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April, 2018

ADVICE FROM AN AMATEUR INVESTOR
by LARRY

1. Trading is overrated. Today I talked with a lady in her sixties who has worked at Wal-Mart as a greeter, still makes close to the poverty line, and looks likely to keep punching the clock indefinitely. She told me she and her husband had been on top of the world in the late 1990s. He was doing terrifically at day trading. Then the first of a series of market downturns occurred, and they lost everything. Yes, there are folks who can make a living or even a lucrative hobby as equity, real estate, or currency traders, etc., but I think sooner or later most get caught flat-footed.


2. A small portfolio can be better than a well diversified one, particularly if we invest over time. Which is more profitable, a carefully selected handful of stocks that are growing earnings and not too expensive or three or four mutual funds, each with dozens of investments? Generally with the latter approach one will have duplication and way too many different securities in our mutual fund portfolios to make the needle move much, even if one is a big winner. Instead, 10% of one's investments, for example, can be in a single company in which one has high confidence. Sure, one of those handful of stocks could go down a lot, but on average the group will likely do alright, and if one of them takes off like a rocket, you'll definitely know it! Five years ago (4/12/13), Apple (AAPL) had fallen and was available for only about $61. Yet it was not going anywhere, and a big bet on that company seemed like a potential winner. This proved to be the case. On 4/12/18 its price was just under $174, a gain of 185%. Small investments made frequently in the shares of good companies (i.e. diversification over time), especially when the markets are down significantly, will achieve much the same effect as allocations into many stocks, yet without sacrificing the benefits of holding a more focused portfolio.


3. Mostly, invest for long-term dividend income, not short-term common stock earnings. Geraldine Weiss was highly successful at investing. She said company earnings are too easy to manipulate. For her, a sounder method was to look at the dividend charts of good companies, ones with records of lower than average risk, histories of higher than average financial strength, and payments of dividends having low risk (ones that have been paid year in and year out and whose dividend payout ratios are lower than average) and then invest in them when they are paying higher yields than they typically have in the past. One can refine this approach to one's benefit by targeting a reasonable level of growth of a portfolio's dividend income, 10% annually, say, and cautiously investing to achieve that goal each year.


4. A good way to get money is to work for it. It sounds so basic as to be for kids. In fact, it is part of financial curriculums for young people. Yet a number of folks still in adulthood expect things to be available without putting something back into the economy themselves. It is helpful, in my opinion, both for individuals and corporations, not to mention foreign nations, for folks who are panhandling or waiting for other forms of handouts to discover the joys of being financially independent. This cannot be an absolute rule. A mature society takes care of those whose contributions cannot be measured in dollars, yen, etc. However, most companies, countries, and citizens are in my view better off earning their own way.




5. It is advantageous to set aside funds for saving and investing. In contrast, investing with borrowed money is borrowing trouble. Recent statistics on folks' assets set aside for retirement (excluding home equity, for folks need their lodgings) indicate that, on average, people in their last few years before intending to leave the workforce have only about 10% of the principal they will actually need to safely do without earnings and live as well as before, given their mean life expectancies. People in this position are often vulnerable to get-rich-quick schemes or to trying to make up for lost time by doing risky market speculations, even using credit cards, margin, exchange traded fund derivatives that double or triple market results, or loans from their retirement accounts to boost their proceeds via leverage. They are then that much more anxious when an inevitable market downturn leverages their losses instead, being more than ever prone at that point to sell out when prices have fallen below their cost bases. It is reminiscent of trailer parks "attracting" tornados. In personal finance as in housing, when we have less cover, bad things seem to follow.


6. What we want to purchase is less important than what we need to buy. What must we really have? For folks facing retirement or other financial challenges with too little money, this is more than an academic question. In many cases, it involves funds to offer a nutritious diet for all in our family, an adequate place to live, transportation, money for good health care, paying our debts and taxes, utilities, gasoline and maintenance for vehicles, insurance premiums, and home repairs. Each household's necessities are its own, but, for many, necessary expenses can also include alimony, child support, day care or babysitting, a smart phone, and funds for fresh learning or education. The average person probably needs some kind of entertainment as well, so throw in dollars for at least modest recreational expenses, perhaps for dancing, concerts, eating out, travel, books or magazines, deserts, movies, or costs related to a favorite hobby. Such overall expenses can typically be pared down to an extent. One need not have as much square footage in a home as parents might have acquired after several promotions and decades in their jobs. One might get by with medium-priced health care, not a "gold" plan. A compact car that's a few years old might suffice rather than the latest model sports car or SUV. High fashion clothes are nice to have but can put stress on a sensible budget.

And most of what we need might be less tangible, also less expensive: a happy marriage; a lower stress lifestyle; good times with kids, grandkids, nieces, or nephews, work we pretty much enjoy; pets; exercise; time; leisure pursuits we really dig; and friendships.



7. Treat complicated investment systems as beyond one's pay grade. Warren Buffett says if you cannot put a strategy of buying and selling stocks on the back of an envelope, it is probably too complex to be worthwhile.


8. Be patient, and do not impulsively sell out of your stock market holdings, especially in market downturns. Investing can be routine, fun, a chore, or frantic. There are ways to remove almost all the strain from it, for example, buying on a regular basis through a retirement plan arranged at work, the funds coming out before we even see the paycheck. A person could, though, discover a flair for it, and then managing one's portfolio might be as absorbing as having a healthy garden. Yet what had been a source of enthusiasm and pleasure can instead be nerve-wracking if we go at it the wrong way, insisting on a high rate of return every year, for instance. If you are like most people, you hate to lose what you already have. As corrections or bear markets unavoidably take the prices of our stocks or mutual funds down from time to time, there can be strong urges to sell off most everything to avoid further pain. Yet, this is the very time to hold steady to one's tenets and remember that the successful investor is usually in it for the long-term. When there are really big drops, they are buying, not selling opportunities. Meanwhile, thanks to the magic of compounding, assets that are left alone and allowed to go up over time can make a truly amazing difference in one's net asset value.


9. Learn what you are good at and what you are not. Cultivate the one; avoid the other. Some investors have a facility for picking winning mutual funds while others specialize in pharmaceutical companies. Another person may be great at statistical analysis and valuing a stock, yet another at buying cars and knowing which companies make the best ones, so that he or she can do well waiting till one of those corporations is under a temporary cloud to buy at a bargain price what will surely bring good returns when the current situation is resolved. Still another person may naturally specialize in dividend stocks and know how to pick the better ones. Someone else may develop a winning mechanical strategy, for example choosing stocks with relatively low P/E ratios, relatively high dividends, ones rated as timely by "Value Line," and that have good prospects for the next 3-5 years. Each of these investors may have his or her own particular vulnerabilities, though. One might not know up from down when it comes to neglected small-cap stocks, another may almost always lose money in stocks selling for less than $5. An investor may be prone to selling way too soon or when there is a bear market. An individual needs only one or a few things at which he or she is really competent to do well at investing. Yet it is often difficult to admit our limitations, and quite costly if we do not.


10. Keep some "dry powder." Whether with money market funds, certificates of deposit, short-term Treasuries, or shares in a low-cost intermediate-term bond fund (with distributions reinvested), keeping a percentage of one's liquid assets in reserve makes sense when contemplating volatile stock markets. Sooner or later, they get ahead of themselves, then drop substantially as they "seek" a return to the mean, usually overdoing it first on the downside. When it is clear that the equity market is again a terrific buy, for instance when the total U.S. market-cap to gross domestic product is 0.8 or below - and currently that ratio is instead about 1.4 - these funds can be used to buy shares of great companies on the cheap.


DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)



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