Individual stock investing

The reason I hate investing in individual stocks is because at the end of the day there will be winners and there will be losers. All of your individual stock holdings will not win. To win at investing in individual stocks your winners have to outperform your losers. Your winners have to win bigger than your losers losses. At the end of the day they may just end up canceling each other out and that is why you have to cut your losers short and let the winners ride. I always end up wishing I had invested more capital in the winners and less In the losers. I wish I knew that low cost broadly diversified index funds always win, because then I wouldn’t invest in anything else. I hate losing as much as the next guy. That’s why I know individual stock investing is not for me. I would rather buy them all in a total stock market index fund. The reason being is because I know that I love buying the dip. I love averaging down or dollar cost averaging, but with individual stock investing that is not always the right move and that’s the hardest part. Knowing when to buy and when to sell is hard with individual stock investing. Partly because it involves market timing, especially if you are selling high; which is what you are supposed to do. But how high exactly do you let your winners ride. Do you sell 1 year , 5 yeas or 10 years into a bull market and what percentage of your stocks do you sell. You are not to sell low which is what cutting your losers entail.; and what the heck are you to do during a market crash when everything is loosing. With index fund it’s clear. Always buy and never sell until retirement or sell some off the top if you must, but sell at new market all time highs. Also set an asset allocation and rebalance when necessary. The total stock market index fund will go up forever and will never declare bankruptcy. Time is your friend and if you have a lot of it, use it wisely. Sit back relax and let the market give you its average 9% returns.

Perspective

1. Stocks will likely continue to fall for the next 1 month, 3 months, 6 months, 12 months or 18 months

2. Stocks will likely hit all time highs again in the next 1 year, 3 years, 5 years or 10 years.

3. If you’re a long term investor and don’t need to touch your cash for the next 10+ years then how low the stock market goes and how long it will take before stocks find a bottom doesn’t matter.

4. Stocks will likely continue to trade at a discount relative to all time highs for the next 1-2 years. There is no need to stress if you can’t deploy a massive amount of capital into the market at the current levels. Don’t worry about buying the bottom or catching a falling knife, just continue to invest regularly and dollar cost average.

Reasonable Investment Plan

I just heard another sad story about someone who lost a lot of their nest egg during the Great Recession and can’t retire until they are 70 years old. This individual is now 60 and trying to figure out how to slow down and still maintain a sufficient salary to meet their goals. This situation likely occurred from either panicking in the middle of a market crash and cashing out or investing in risky assets. Stories like these still strike fear into the hearts of many americans as the doom and gloom mantra dominates the mainstream media headlines in this record setting bull market.

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The Market Cycle

 

I recently read Robert Kiyosaki’s, the author of Rich Dad, Poor Dad, recent article about the seven stages of a financial bubble which was first mentioned in Nobel Laureate Hyman Minsky’s 1982 book titled Can It Happen Again. The seven stages of a financial bubble as Robert Kiyosaki stated in his post are

  1. A financial shock Wave
  2. Acceleration
  3. Euphoria
  4. Financial Distress
  5. The Market Reverses, and the Boom Turns into a Bust.
  6. The Panic Begins.
  7. The White Knight Rides in occasionally.

Stage 1, the financial shock wave occurs when a financial disturbance causes a crisis. Examples include a war, substantial interest rate changes or new technology.

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Preservation Of Capital

Preservation of capital is one of the most important rules of investing. Just like the physician’s oath is to do no harm,  preservation of capital is the investors oath. Abstaining from negative returns and avoiding loosing it all on bad investments is the golden rule. This is probably the top reason why so many individuals fear getting into the market and end up sitting on the sidelines. I’m sure we have all heard the horror stories of people losing their shirts in realestate investing and the like. Continue reading “Preservation Of Capital”

How Many Stocks Should You Own?

I recently read a blog post on investment basecamp blog that addressed the question of how many stocks should an individual investor own. We all know and have heard diversification is the best method to minimize risk in the stock market. Some say diversify across all asset classes including commodities and currencies. According to the basecamp article the academics say that 90% of maximum diversity is obtained by owning a portfolio of 12- 18 stocks. Benjamin Graham recommend 5-25 stocks with each company being large, prominent and conservatively financed. John Keynes recommends 3-5 stocks that you know well and in the management of which you thoroughly believe. Warren Buffett says 5 to 10 stocks if you are able to understand business economics and able to find sensibly-priced companies that possess important long-term competitive advantages. If not Buffett is actually a big fan of indexing and Seth Klarman recommends 10 to 20 stocks that you know very well.
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