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beth_leonardBook review: The Motley Fool Investment Guide by David & Tom Gardner
"Rich Dad, Poor Dad" convinced me that I need to actually actively invest my money, "The Motley Fool Investment Guide" gives me some tools to figure out how. The book I read was written in 1996, and the advice in it stood up well through the tech bubble to now.
The Fool recommended portfolio investment steps are like a ladder.
Benchmark the S&P 500 The first step to any portfolio is to invest in an S&P 500 mutual fund. If you don't have time and/or money do do the rest, this is a good place to start. All other strategies you try should do better than the S&P including commissions. I think the base rate of return over decades is 10.5 or 11.5% that they're trying to beat. Anything else you do, you should track the S&P and do good accounting to do better than it.
Small dogs of the Dow, 2-2-3-4-5 The next step that requires almost no research is a high-yield Dow Jones stock investment approach. Basically you take all 30 stocks that make up the dow Jones industrial average, then look at the ones that pay dividends. Of those you figure out the yield. Rank all of them by highest yield percentage and pick the top ten best yielders. These are the dogs of the dow. Of those top ten, rank them by actual stock price, the smallest of those are the small dogs of the dow. Don't buy the smallest of those stocks, buy the next four as 2-2-3-4-5, then rebalance your portfolio once every 12 months (long term cap gains). That gets you an average of 25% return across decades and minimizes commissions.
Small cap stocks The next bulk of the book goes into finding, evaluating, buying and selling small-cap stocks. You need to be serious about tracking your stocks and reading the companies' financial reports at least once a quarter to do well in small-caps. I don't think Jon and I are there yet, but for the small time investor, the returns can be above 50%. Large institutions *can't* invest this way because they have too much money, and investing in a small-cap stock would change the price just by looking at it. Your goal is to find the small-caps that are going to grow to mid-cap size and buy them before the instatiutions get in. When the mutual funds start buying your stock, that's typically when you exit (if you have someplace better to put your money.)
The book talks about how, once you've found a company with a good financial report, you buy it when it's PE is half or less of it's growth percent. You sell when PE equals growth percent and you have someplace better to put your money and you short when PE is 1.4x growth, meaning that the stock has had a runup in price that took it too far up.
Shorting stocks I'd always feared shorting stocks, with words like "unbounded potential for loss" and "Netscape Short-squeeze" ringing in my ears. While I still don't think I have the time to do it right, I'm not as afraid anymore. If you're going to short, you need to have a margin trading account. You need to know what you're doing and have read company financial statements for a while. You need to keep track of your stocks on an at least weekly basis. They recommend against shorting stocks in "closed" situations -- i.e. tech stocks with a product no one else can easily duplicate. They recommend instead "open" stocks with a business model that may seem novel originally, but that can be easily duplicated by other companies, i.e. new retail stores. Their example was Bed, Bath, and Beyond. Look for the PE to growth ratio to be over 1.4, set your threshholds of when you will get out, for example if it goes up 20% or down 20%. Most shorts you are looking to be out within 3-4 months, but you can sometimes hold on longer if the stock isn't moving but growth prospects look unhealthy.
Short positions should be the smallest part of a portfolio.
--
Those are the main pillars of a good portfolio for a small investor. The cite other investing strategies they don't recommend. The give a nod to Buffet, Lynch, and Michael O'Higgins. Those books are next on my list, but the dow strategy seems safe enough to take ready cash and invest in now(ish). The strategies they don't recommend are: the state lottery, vegas, day trading (the fees kill you), options and futures, technical analysis, penny stocks, and software that makes investment decisions for you. They also don't recommend having someone else manage your money for you.
I wish they said more in the book about what's wrong with options and futures, but I'm not ready to invest with those yet anyway.
A good read, and the things they recommended would not have gone poorly through the 12 years after the book was written and when I read it. Always a good sign in an investment book.
--Beth
"Rich Dad, Poor Dad" convinced me that I need to actually actively invest my money, "The Motley Fool Investment Guide" gives me some tools to figure out how. The book I read was written in 1996, and the advice in it stood up well through the tech bubble to now.
The Fool recommended portfolio investment steps are like a ladder.
Benchmark the S&P 500 The first step to any portfolio is to invest in an S&P 500 mutual fund. If you don't have time and/or money do do the rest, this is a good place to start. All other strategies you try should do better than the S&P including commissions. I think the base rate of return over decades is 10.5 or 11.5% that they're trying to beat. Anything else you do, you should track the S&P and do good accounting to do better than it.
Small dogs of the Dow, 2-2-3-4-5 The next step that requires almost no research is a high-yield Dow Jones stock investment approach. Basically you take all 30 stocks that make up the dow Jones industrial average, then look at the ones that pay dividends. Of those you figure out the yield. Rank all of them by highest yield percentage and pick the top ten best yielders. These are the dogs of the dow. Of those top ten, rank them by actual stock price, the smallest of those are the small dogs of the dow. Don't buy the smallest of those stocks, buy the next four as 2-2-3-4-5, then rebalance your portfolio once every 12 months (long term cap gains). That gets you an average of 25% return across decades and minimizes commissions.
Small cap stocks The next bulk of the book goes into finding, evaluating, buying and selling small-cap stocks. You need to be serious about tracking your stocks and reading the companies' financial reports at least once a quarter to do well in small-caps. I don't think Jon and I are there yet, but for the small time investor, the returns can be above 50%. Large institutions *can't* invest this way because they have too much money, and investing in a small-cap stock would change the price just by looking at it. Your goal is to find the small-caps that are going to grow to mid-cap size and buy them before the instatiutions get in. When the mutual funds start buying your stock, that's typically when you exit (if you have someplace better to put your money.)
The book talks about how, once you've found a company with a good financial report, you buy it when it's PE is half or less of it's growth percent. You sell when PE equals growth percent and you have someplace better to put your money and you short when PE is 1.4x growth, meaning that the stock has had a runup in price that took it too far up.
Shorting stocks I'd always feared shorting stocks, with words like "unbounded potential for loss" and "Netscape Short-squeeze" ringing in my ears. While I still don't think I have the time to do it right, I'm not as afraid anymore. If you're going to short, you need to have a margin trading account. You need to know what you're doing and have read company financial statements for a while. You need to keep track of your stocks on an at least weekly basis. They recommend against shorting stocks in "closed" situations -- i.e. tech stocks with a product no one else can easily duplicate. They recommend instead "open" stocks with a business model that may seem novel originally, but that can be easily duplicated by other companies, i.e. new retail stores. Their example was Bed, Bath, and Beyond. Look for the PE to growth ratio to be over 1.4, set your threshholds of when you will get out, for example if it goes up 20% or down 20%. Most shorts you are looking to be out within 3-4 months, but you can sometimes hold on longer if the stock isn't moving but growth prospects look unhealthy.
Short positions should be the smallest part of a portfolio.
--
Those are the main pillars of a good portfolio for a small investor. The cite other investing strategies they don't recommend. The give a nod to Buffet, Lynch, and Michael O'Higgins. Those books are next on my list, but the dow strategy seems safe enough to take ready cash and invest in now(ish). The strategies they don't recommend are: the state lottery, vegas, day trading (the fees kill you), options and futures, technical analysis, penny stocks, and software that makes investment decisions for you. They also don't recommend having someone else manage your money for you.
I wish they said more in the book about what's wrong with options and futures, but I'm not ready to invest with those yet anyway.
A good read, and the things they recommended would not have gone poorly through the 12 years after the book was written and when I read it. Always a good sign in an investment book.
--Beth
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Shorting stocks
Date: 2008-03-18 03:39 pm (UTC)First I just don't like the feal of benefitting off of misfortune. If a stock goes doen in value that is bad for the company and bad for the current investors. Now I have to admit that the distinctions blurr a little when I consider that A viable investment strategy is to wait for a company to have misfortune in the short term, but if I believe the company is long term viable to buy stock at the low price as the market reacts to the short term. Is that not also profit from misfortune?
Also, from a portfolio perspective shorting is part of investment, I am using my money to try and make more money with different levels of risk/reward. From a company's perspective it is anti-investment. The idea to shareholding/investment is to share the corporate risk/reward.
From a wholestic view I am not sure if it is beneficial or not. For instance from a first perspective day trading is not wholestically beneficial, it is gambling off of localized maxes and mins. But what that perspective misses is that day trading actually helps stabalize prices by ensuring there are always buyers/sellers for shares that are willing to trade today. If all investors where the by it and let it sit for 20 year type then localized in time events could cause larger fluctations in price, because the number of shares available for churn is so much smaller.
I have yet to be convinced that there is or is not a wholestic benefit to short trading existing. So it makes me uncomfortable.
Re: Shorting stocks
Date: 2008-03-19 07:37 pm (UTC)Not all companies issue stock. Those that do have made a choice to be public about their financials in exchange for capital to expand their business more rapidly. Sometimes, they generate so much enthusiasm for their stock that the price goes up beyond the point where it's a good investment for more people. An investor who notices this isn't necessarily making a bet against the company, they're making a bet against the company's stock.
Good companies get run up too high sometimes. Having people who are shorting, who want to buy the stock if it goes down, helps provide some protection of the stock's price if the company does have a quarter of bad news -- when the price starts to drop there are people who do want to buy it at that lower price, instead of having every last investor in the company wanting to sell out. Morally, if you wish to think of it that way as providing some protection from total loss.
Patri's recent coup in short-sales is a bit on the extreme side, but even then, when the company he shorted should have been trading around $2, it actually was trading at $4 or $6. I'm assuming in part because of the people who sold short who now want to buy the stock, pushing it up again.
There's also been many times (the book's authors cite AOL through the 90's) when the short sellers have been forced to buy back the stock at a higher price, pushing it even higher. Feeling bad about shorting is like saying you have a moral duty to never sell a stock you've bought because doing so might cause the price to go down and is betting against the company's future price growth. I don't buy it.
--Beth