Wednesday, June 24, 2015

Stock Investing: FAQ

I've been doing this a long time. Since 1992, in fact, and I've beaten the market in all but 2 of those years. As you know by now, I do my own research. I read a lot of business news, I argue with other investors, I do the math (well, most of the math). I get it wrong, but more often than not, I get it right. At least in the long run.

I also collect questions. A stock investor is like a real estate agent or fitness coach: everyone wants to hear some tips, tell you their story, explore their own (sometimes harebrained) ideas, ask your thoughts. It's great, I love to talk about it. Some of my favorites:

1. I've been thinking about getting into the stock market, but I'm afraid we're in for a big market drop and I can't afford to lose the money. When is a good time?

Now. Now is just about always a good time to begin investing in stocks. For you, for your kids, for your mom and your next-door neighbor. Doesn't matter if the market drops, it always comes back and, if you choose the companies you invest in carefully, you are unlikely to lose. It's not that easy, of course: the trick is going for the long term. If you want to dabble, just grow your money quick and get out, try Las Vegas. But if you are willing to commit to a 5-year minimum (50 is better) and you can afford to leave your money in the market, you'll do great. If you buy in and the market slides, great, it's just gone on sale. Buy some more.

2. How do I teach my kids about stocks? I want them to learn about proper saving and investing but I don't know where to start.

Open each of your kids a small portfolio of their own. Fund it with a chunk of their savings (again, think L-O-N-G term) and then add whatever you can part with to start them off. It can be a total of $500 or $5,000. Easy to do on E*Trade or TD Ameritrade. Show them how to research the companies that interest them. Teach them the kinds of things to look for, like a wide competitive moat and low debt and smart managers and a great brand. You can guide their research or not, that's up to you. The #1 goal is to give them a sense of ownership, and of self-determination. The #2 goal is for their stocks to increase in value. Be prepared for them to lose the money, at least on paper and at least in the short run. Show them how to check up on their holdings (not more than weekly, and preferably monthly). Let them discover the excitement and pride of their own great choices.

3. What does it mean when the stock splits? Does that make it a better deal? Should I buy more? 

A stock split means nothing . If you think 4 quarters are worth more than a dollar, you'll love stock splits. But beyond the price of entry to own a bit of the company, a split changes nothing.

4. My buddy's cousin works for at a bank and he says XYZ company is a great buy at the current stock price, it's about to pop. Should I pick some up?

I never act on tips I get. When I buy a stock, it's nearly always a company I've been watching for a long time. It's usually a company of which I am a customer. It's a company with a brand most people know or will know, with an excellent executive team and very little long-term debt on their recent balance sheet. When I deviate from this method, I tend to get my hat handed to me. Unless I have a damned good reason, these days I stick to my script.

5. How much of my savings should I put into stocks? My broker (boyfriend, sister, dad, colleague, barista, hairstylist) says I should have __% in the market but I should also have some in bonds and leave the rest mostly in cash...?

Everyone's least favorite answer: it depends. There are many considerations here, like your age, income level, expenses you face regularly and expenses you see on the horizon. Your risk tolerance needs to be looked at, as well as your financial goals and timeframe. We should even talk about the stocks you're looking at, because there are very stable ones that grow only a little and there are volatile ones that (often) grow faster. As a rule of thumb, leave enough cash to get you through 3-6 months at your current living standard, in case of trouble, and invest the rest. Where to invest it, however, is a long discussion.

6. Wouldn't it be easier to buy a mutual fund or two rather than spend all that time choosing the right stocks? I don't want to get it wrong. Maybe I should just hand it all over the professionals.

It would certainly be easier to give your money to a professional fund manager. But if your goal is to substantially increase your wealth over time, you might want to reconsider: Approximately 80% of mutual funds underperform the average return of the stock market overall. Think about that: you give your money to a professional investor, who has analysts and specialized computers and reams of data and access you don't have; but 4 times out of 5 he can't even keep up with the S&P 500. One reason of course is you have to pay for the fund manager's services, often 2% of your assets. So not only does he need to beat the market, he has to pay for himself as well. A great article about this problem:

If you want to get into the market, and you really don't want to pick stocks, buy an index fund ETF (an automatically-trading fund, with no manager, which mimics the overall market and which you can buy or sell like a single stock).

7. How often do you trade?

Weird question, but I get it a lot. The answer I generally give is, "As little as possible." Which is a shortcut. What I mean by that is that I buy whenever I have cash to spare and I see a price I like on a company I admire, or already own and I want more of it. I sell on only two occasions: 1: something in my investing thesis has changed (new products suck; sales/profits have been falling over quarters; major lawsuit against the company; merger I was counting on didn't happen; competitor is gaining fast and stealing market share...). 2: I need the money for something else, like tuition or a big purchase or another stock I like better. Trading is generally not good for long-term portfolio returns. As a rule, heavy traders earn less. I study the companies I want, I buy, I hold if I can. That's it. The less involved I am, the better I do.

I'll ask myself more questions in a future post.

1 comment:

  1. Solid FAQ page- my favorite is about teaching your kids about stocks. Important skill, but a lot of responsibility.