Econ 901
Posted by Ted Bronson | Filed under E-901
What, is that a typo? Nine oh one can’t be right, can it? Yes it can. There are some classes you just can’t squeeze into college.
E901 is a course in real world, nuts and bolts, how to make money when the market is awash with fear. How to harvest hope. And how you, as an individual, can use common sense to make money in the long term.
I write this because a Gentle Reader wanted to know “since I can’t go back to the eighties and buy silver and gold, what can I do to accumulate wealth?” (Obviously in response to this post from last week.)
I have developed what I think is a sure way to make sure that you have value in your portfolio when you need it. It comes down to three things really:
A person is smart. People are dumb, panicky animals and you know it. (Thanks Kay)
For the purposes of this discussion, it means to pay attention to the news, figure out where things are going wrong, see if the principals are taking action, then buy when prices bottom out if it looks like things are going to turn around.
If you build it, he (they) will come. (Thanks Joe)
What this means is that there are some things people will always need or always want. Do your research and figure out what those things are in your own life and see if the company producing those things are publicly traded.
As the leader of all illegal activities in Casablanca, I am an influential and respected man. (Thanks Ferrari)
I am not condoning illegal acts here, just saying that sometimes it makes a big difference who is running the company you are interested in buying.
Ok, that was the nuts of the stratagem, now on to the bolts.
First of all, unless you are loaded and able to buy big blocks of stocks with a phone call to your personal broker, you don’t have any way to make a huge killing right out of the chute. Don’t even try, you will just get disappointed. Investing is for the patient, not the manic.
Starting with the second bullet up there, take a look around your house. Your garage. Your office. Who makes all those THINGS that are filling up your space? What are you replacing on a daily/weekly/monthly/annual basis? Are you consuming any luxury items that you could really do without but would just hate to let go? On your drive to work, do you pass anyplace that just seems to always be crowded? When you answer those questions, you can then figure out what companies touch your life directly.
I have NEVER lost money on a stock if I used the products the company produced. That doesn’t mean that just because I bought the stock, the company turned to gold. It means that I didn’t buy the stock for short term gains if I knew it was going to be a stable, dividend paying addition to my portfolio. These kind of stocks are not glamorous or exciting, but they pay off in the long term if you will just be patient. Additionally, these stable companies that actually produce concrete items that people need to have are the least likely to fail if for no other reason than product recognition. (Yes, I qualify Coca-Cola as a need filling company.)
I would hope that the above is nothing you don’t already know, but for the edification of our Gentle Reader who may not, please bear with me.
But how, you may ask, can I play the market when I have bills to pay? First of all, if you are playing, leave now. Second, I know for a fact that if you are reading this, you have internet access. Go to any one of a boatload of online investing companies and create an account. You want to find one with a good reputation, low costs, free research capabilities, and a good reputation. (Yes, I said that twice on purpose.) Once you set up an account, you can generally just put in few dollars a week/month. I also know for a fact that if you are reading this, you are affluent enough to find something in your life to let go of so that you can put a few bucks a month into the market. What you need to do then is just buy partial shares, with discipline, every month. If you are buying dividend paying stocks, when those pennies roll in, put them right back into your account to buy more shares. Eventually you will have big blocks of shares. (Here at Casa de la Ligne, we use Sharebuilder, which we chose because there wasn’t a huge startup deposit required, which should also be a major bullet point for anyone looking to open an online trading account.)
Speaking of where you can find those little piles of scratch reminds me again of bullet point number two up there– what are the things that you need or want everyday? Do you need your Starbucks or KrispyKreme on the way to work? How about you stop consuming and start buying instead. SBUX just went through a change of CEO and the lowest stock price it has had in years. KK is almost exactly in the same boat. Using the principles above (panic, bargain basement pricing, and knowing who is running the joint) makes both of these stocks look pretty dang good. Exercise for the student: which one offers the greatest value based upon current stock price/historical high/business model? Either one might be good for long term holding, especially when one takes into account that the average consumer (in an uncertain economy) is likely to buy him/herself ‘little treats’ a couple of times a week rather than shell out big bucks once a month. And in a similar vein, New Frontier Media is another company that offers, shall we say, specialty luxury items. With the added benefit of actually being a dividend paying company. This is where you have to make another choice though: will you buy into a company that you don’t respect just because you like the color of their money?
That is, to me, one of the single biggest factors I personally have in deciding whether I will buy stock in a particular company. I will NEVER own a stock or mutual fund affiliated with the Bank Of America because I don’t agree with their stance of giving accounts to illegal aliens. Besides the historical precedent that such account holders are subject to higher (some might say usurious) interest rates, hidden fees, or grey market money transfers to foreign countries, the bank itself is blatantly attempting to capitalize on a class of people who are NOT LEGALLY IN OUR COUNTRY, regardless of how well or poorly they treat said aliens.
Other philosophical tendencies help me chose companies to buy into as well. I am all about being able to take care of things myself, right? But I don’t have the skills to make a firearm, or the ammo for it if I could. (At least not yet.) Plus, the “sky is falling” sentiment out there in the aether make it seem like an even better than before idea to have such things in easy grasp. A few minutes searching around on the web and I find that Ruger is publicly traded. Further research reveals that it is cheaper by far than usual. You gotta wonder why. (Disclaimer..I bought RGR at about $7.40.) So more homework is in order. Seems that Smith and Wesson is in the same boat. (Disclaimer..bought SWHC at around $3.90) It seems that last autumn, when the market was starting to lose it’s direction, someone noticed that the warm weather was keeping people from doing as much hunting. Fear and speculation kicked into high gear, the market as a whole fell by a big chunk, lawsuits were filed, etc. So these companies, which have historically been performers on stock price and company value are now both in the doghouse. Time will tell if I have purchased wisely, but both stocks have come up since I originally bought and I have a reasonable expectation that by the time I retire, dividends and stock value will have paid any broker fees at least. (I kid, my broker fees were zero because of the program I use at Sharebuilder.)
So I was set for keeping American firearms companies afloat, now I just needed to find out who made bullets. Not as easy, believe me. Seems that ammo makers are all secretive and stuff. I finally tracked down some whys and wherefores and figured out “Holding companies, dummy!” Olin Corp is a nice innocuous name for the company that produces Winchester Ammo. They also are into metals, fabrication, and chemicals, paid out eighty cents a share dividends, and are trading below historical highs. (Disclaimer: yeah, I bought this one too, when it was around the sixteen buck area.) So this one company fits into my formulae of buying and holding: makes tangible things that many people want and market fears drove the price down.
So, speaking of things that come from out the ground: Coeur D’Alene Corp. also pulls stuff out of the ground…silver. No, I don’t own this one, but it is about to make the list. So are a bunch of other metals producing companies. I think I missed the window on this entire sector, but if stock prices come down again on the companies that are actually producing the metals selling for record high prices, they will be worth another look. Oil producers, drilling companies, and the ships that move the oil around could be good buys also. Several of the small and independent outfits are at or near record lows, so they could be worth adding into your purchase plan. One of the last companies in what I call the hard resource group is a boring one. Potlatch makes trees. Well, I guess they really make lumber and paper from the trees that grow on their land, but still, it comes down to a company that makes things you use everyday: with the bonus of 2 buck a share dividends. But while we are thinking about natural resources and their usefulness in your everyday life, don’t forget companies that make your garden grow. Remember, growing food never goes out of style. Especially if people are scared of tomorrow’s newspaper.
So when your neighbor is getting nervous that all the houses on the block are going to be repossessed because no one in the country can pay their mortgage, he is likely to start selling chunks of stock in companies that make loans. Which is how I was able to pick up a little Sallie Mae for about $17/share. But Ted, you are intentionally investing in housing loans right now? Why yes, because I am pretty dang sure the nannies in D.C. will not EVER let SLM fail. Despite the pending litigation or the Minoan labyrinth of regulations, eventually SLM will reclaim it’s value. The idea, as always, is to be patient.
I would be remiss in my lesson, Gentle Reader, if I failed to mention two final things about this whole investing philosophy of mine:
Everyone gets burned by something eventually, so don’t risk what you can’t lose.
I took a bath on an exploratory gold venture that is now worth twenty percent of what I paid for it. I have only lost money once I sell though, so all I have to do is hold on and wait. It’s not like a penny stock is going to break me, and if nothing else it helped me to learn a valuable lesson in judgement.
The last thing is this:
Despite all the other reasons to NOT buy a stock, sometimes it pays to dream.
I have high hopes for SpaceDev, not just for stock gains, but for the advances they just keep making.
That, Gentles, is Lecture one of Econ 901. I own some of the stocks mentioned in the body of this post, so don’t go complaining to me if you lose money investing in any of them because I am likely to have lost money as well: you shall find me unsympathetic to your plight. You should also note that I didn’t really go much into my third movie quote from the beginning of class. That is because you should do your own homework on the folks who run the companies you are interested in buying. Wiki, Who’s Who, your cousin’s third brother-in-law, the interwebs, newspapers, magazines, etc. are your source material for that kind of thing. You don’t have to do this step, there are lots of folks and companies who make a good living figuring that stuff out and you could just as easily pay them for their brainwork. But I like to know something about the folks running my company.
Tags: How-To
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February 1st, 2008
You really need to learn about setting stop losses.
Consider this:
You buy 10 shares at $100/share for a total investment of $1,000.
The share price drops to $20/share, your investment is now worth 20% of what it was, or $200.
The price rises to $100/share and you have your $1,000 back.
Now, if you had set a 20% stop loss then you would have sold at $80 per share and taken a $200 loss.
If you then take what’s left of the original investment ($800) and buy the stock back at $20 per share you have 40 shares.
The price rises to $100/share and you now have $4,000 or a $3000 gain.
It’s stupid to ride a stock down to zero or to 20% of it’s original value. Nobody buys the right stock at the right price every time. If it doesn’t perform the way you thought it would then sell it. You can always buy it back later. Ride the winners and cut the losers lose.
February 1st, 2008
Thanks Curly. Thanks for assuming I don’t know the term or the strategy.
I appreciate your comment because I was actually going to cover that very thing in my next installment of this category.
I am also eventually going to cover cost averaging, selling short, the hidden dangers of mutual funds, why gold, oil, and concrete prices are all artificially inflated, the affects of wheat yields on skirt length and facial hair, and how the size of the Shuttle’s solid rocket boosters are related to Ancient Rome.
Believe me when I say, patience is your friend here, assumptions are not.
Consider for the moment that in every case I mentioned in this entire article, I spoke of owning the company, not trading the stock. I have every reason to expect the gold exploration company stock price to rise again if they do any of three very possible things. The price I paid for it was such that the payoff is worth taking a paper loss at this time. If I am right, I will eventually start getting dividends which would far outweigh the short term potential loss.
Sometimes investing is about taking a long shot because you believe in something or someone. It’s not about faith, it is about evaluating the potential, seeing if potential loss is worth the risk, and deciding if you can afford to lose if you are wrong.
‘Preciate the condescending tone.
February 2nd, 2008
If you want an exemplar of condescension then I suggest you read your post.
Your notion that “you only lose money once you sell” is not only wrong, it’s incredibly bad advice to pass on as anything resembling economics. Spend some time on “lost opportunity costs”.
February 2nd, 2008
Curly, while I appreciate the fact that you not only read the post, but also cared enough to comment twice, I cannot let help but notice that you are still thinking like a TRADER instead of a OWNER. You again make assumptions without asking questions. You seem to me the kind of person that is in effect responsible for the state of the markets right now–short sighted.
The markets are currently roller-coastering due to fear, speculation, overreaction, hype, greed, and misplaced governmental interference. (I know that seems like an oversimplified explanation and it is; but I am not going to hand the student the answers in my class, I trust them to do the research themselves.) The individual investor can ride out these peaks and valleys by not giving in to the temptation to follow the lead of others rather than stick to their strategies and be OWNERS.
We must take the long view of things…if a stock is worth buying at ten bucks a share and the market as a whole retracts, you have to ask if that same stock is still worth buying at eight or five or three bucks. It is the same company, may even be the same managers. Same products. Same customers. same same same. The difference is that confidence in the MARKET itself has changed. If that is the case, then absolutely buy more of the company. But OWNERS don’t loose confidence in the company when the MARKET acts wonky, only TRADERS do.
As I stated in the original post, if you are here to ‘play the market’ you may leave because our goals are too far opposite each other. TRADERS and speculators are the ones who have set up the current market “crisis.”
February 2nd, 2008
I would also like to point out to Curly that, as explained in the post itself (and on other places around the site) this is a how-to post, for people who might not be so very market savvy as yourself. It is also #1 in a series of posts on investing, so some of what you are throwing out here is due to be covered down the line.
In other words, if you think we’re doing it wrong/too slowly, there are lots of free blogging services out there…Blogspot, Blogger. Feel free to get your own and lecture at will.