Wednesday, July 22, 2015

Stock Investing: FAQ (cont'd)

Answers to more questions I get asked routinely:

1. Should I just go ahead and buy the stock I want, or should I wait for a price drop? What if it's really expensive? 

Stillborn Qwikster: Even the name was a terrible idea
I've told the story before of my Netflix gaffe: owned it in 2009 and 2010 and saw my investment increase over 300% in that time. Then in September 2011 Netflix announced it was splitting off DVD rentals from on-demand, such that existing customers would effectively pay double current prices for to keep their existing arrangement. It was such a bone-headed, greedy, out-of-sync-with-the-customers move that I lost all respect for CEO Reed Hastings and his previously brilliant management team, and I sold my shares immediately. A month later Netflix reversed course, apologized to its customers, and started building back the trust. I should have bought it back but I was skeptical ... Now the stock is up another 400% since my sale and I'm still waiting for that buying opportunity. Worse, Netflix is not the only company I've made that mistake on.

Some people have to feel they got a bargain. But for me, I generally don't worry about timing my purchase to a price dip. I'm buying companies I intend to hold for a very long time-- 3 years or more, on average. Longer if possible. Warren Buffet says, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” In my current portfolio, the stocks I've held more than 6 months average a 34% annualized gain. If there's a company I've been watching and understand, which makes amazing things, and crushes their competition, and carries little debt, their stock on the rise, then I have little interest in timing the purchase just so.

2. I've heard people say "Sell in May and go away." Is there a time of year when things usually drop, so I shouldn't invest?

No, there is no such time of year. That's an old legend, once sort-of true, when the world moved slower and news was once or twice a day and traders spent half their summer at the beach club on Long Island. Those days are gone. Now things move fast and they change constantly. It never slows, not really. Get in as soon as you can, because the power of compounding will increase your invested savings exponentially over your lifetime. The sooner you get into the market, the wealthier you'll be when it's time to retire.

3. Do you have any tips? What's hot right now?

Disney never disappoints
This is one of those useless questions that everyone asks, because their investing philosophy is different from mine-- or more likely-- they do not yet have one. The answer is dependent on things only they know: what they do for a living; the industry or industries they understand and follow; the companies they already do business with; their savings and investing timeline; their patience with volatility, or their "risk profile." What I (seasoned and tolerant of risk) might recommend would likely make them seasick with wild price swings. What they (new to the stock market and accustomed to having a managed IRA) might find interesting would make me sleepy with the boring steadfastness of a dividend-based, low-growth return.

Generally I duck the question entirely by pushing them to a familiar name which grows pretty consistently despite a steady, blue-chip status: Starbucks, Disney, Berkshire-Hathaway (Buffet's conglomerate). A little something for everyone.

4. A lot of stuff I read says I should diversify across industries, like a little bit each of energy, biotech, banks, manufacturing... What do you think?

Short answer is Yes, you should diversify across industries, as well as across nations, growth stages, market caps, even asset classes (bonds, real estate, etc). But the reality is most of us know some areas a whole lot better than others. I've mentioned before that I know nothing, repeat nothing, about commodities. Or insurance. Or medical/health care. So while I should own stocks in those areas, I do not. Because at the end of the day, the single most important rule for me is Buy what I know. That's it. How can I possibly do a deep analysis-- either prior to purchase or later, when I'm keeping track-- if I don't genuinely understand the product they make, or the process by which they make money?

So I have industries I feel I get. Auto manufacturing, online retail, social networking, finance, entertainment, and so on. Limited, but within my wheelhouse.

5. If you only had enough money for one investment, would it be real estate, stocks, bonds, gold... ?

Stocks. Hands down. Nowhere else can I average over 20% per year on my capital. Even in a bad year I eke out 10% overall. The only thing which comes close to that would be private lending, which is very risky and a totally different kind of investment.

Looks great but it's not for everyone
Gold, it should be noted, has historically been a safe haven for cash in an unsafe or unstable financial world. Lately gold prices have dropped hard. But if you look back 100 years or 5,000 years, gold has been a great place to put your money. On the other hand, gold earns nothing. It just sits there. You have to have total faith that it will appreciate over time. Unlike a stock, there is no management team working their asses off to earn shareholders a return on that gold. So while there's virtually no risk that you'll lose your entire investment, there is also no promise that your asset will appreciate.

Real estate is generally a good investment, but again, it's a specialty requiring different skills and different expertise. Buying shares in a REIT (Real estate investment trust: many are traded over the counter as an exchange-traded fund) is not a bad idea if you are looking for broader diversification.

6. Choosing stocks and managing a portfolio looks confusing and difficult. Why can't I just put it into an index fund or a mutual fund and forget it?

You can do that, of course. Choosing stocks and buying for a long term hold is not for everyone. Direct stock ownership requires diligent research at the front end followed by years of tremendous patience and often a strong stomach after that. I do it because I make far better returns choosing my own stocks and managing my own portfolio than I would any other way. I also enjoy the process. But if you're the sort of person who is terribly busy, or easily distracted, or who would forget to look in on their stock holdings, or who hates that particular brand of responsibility-- yes, there are other ways to be in the market which require less from you. You will have to determine your own priorities and your own temperament and go from there.

7. How do I know when it's time to sell a stock?

There are only 4 reasons to ever sell:
  • Your original investing thesis has changed or was incorrect;
  • One of your holdings has grown too big and your portfolio needs to be rebalanced
  • You found a better place for the money 
  • You have a need for a tax loss to cancel some other substantial gain
I go into more detail regarding each of these reasons in a previous post, which you can find here.

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