You don’t want to be a lazy worker since you’ll never see your income rise and you’ll be the first person laid off if you aren’t fired outright.  You don’t want to be a lazy spouse since it will hurt your marriage.  You don’t even want to be lazy when it comes to managing your money since you’ll waste all sorts of money buying stuff you won’t remember in a week.  One place where it is good to be lazy, however, is in investing.

Lazy investors don’t do anything very often.  They think about calling in an order to sell a stock that has gone way up in price, but then it is a week or two before they get around to it, so they only trade a couple of times per year.  They don’t feel like pouring through stock tables, so they pick a couple of mutual funds that cover the markets and just stick to them.  They use payroll deduction since they’re too lazy to send in a check each month.  They maybe check their account balance once a year, so they may actually miss a whole market crash and recovery (what great recession?).

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Why does it pay to be lazy when it comes to investing?  It is because active traders do things that cause them to be bad investors.  They see the markets going up, so they put more money in just before it peaks and crashes.  They get scared in market crashes and sell just as stocks are hitting the bottom and starting to rally.  They go through their 401k account and shift out of the funds that have done poorly and into those that have done the best, buying those funds when they are high in price and selling the ones that are low in price right before they start to rally.  The next year they do exactly the same thing, trading back to the funds they owned before.  They watch CNBC and buy or sell stocks because some analysts tells them to, buying or selling with everyone else who saw that program and therefore getting a really bad price.


In the end they spend a lot in fees and make a lot of money for their brokers, and maybe get banned from trading by their mutual fund company, but they lag the returns of the markets.  They also create a lot of paperwork when they do their taxes since they need to account for each trade. So they do more work but get less done.

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Be lazy and you’ll make all the right moves.  You’ll just own everything, instead of trying to choose, so you’ll always have your money in the stocks that are doing well at any given time.  You’ll rarely sell, so you won’t sell in a panic.  You won’t generate costs and tax paperwork by doing a lot of trades.  You won’t be stressed at night about what the stock market did that day because you’ll not even look at the markets.  Being lazy is great for an investor.

If you want to become a lazy investor and make more money, here’s a few tips:

1. Be lazy when selecting investments.  Instead of spending hours researching stocks, buy mutual funds.  And instead of spending hours pouring over mutual fund evaluations and reports, just buy the basics – an S&P500 fund, a Small Cap Fund, a Total Bond Market Fund, and a Total World International Index Fund.  Don’t have the money to buy all of these at once?  Just buy the Small Cap fund now, then add the others when you think of it later, maybe in a year or two.

2. Be lazy in your fund allocations.  Instead of trying to figure out which funds to buy based on what the talking heads are saying is going to be hot next year, just invest 25% in each fund.  Whenever you have money to invest, find the fund that is the lowest percentage of your portfolio and buy that one.

3. Be lazy when selling.  With mutual funds, unless you need the money within five years, don’t sell at all.  Just let your money ride.  If the market goes down, don’t sell.  If the market goes up, don’t sell.  Just lock it and leave it.  If you own any individual stocks, don’t sell them unless one becomes worth more than $50,000 or ten percent of your account, whichever is bigger.  If that happens, sell half, but not too quickly.  Otherwise, give time for the company to grow.

4.  Be lazy when sending in money.  Put your investments on auto-pay so that you don’t need to remember to send in money.  Just have it magically leave your checking account once or twice a month and go into your mutual funds.

5.  Be lazy when reading your statements.  Maybe open a statement once a year when you have nothing better to do, and then to mainly check and see if you’re getting hit with any fees.  So long as things are chugging along, don’t make any changes.

So there you have it.  Be active when it comes to exercise.  Be active when it comes to budgeting.  Be active at work and active with your kids.  But be lazy about investing, and you’ll do better than 90% of the other investors out there.

 

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

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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.

If You’re Buying a Single Stock, Don’t Buy Apple


One issue when people decide to start single stock investing in that they choose stocks that they know.  Back in the 1980’s, people would have picked McDonald’s or Coca-Cola.  Today, they would pick Apple or Google.  But if you want to own shares of Apple or Google, you would be better off just buying an S&P 500 index fund or ETF, which would contain about 4% Apple, along with large percentages of Google’s parent Alphabet, Amazon, Facebook, and other internet titans.  Really if you buy any large cap stock fund, you’ll probably end up with a large amount of Apple stock since it is so dominant in the large-cap area.

And you should be buying index mutual funds and ETFs for a large bulk of your holdings.  That is where you should have your 401k investments, your investments for your children’s college tuition, and most of your investing outside of retirement.  If you were 45, there would be nothing wrong with a $1 M portfolio consisting of two index funds – half in a large-cap index and half in a small-cap index fund.  If you threw in a bond fund into the mix t add a little stability, you’d be in god shape even if you never touched individual stocks.

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But if you did decide to purchase an individual stock or two, I would hope that you would not pick Apple, or Alphabet, or Home Depot, or Exxon as your pick, unless your were in your 60’s.  The reason is that a single stock purchase should be done as a way to try to beat the markets.  You’re trying to find a company that will grow by 1000% in the next ten or twenty years while the market only grows by 200% to 400%.

Big stocks like Apple don’t do this typically.  Neither does Home Depot or Facebook.  They did in the past, when they were smaller and more nimble, but now they’re huge juggernauts that everyone owns.  How many more people can buy shares of Apple if they already own shares of Apple?

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When you’re buying individual stocks, you want to look for growing companies that are the best in their industry.  You want to find businesses that are not on every corner or in everyone’s purse and pocket.  These are the companies that have a chance to beat the markets if you hold them over long periods of time.

Right now I’m loading up on BJ’s Restaurants and Bloomin’ Brands.  I’m also buying into auto parts retailers like LKQ.  I like these companies because they are very well run, have been profitable for several years, have lots of room to grow and expand.  I’ve done well in the past with Rollins (Orkin pest control) and Sonic.  When I buy these stocks, I buy them as an owner, not as a trader.  I plan to hold them for years and let them grow.  I don’t worry if they sit there this year or even decline a bit since I’m in for the long haul.  That’s how you do well with individual stocks.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

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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.

Catching a Falling Knife


Wall Street has a lot of sayings developed by traders who learned one lesson or another, usually after losing a great deal of money.  One of the bromides is to “catch a falling knife,” usually used in phrases like “He tried to catch a falling knife with that stock and lost his shirt.”

In stock market parlance, to “catch a falling knife” if to buy a stock that is declining rapidly in price with the hopes of buying the stock at the bottom, thereby getting a good price, from which the stock rebounds sharply, leading to a quick profit.  As would be the case with trying to catch a real falling knife (picture point side down, razor-sharp, rocketing towards your foot) the maneuver is tricky.  If you move too soon, you will be rewarded with a slice in your finger or a point in your palm.  If you move to slowly as the handle whizzes by, you’ll miss the knife entirely.

Buying falling stocks is a form of value investing, in which an investor buys stocks that he believes are undervalued and holds them until he believes they are fairly valued or overvalued.  The general premise is that an undervalued stock will eventually return to its fair value, and that undervalued stocks will do better than overvalued stocks.  Value investing is based on the “buy low, sell high” philosophy.  This strategy has proven itself at various points in the past, although in recent years the momentum investing approach (buy high, sell higher) has actually been more profitable.

 

        

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The trouble with buying declining stocks is that stocks that are falling rapidly in price are usually falling for a reason.  Looking at the current British Petroleum fall, the stock is declining because the clean-up efforts from the oil spill will cost unknown billions of dollars, which in turn will hurt earnings.  There is speculation over whether the dividend will be cut or eliminated, how big the losses will be, and how much will be paid in legal costs and claims resulting from the numerous lawsuits that will no doubt come in the next year or two.  In addition, the actions that the US Government may take and their effect of future profitability are unknown at this point.  Because stock investors hate uncertainty the price will continue to fall. (Even if the news is bad, if you know the numbers you can value a stock.  If there is uncertainty no one knows how to value the stock and therefore are afraid to step in and buy).

The only time to try to catch a falling knife is when the whole market is declining, and then to pick up shares of a stock you have determined to be a good long-term buy and were accumulating anyway.  In this type of situation, good stocks and bad tend to decline, so your great company will fall along with everything else.  When the markets turn around, the great stocks are the first to shoot back up, providing once-in-a-lifetime returns.

To determine if the whole market is declining, rather than just your stock, look at the mid-term charts (maybe 6-month time span) of several stocks.  If they all look about the same, with head and shoulder patterns and then a downward trend, the whole market is falling (the current market is like this).  If only the stock you are interested in is falling, it is best to stay away because there is probably something other know that you don’t (yet).

 

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If you determine that the whole market is falling, the way to catch the knife is to wait for the initial decline to start to slow and flatten out and then buy about 1/3 of the number of shares you will eventually buy.  Then, wait for the rise and hope it is a bear-market, “suckers” rally.  If it is, wait for the stock to decline beyond the previous low and then wait until it begins to flatten again.  Buy the second 1/3 here.  Repeat one more time if the market cooperates and there is a third downturn.  If the stock moves up and crosses the original high (the “head” of the “head and shoulders” pattern) wait for the subsequent low and buy the rest  of the shares because the fall is probably over.

After you are all in, just sit back and wait.  The stock may fall farther, but by buying in stages you lower your cost basis and also are aided psychologically.  As the stock moved to new lows, since you were hoping it would continue to decline, you don’t get the self-doubt that you get when you buy the full position at once and see the price continue to decline.  It is almost impossible to catch the exact bottom, but this way you had three tries.  Eventually the stock should recover and set a new all-time high if you picked the right kind of stock, so whether you got the exact bottom or not won’t really matter.

Happy catching!

Join the conversation and help make this blog more exciting!  Please leave a comment.  Also, if you have an investing question, email  vtsioriginal@yahoo.com or leave the question in 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.