How to Become a Successful Investor–Part Four: It’s A Matter of Discipline

After thirty years as a professional investor I have heard just about every cocktail party stock tip or market timing success.  With their hand wrapped around a highball, everyone’s a winner.

Were that it were true.  But it’s not.

Important for us to remember is that no investor or investment discipline can be right all the time.  If we were to listen to every hot tip advocated by friends or acquaintances, we would likely chase our tales right into bankruptcy. So what is an investor to do?

First, consider what kind of investor you are.  By that I mean:  what kind of investing suits your temperament?  Are you, for example, an early adapter?  Did you own the first iPhone or iPad or are you first in line for the latest new movie release?  If so, you are likely to be comfortable buying growth stocks.  Growth stock investors are less focused on the price of the stock than they are the price momentum of the stock.

Value stock investors, however, are more reticent and conservative by nature.  Though not necessarily risk averse, value investors wait for products or companies to become established before they jump in.  If you still carry a flip phone you are likely a value investor.  Or if you drive your car, as I did, to the point of deafening rattles and yards of electrical tape holding the side-view mirror in place, you are someone who is less concerned with the latest trend and more concerned with obtaining value.

Both growth and value stock investing can be successful.  The fabled Peter Lynch of Fidelity’s Magellan Fund was the epitome of a successful growth stock investor.  Warren Buffett is the quintessential value investor.  Both have made billions of dollars for their respective clients.  And both have implemented strategies that are compatible with their personalities.  As should you.

Once you understand your investing bias (growth or value), do not stray from the kinds of stocks you are comfortable holding.  It is unwise for us to act against our nature in general and particularly so as investors.   Discipline and consistency pay off in the stock market.  Consider my Intelligent Investing Rule #1:  Having any investment discipline is better than having no discipline at all; once your investment strategy is established, never deviate.

But if you do fall off the wagon, don’t give up, get right back on and stay the course.

Next post we will explore two specific valuation disciplines you can employ in your own portfolio.

How to Become a Successful Investor–Part Three

Over the weekend I came across an interview I gave to The Wall Street Transcript ten years ago almost to the day.  I read the interview with great interest since the last ten years have been a difficult time for investors.  In the article I recommended five stocks for purchase and those five stocks provide the perfect opportunity to examine my third premise:  investing for the long-term is accessible to the average individual.

On April 14, 2003 the five value stocks I suggested to the TWST were all considered to be high-quality, well-managed companies, each out of favor for some reason. (You can read the interview for the specifics.)  As a value investor my premise then was the same as it is now–buy great companies when they are cheap and hold them for the long-term.

The five stocks I discussed in April of 2003 were Genentech (DNA–purchased by  Roche Holdings in 2009), Cisco (CSCO), Disney (DIS), Citigroup (C) and General Electric (GE).  In the table below, the performance for each stock is calculated on a weekly basis from the close of trading April 11th 2003 (the last trading day prior to the Monday, April 14th publication) through the close of trading Friday, April 12th, 2013. The first column represents the absolute return for each stock over the entire holding period.  The second number represents the average annual return.  Below the five stocks you will see the performance of the S&P 500 and the combined (equally weighted) performance of the portfolio of five stocks over the same period.

DNA     432.9%   32.5%

DIS       286.8%            14.5%

CSCO     70.7%              5.5%

C           -84.8%             -17.2%

GE         20.1%               1.8%

S&P      109.4%     7.7%

PORT   249.7%             9.6%

What can we conclude from the performance of these stocks?  Three things.  Diversification is always important.  Despite making sound, thoughtful investment decisions we cannot possibly know which stock will quadruple and which one will tank.  But, we do know that if we diversify our holdings into different industries (Biotech, Entertainment, Technology, Banking and Industrials, for example) we have a better chance of collectively generating excess return.  The second thing we learn is that we can have one or two laggards and still do as well as or better than the market.  And thirdly, over time well managed companies, for the most part, manage to fix their problems and return to growth.

Make a list of the companies whose products you use on a regular basis.   Then, begin to watch the stock.  Charts are readily available on Yahoo Finance and you can begin building a knowledge base on each company.  It is knowledge, after all, that provides the courage to buy stocks when they are cheap and makes investing accessible to the average individual.

(Recently I blogged on one of my favorite stocks–Coca Cola–at nerdwallet.com. Read my post for ideas on what to look for.

How To Become A Successful Investor-Part Two

 

As a thirty-year veteran of the market I am astounded by the mystique that surrounds stock investing.  Many very smart people I meet believe that the stock market is too complicated for them to understand or, worse, entirely random.  Neither is true.

When an investor buys one share of a company’s stock he or she is buying the commensurate portion of that company’s earnings.  That is measured by the price-earnings ratio or the p/e.  The price-earnings ratio measures how much an investor is paying for company earnings.  Generally speaking the lower the p/e the cheaper the stock.  Over the long-term p/e is a meaningful and helpful determinate for investors to assess whether a stock is cheap or dear.  Investors are often willing to pay a higher p/e for companies with strong earnings growth and less for companies they believe will generate slower earnings growth.

Great companies demonstrate a persistent tendency to perform over the long-term. Take for example two tech powerhouse’s: Google (GOOG) and Apple (AAPL).  The hyperlink takes us to a chart comparing the two stocks over the most recent one-year period. GOOG sports a p/e of  22.9X trailing twelve month earnings; for AAPL the p/e is 9.6x.  Investors have rewarded GOOG for what they believe to be a stronger earnings future.  Consequently the p/e has risen as the stock has outperformed the market and AAPL.

Looking over a longer term period beginning in August of 2004 when GOOG became a public company we see that compared to AAPL, GOOG has performed well but underperformed AAPL.  Both are great companies.  The difference?  Wall Street expectations for earnings growth during the periods measured has changed.  Still you would have been well-served with either company.  Or both.

Buying great companies pays off over the long term but if that task seems too daunting consider buying an exchange traded fund (ETF) that tracks the S&P 500.  Over the last approximately fifty years, despite a number of devastating bear markets, simply owning the S&P 500 index would have generated a return of approximately 1600% .

But you don’t need fifty years to generate excess returns.  Remember the study I cited in my first post.  According to Wharton professor Jeremy Siegel since 1871 the stock market has generated an average return of 9.4% for every rolling twenty-year period.

Take a look at Vanguard’s VOO for a low cost ETF that tracks the S&P 500. That may just be a great place to start.  Provided you are willing to take a reasonably long-term view.

Why the Fed and Monetary Policy Matter–Made Simple

It is difficult to understand monetary policy on a good day.  Most of us don’t.  But we get a glimpse of insight when we, say, refinance our home and discover that thirty-year mortgage rates are below 4.0%. Suddenly we realize our monthly payment is going to be much cheaper than it used to be.  We might even be able to afford a bigger house with a bigger mortgage.  For most of us with finite budgets, it is all about the cash flow.

Not so for the federal government or the Federal Reserve Bank (Fed). They create cash flow.

You may have read that the Fed is buying approximately $80B in Treasuries and mortgage-backed securities each month.  This is referred to as QE (quantitative easing) 1,2,3 etc.  QE has been aggressively implemented by the Fed since 2008 and these purchases have grown the Fed’s balance sheet from $1 trillion in 08 to close to $3 trillion today.  But here is the important part for investors and taxpayers.

The federal government (think Washington D.C.) is borrowing money from individuals, foreign governments and corporations when it issues Treasury bills, bonds and notes.  If you own a treasury bond or treasury bond fund you are lending your money to the federal government.  But lately the appetite for U.S. treasuries–particularly among foreign governments has declined.  Here is where the Fed comes in.

Since each of the twelve Reserve Banks (that comprise the Fed) is authorized by the Federal Reserve Act to issue currency, when the U.S. government issues an excess of treasuries (borrowing), the Fed is able to print money to buy up the excess treasuries the public doesn’t purchase.  To the tune of almost $1trillion per year since 2008.  Currently the Fed is buying about 57% of the treasuries issued because the demand for U.S. government debt has declined just as our government’s spending has ramped up.

In the real world the transaction might look something like this:  You want to buy a new car.  But you can’t afford the car and you don’t have the money.  So, you decide to lend yourself money with money you don’t have to make the purchase.  You write yourself a check from an account with insufficient funds (in other words you print your own money–kind of), deposit the check in another account, run down to the car dealership and  pay for the car out of the account with the kited funds.You go to jail.

But for the government it is completely legal.

So why do we care about this?  Two reasons.  The first is that while I am a long-term bull on the U.S. equity market, in the short-term, much of the appreciation in stocks which began in 2009  has been fueled by QE. By keeping interest rates so low the Fed is encouraging investors to turn to the stock market for higher returns.   The second reason is that flooding the economy with currency to fund unchecked government spending (recall that the Senate hadn’t passed a budget for the previous four years until a few weeks ago) can lead to inflation and very slow growth in the real economy.

So don’t get caught up in the short-term, day-trading hype propagated by the financial media.  Stay the course.  Buy great companies for the long-term. Over a reasonable period of time the stock market averages approximately 9% per year even when all the bear markets are included.  But, buy quality.  Oh, and use real money to fund your purchase.

Launch of Arizona Republic Blog Posts

Dear Friends,

I know that,if you are like me, you are inundated with information each day.  It is hard to choose what to read–how to invest your time.  That is why I have partnered with the Arizona Republic Newspaper to post these crisp concise advisory’s on the how-to of investing.

I hope you enjoy them.  And, perhaps, learn something, too.

Here is the link:

Arizona Republic