I invest and I trade. It’s worth discussing these as two different things.
Investing
Investing is about making money in the long haul. Investing isn’t about figuring out what’s hot right now. It’s not about changing market conditions. It’s about growing a nest egg over a period of decades.
Investing is easy: Buy a diversified mix of ETFs and rebalance every year. I primarily invest in SPY, VEU, TIP, DBC, and cash. It’s very difficult to beat the market consistently, and diversification is important for a host of reasons. By the way, SPY is the market, so simply investing in SPY for the long run is a fine strategy. You’ll have an alpha of zero, which is a lot better than many people. VEU is the world except for the US. It’s the other market. TIP is inflation indexed treasuries. It’s a safe investment. DBC is a commodities index. It’s protection against rising oil, food, and stuff like that. Cash is cash, and is a hedge against a “Second Great Depression.” When rebalancing, the cash holdings cause you to buy low and sell high. That’s considered a good thing. You can allocate across these five in any weighting and do fairly well. I’d recommend putting at least a fifth into SPY, but not more than half. That allows rebalancing to work. Commodities is not strictly necessary (after all, TIP is inflation adjusted), so tailor the weights to your own preferences. Still, that’s an entire balanced portfolio with only 4 ticker symbols. That wasn’t possible a generation ago (well, GE, some treasuries, and cash might have come close).
I want to re-iterate: it is very hard to beat the market consistently. Base a good chunk of your portfolio on that assumption and investing will be significantly easier. And have a long time horizon. Even if my crash prediction is accurate, you’ll still make money with a long enough time horizon. And timing the market is a sure way to lose money. Nobody has a crystal ball.
Trading
Trading is another beast entirely. Trading is about a 3 month time horizon at the median. Some trades can be as short as a few minutes. Some trades are for a year or two, but those are surprisingly rare. Longer than that, and you’re investing. Your ability (anyone’s ability) to predict an individual company’s trajectory for more than a year is small. At that point, you are investing in your faith in the company’s growth for the long haul, and you might as well stick it through (or, until you lose faith).
When you trade, you should set the time line for the trade at the onset. You should have exit conditions to the upside and downside. The exit conditions don’t have to be fixed values, though. Do not let your losing trades become investments. You will be wrong, perhaps often, but take your losses. I bought WaMu near the beginning of this crisis, thinking that they’d bounce back. I was wrong, and I took a loss of a couple thousand dollars, then reversed my positions. I made all of that money back. In general, I like 10% stops, but there are other criteria you can use. When in doubt, trade with the trend.
Research
Whether trading or investing, research is critical. You can read a company’s quarterly reports… Ha ha ha. I’m kidding. That’s a terrible way to do research unless you are willing to spend the time learning all of the accounting rules that go into a quarterly report (I have, and it’s of marginal value). Instead, listen to the quarterly conference calls. This is a must if you plan on putting money into individual companies. Sometimes they can be quite informative. For example: if a company complains about short sellers in their conference call, dump the stock. Heck, short the stock. 99 times out of 100, you’ll profit. Only bad management blames short sellers. Listen to the Q & A portion. This is where the short sellers will try to get the management to air their dirty laundry. It can be entertaining. If it’s not your thing, go read blogs that summarize that kind of thing.
Yahoo finance is an excellent source of information. So is Bloomberg. All of the financial professionals I know have CNBC on the television with the sound muted. They present great information, but provide terrible advice on that station. Look at a stock’s chart. Look to see if there are seasonal trends. For example, Apple seems to fall almost every time Steve Jobs presents a new product, only to soar to new heights later. As a general rule, don’t buy Apple on the eve of MacWorld Expo or Apple Developers Conference. This is a textbook example of “buy the rumor and sell the fact.”
When you perform your research, keep an open mind. I read SeekingAlpha posts on occasion. They are often linked to from Yahoo. That said, I never base a purchasing decision directly on what I read there. The information is of questionable accuracy. Still, I’ve learned quite a bit from the site.
Sometimes, your personal insights will pay off. I bought NVIDIA around the release of Doom III and Half-Life 2. One or both were sure to be blockbuster video games, and both were bound to be motivations for people to buy new, expensive video cards. Sure enough, I made about 75% in a few months. Of course, the trend was my friend during that time as well. A monkey could have profited. I’d like to think I profited more than the monkey.
Off Topic: Email Me
I’ve posted an email link to the right. Please email me with questions or post ideas.
