11 Basic Principles Of Investing

This was a reply we made on Reddit for the question of a beginning investor, thought our regular readers might find the discussion useful too.

I know Nothing About Investing

“The basic principles:

-Diversify (8 or more non-correlated stocks).  Diversification only helps you avoid an individual stock risk, it does not help you avoid market risks (like last fall stocks & bonds all went down).  Having 8 Mutual funds each with 300 stocks that turn out to be closet S&P500 trackers is not being diversified.

-Any single bet you make, use less than 5-10% of your total.  “Day trade”, “swing trade”, and be active with 5-10% of your total.  Don”t play the market with all your savings.

-Pick your exit rule before you buy anything.  Buy Ford at $8 and plan to sell if it hits $6 or $10 or whatever makes you happy/comfortable.  But pick that point before you go in.  Otherwise you watch Cisco go from $75 in 2001 to $14 in 18 months “because it might come back up” and in 2009 it still peaks only around $25 or so.

-Study an industry and understand the stocks you buy – they are companies with products – do people buy the products? 

-Read footnotes in the back of the Annual Reports, skip the pictures in the front.

-Keep an eye on the trends.  General market trends, specific industry trends, or trends for a particular company.  Ski company will have different sales in the summer than the winter.  Companies profiting from Foreclosures are doing well now but maybe not in three years.

-Watch round-trip trading and management fees.

-Think.  Back test any theory you want to try out before doing it. Be cautious listening to any ”expert” on TV or Radio or mutual funds or financial planners. It”s your money so .. Think.

-Small investors often have advantages over the big trading houses.  Trading companies have massive computer systems with microsecond trading capability, but if they buy or sell a particular security they do so in such large quantities that they move the market.  So they are forced to buy and sell over weeks sometimes.

-Read up on ”Fundamental” and ”Technical” Analysis.  Understand both because professional traders are in either one of those two camps – and trade accordingly.

-Get a discount brokerage account and fund it with just a little cash – that if lost you won”t be terribly upset.  Then trade and learn.  You can paper trade for years but won”t learn fundamentals until you actually have “skin in the game”.

-Read Buffet, Lynch, Levitt, Fisher, Graham, and Magee.

Stop by my starting investor site http://www.greenhorninvestor.com

Good Luck !”

Your Car Can Help You Retire Rich

The link below has a good take on transportation.  And in turning conventional wisdom upside down – because as we”ve heard, conventional wisdom is often more conventional than wise…

[ Normal Thinking about Cars ]

They play a little fast with the numbers – do you really get 12% from a regular mutual fund?  Maybe you thought so in 2005 but by now you might question that ”average return rate”.
Does the $475/month assume no lost work?  Surprise medical bills? “Maybe just this once we”ll take a trip” and spend some of that savings now rather than later?

This same concept works with houses.
And furniture.
And boats.
And many other things you may have in your life.
So look around and see how this concept might work with your particular situation. Have some fun ones to include int the comments?

How Do You Spend Your Cash?

We quickly noticed the part in the middle – if the taxes paid are greater than 21% of the listed income then the poor family is upside down.  Reviewing tax tables it”s not hard to get above 21% for Federal and State.

We”re curious how you”d suggest the consumer caught in the above review could alter their lifestyle and generate some savings.  Starting with Home and Transportation probably, but what are your thoughts?

‘, ‘How Do You Spend Your Cash?’, 0, ”, ‘publish’, ‘open’, ‘open’, ”, ‘how-do-you-spend-your-cash’, ”, ”, ‘2009-07-10 00:55:33’, ‘2009-07-10 00:55:33’, ”, 0, ‘http://privateproductivity.com/ghi/?p=87’, 0, ‘post’, ”, 2066), (88, 1, ‘2009-07-10 00:55:34’, ‘2009-07-10 00:55:34’, ‘

We quickly noticed the part in the middle – if the taxes paid are greater than 21% of the listed income then the poor family is upside down.  Reviewing tax tables it”s not hard to get above 21% for Federal and State.

We”re curious how you”d suggest the consumer caught in the above review could alter their lifestyle and generate some savings.  Starting with Home and Transportation probably, but what are your thoughts?

A Pleasant and Scary Chart [2009 Archive]

Today we have a couple of interesting charts. 

The first one predicts that we should be mostly completed with our Recession… since the average recession is 11 months and today is apparently 11 months into Our Recession.  A Pleasant thought that we are getting close to exiting this economic fiasco.

Of course, This next chart is quite Scary…. Increasing money supply generally, as our Finance Professors liked to tell us, bad for future inflation.  That means rising interest rates when it starts to hit.  And it will be in waves because the FED interest adjustments take 18 months to hit the economy with lots of opportunity to over-correct on the economic feedback.

So what to do with those investments now?… Need to do some more research on bond values in rising interest rate environments… hmmmm.  Equity markets certainly won”t be going up. hmmm.

Now we saw this link [Guardian] that discusses how various countries have thrown Cash at the Banks in terms of GDP:

UK = 20%
Norway = 14%
US = 7%

That is some significant spending.  As all these countries wait for ”the consumer” to rescue us, how long will that take?  Maybe dipping into the gold-bug game seems the right thing to start doing (we did a bit yesterday)?

What do you think?

10 Investment Rules from Warren Buffet

10 Rules

The snow shoveling episode reminds me of the story Kiosaki told in his book “Rich Dad, Poor Dad” that has some great concepts (and has some internet criticism that “Rich Dad” was cobbled together from several great investor writings like Warren Buffet).

What to do about Detroit [2009 Archive]

As Automotive Industry “refugees” here at Green Horn Investor, we”re interested in the investing business of the Automotive Market.  Prompted by a post from Seth Godin who brings up an interesting angle on what to do with Detroit we thought we”d add in a bit of our insight.

There is a huge amount of angst within the industry itself and people outside the industry who just do not really understand the ramifications of saving or squashing such an industry.

-Those that advocate “let them fail”, which means a huge loss of direct jobs and small and medium businesses that depend on the spending habits of those jobs.  Foreign car companies, they say, will add more capacity and jobs.  But those are just assembly plants.  Not the supply base that extends from engines to gloves and tags that make things all over the US.  Those are the real jobs that will disappear.  There is also the freedom arsenal of being able to switch over automotive production and talent to any war material needed.

-Those that advocate “give them cash”, which means a huge loss of jobs when the money runs out.  There will be squandering.  There will be improvements.  The amounts of cash are tiny and won”t really provide real sustenance for survival (we think the ”recession” will last several years yet).

A typical car has over 25,000 parts used in building it.  It is one of the most complex devices that people throw into the harshest environments they want to go to – from the Beaches to the Mountains to urban parking structures. How many rainy pot-holes does your precious iPod get regularly thrown into?  Or how long does your leather couch upholstery last with a big wet Labrador retriever bouncing on it?

Anyway, back to Seth Godin”s idea… organize collapsing the Big Three and making it easy to be replaced by “500 new car companies” like there was at the dawn of Automotive Technology.  He does touch on the Regulation issue – to eliminate or reduce requirements (there are many supriferous ones, but others which could include brake testing, or emissions, or crash safety… that might need to be considered a bit more thouroughly).

In the early 1900”s, Detroit was ”Silicone Valley”.  Mechanics and tinkerers in their garages built the cars and the companies that lived through the last century.  There were ”tech wrecks” along the way, M&A activity (especially involving Chrysler), and real business innovation.  It would really be impossible to recreate that environment again.  Especially when foreign automotive companies are standing there ready.  And these are “mature” products, there is not a lot of innovation in today”s vehicles like there was early on when everyone was trying to figure out how to improve durability or function (like safety and convenience of electric starters instead of hand cranking). 

How many radio companies were there that narrowed to a handful? Or television companies that narrowed to a few? Or computer manufacturers that have narrowed? How many home improvement/lumber stores do you shop at? The normal progression of products and companies is to get to a few large companies.  Buyers want simple brand choices and standardized products and tend to favor this selection pattern (ever shop at Walmart or Target?).

A few smarty-pants silicone valley cash-out kings have started some automotive companies – and are struggling.  It”s a tough market to compete in.  Remember there are 25,000 parts to fiddle with, and massive global entrenched competitors with very loyal domestic US buyers (Toyota, Honda, BMW, etc) – how many customers will put up a three to five year loan to a couple of guys in a garage? How many really?

The Domestic Big Three will need to turn into the Big Two and slim themselves down to a few brands each with only a few products in each category produced at multiple plants at high volumes (making profitable vehicles takes a high volume business).  The GM-Jeep company may even declair bankruptcy to shed union and dealer and pension liabilities that currently puts them at a cost disadvantage (employee health care costs more than the steel in a car – and health care is rising faster than the price of steel!).  Revamp the regulation issues, tax fuel to convice buyers to desire smaller vehicles that the companies can then plan to invest in that will do more for environmental improvement than any new high-tech powertrain will do for the near term.  Actually, that fuel tax will encourage alternate powertrain solutions by building in a natural incentive.

Detroit will survive, it will just look different.  We keep watching the Automotive sector stock prices.  There is value there after the hard choices are made. 

Lawyers and the impact on GDP [2009 Archive]

Looking through the general business press we found this particularly maddening item:

[Bloomberg] “Chrysler Lawyers May Get $200 Million From Bankruptcy Case Work” – considering that that money represents 5% of the Government Taxpayer Money pledged to get Chrysler a quick bankruptcy – that”s a lot of cash.

So that makes us wonder, what exactly is the general impact on our Nation”s GDP from all the lawyering going on every year?  A quick Google search and we find this article discussing several studies that all add up to…

[LegalNewsLine] About 2 percent of US Gross Domestic Product (GDP).

Then we asked, so exactly how big is 2 percent of US GDP?

It”s about the same as spent on total US Research and Development (R&D) – [National Science Foundation].  All that work at public and private labs and companies trying desperately to invent the future and solve technological and medical and science problems (the next Thomas Edison is out there right now)… and as a nation we decide to spend the same in the legal system – basically arguing with ourselves.

Those Chrysler lawyers should avoid flying to Washington on some jet airplane or we”ll all hear about it.