Saturday, September 24, 2011

Happy, Sad, Angry, Afraid, and Ashamed

I am not exactly sure what sequence of events led me to try and help myself and others address life’s common financial issues. Perhaps this started ten years ago, when I found it so difficult to find someone to teach me the basics of systematic investment. Along this path, I was surprised to learn that people are just about as likely to talk about financial problems as they are incidents of sexual dysfunction. This reluctance is not going to help the situation. Psychologists tell us that we can only feel five emotions, happy, sad, angry, afraid, and ashamed. I am not sure I believe that last statement, but for the sake of my argument, OK. I expect the two reasons that most people don’t talk is fear or shame. We are all ignorant about something. Believe me, we all make mistakes, lots of them.

If you have had a problem for any length of time it isn’t likely that it will solve itself. Admitting the problem exists is the first step in finding a solution. Locating someone who knows more about solving the problem than you is the second step. We are a tribal species. We were not constructed to solve problems alone. In finding a helper, first look for technical competence. Then look for someone who likes you but is not too emotionally invested in your success or failure. Typically, for this reason, teenage daughters do not seek fashion advice from their mothers. Finally, avoid commission sales people if the subject touches their livelihood. Anyone who stands to profit from your misfortune is not a good candidate as a counselor. There is an old saying, “Never ask a barber if you need a haircut.”

You are not looking for a guru, a manager, or a parental substitute. You are looking for a friend who is better at one thing than you. That’s all. Would you feel any shame asking an automobile mechanic who attends your church about that weird clunking noise coming out of your transmission? Why do we feel shame when we ask another about that weird clunking noise coming out of our credit card?

Proverbs 11:14

Where no counsel is, the people fall: but in the multitude of counselors there is safety.

What is better than one counselor? Two counselors. Collect as much information from as many sources as practical. This includes both face to face conversations and structured learning from books or canned courses. Share with your friends and support one another as together we progress through this valley of tears.

Consider the proverb, “When a blind man carries a lame man, both go forward.”

There is no end to our ignorance or our need for one another. I have put off writing a will for many years even though I know I need to begin the process of learning about estate planning. My wife and I hold everything in joint tenancy or we are clearly defined as each others’ sole beneficiary. If one of us dies, our financial life is set up to continue without the other. What if we both die at the same time? Then the State of Maryland decides what to do with our possessions after they skim their percentage. I don’t like that solution. For many years we didn’t have enough for this to be all that much of an issue. However, in 1996 I paid off my house. Even back then, I really didn’t want the State of Maryland deciding what to do with my property. Now, fifteen years later, I am finally starting to address that problem in a systematic manner.

Hopefully, you will not waste 15 years pretending that your 800 pound gorilla is not sitting there in your living room waiting to be fed.

Friday, September 16, 2011

How Much Do You Need to Retire?

How much do you need to retire? The old rule of thumb was 75% of your preretirement income. Where do these rules come from? Dan Ariely, the James B. Duke Professor of Psychology and Behavioral Economics at Duke University contends, no one knows where such rules of thumb originate. Once created, if financial advisors and the financial press pick them up, they become conventional wisdom. If someone seeking advice has read much of anything she will ask a financial advisor this question as a sort of a test already knowing the answer she expects to hear. The financial advisor, hopefully better informed that her potential client, knows the answer she is expected to give. Ariely concludes this psychological drama adds little value to answering a very serious question.

He decided to approach the question from a psychological point of view. His surveys asked questions like, “Where do you want to live in retirement? In what sort of activities do you want to participate?” The people who told him they would need 75% of their preretirement income to achieve their goals in retirement in fact would need 135% of their preretirement income to achieve their stated retirement goals. Ariely is not surprised by the results of his survey. Most people do not expect to sit in front of their television for 16 hours a day after a lifetime of working at a job that over 80% of them found unfulfilling. They want to live in Margaritaville. They want to go sailing on cruises in the Caribbean with their grandchildren. They want to play golf every day. They want to go on the adventures they could have taken in their twenties but didn’t because they had responsibilities like car payments and children.

The amount of money required to provide a 135% retirement is so enormous that only the most diligent or fortunate could ever imagine achieving such a goal. Yet people pay for financial counsel that won’t achieve their goals (real 75%? or imaginary 135%?). Ariely notes these same financial counselors give their clients risk tolerance questionnaires to help determine the makeup of portfolios designed to achieve their goals (gold coins buried in Mason jars? or Zimbabwean currency futures?) I just filled out one of these questionnaires after opening a new account. By looking at the questions, I knew the results before they were tabulated. I expected that I would come out with a slightly above average risk tolerance. That was the result. The survey stated that people like me hold about 60% in stocks. I have a little less than that but more than the old conventional wisdom would recommend for someone of my age and situation.

Ariely notes, “Money, it turns out, is incredibly hard to reason about in a systematic and rational way (even for highly educated individuals). Risk is even harder.”

“Knowing others is wisdom. Knowing yourself is enlightenment.” Is an old Chinese saying sometimes attributed to Lao Tzu. Start by examining your life. Ask yourself how you are using money today. Ask yourself how that is likely to change once you no longer have a regular full time job. I would like to buy Robin Master’s estate in Honolulu and drive about Oahu in a beautifully restored Ferrari 308 GTB. However, that is unlikely given my projected retirement income. Perhaps I could buy a modest brick ranch style home on a secluded lot somewhere near the shadow of Paris Mountain and drive about Greenville County in 2010 Acura TSX.

Next, construct a plan to achieve that goal. Implement your plan. As the song says, just wishing and hoping and thinking and praying, planning and dreaming alone in the dark will not help you reach your goal. As you study the results, modify your plan to better match reality. Someday that goal will be yours.

Oh, by the way, one recent survey (I don’t have the reference) found that people actually spend about 80% of their preretirement income after they retire. They drive fewer miles, spend less on clothing, and lunch at the company cafeteria. Of course the kids are gone now and most of them have paid off their mortgage. Some of them move to low tax, low cost of living states, leaving them more than enough money for that famous margarita they serve at Dirty Mary’s Tiki Bar located on Florida A1A somewhere south of Miami.

Monday, September 12, 2011

Who Do You Trust?

In the former USSR during the days of Stalin, teachers would instruct their grade school class to close their eyes and ask God for candy. Of course none appeared. Then they would ask their students to close their eyes and ask Stalin for candy. Of course there would be a piece of candy on each student's desk. Then the teacher would reinforce the notion that they could trust their great leader and the savior state, but that a belief in God was foolishness. Over the last 50 years we, as a nation, have been learning the same lessons. However, I think some of us (even people who are not Christians) are beginning to realize we have already passed the limits of what the savior state can accomplish.

As I move toward retirement I am beginning to understand that with the passage of time I will become more dependent on others. I won’t be earning a salary connected to what I can do, but rather a salary connected to what I have done that will be highly influenced by the vagarities of American politics. Do I really trust God, or do I trust some combination of health science, the savior state and my own cunning?
As I write this blog, hoping to help others even as I am learn how to better manage my personal finances, I hear something whispering in my ear, “If you are such a good Christian, command this stone that it be made bread.” Unlike my Savior, I do not have any such power and I know it. In financial matters, I have been blessed. I also know it could all disappear in a moment. Could I then in honesty say, “The LORD gave, and the LORD hath taken away; blessed be the name of the LORD?” I doubt it.

In times when the kingdoms of this World are in trouble we hear a voice saying, “I will give you all their authority and splendor; it has been given to me, and I can give it to anyone I want to. If you worship me, it will all be yours.” For the charismatic few, the temptation to believe their own rhetoric is very real. Throughout history many great leaders demanded worship from their subjects. I expect many more believed they were worthy of such worship. For the rest of us, the temptation is following one of these false messiahs into the wilderness of our own damnation and destruction. We should remember that the next time we hear politicians promising answers to all our problems. We should also remember that whenever we start to believe in our own infallibility.

Common sense has its role in Faith. While an overabundance of faith has never been my problem, I have seen too many Christians teetering on the edge of some financial decision listen to a voice saying, “If you are such a good Christian, cast yourself off this ledge, for it is written, He shall give his angles charge over thee, to keep thee.” When are our decisions, tempting the Lord? When are they radical Faith? Still, at some point I will leap into retirement. My prayer is that those angels will bear me up in their hands, lest at any time I could dash my foot against a stone.

At some point we are all going to face a situation that requires trust in something beyond our own resources. This morning I read that Hugo Chavez, the Leader of Venezuela, has enlisted the services of shamans from the Yekuana, Jivi and Wayuu tribes to assist in his battle against cancer. It is reported that they danced, sang and prayed as they invoked their ancestors to protect the Venezuelan leader. I suppose, in moments like that we will know who or what it is that we really trust.

[1] And Jesus being full of the Holy Ghost returned from Jordan, and was led by the Spirit into the wilderness,
[2] Being forty days tempted of the devil. And in those days he did eat nothing: and when they were ended, he afterward hungered.
[3] And the devil said unto him, If thou be the Son of God, command this stone that it be made bread.
[4] And Jesus answered him, saying, It is written, That man shall not live by bread alone, but by every word of God.
[5] And the devil, taking him up into an high mountain, shewed unto him all the kingdoms of the world in a moment of time.
[6] And the devil said unto him, All this power will I give thee, and the glory of them: for that is delivered unto me; and to whomsoever I will I give it.
[7] If thou therefore wilt worship me, all shall be thine.
[8] And Jesus answered and said unto him, Get thee behind me, Satan: for it is written, Thou shalt worship the Lord thy God, and him only shalt thou serve.
[9] And he brought him to Jerusalem, and set him on a pinnacle of the temple, and said unto him, If thou be the Son of God, cast thyself down from hence:
[10] For it is written, He shall give his angels charge over thee, to keep thee:
[11] And in their hands they shall bear thee up, lest at any time thou dash thy foot against a stone.
[12] And Jesus answering said unto him, It is said, Thou shalt not tempt the Lord thy God.
[13] And when the devil had ended all the temptation, he departed from him for a season.

Friday, September 9, 2011

What to Do When Things Come to a Stop

The drive home last night was quite the adventure. It took two hours to cover 10.5 miles that would normally take 15 or maybe even 20 minutes depending on the traffic. I inched along through a torrential downpour behind hundreds of other distressed motorists. In quite a number of places we went through fast moving water that was six inches deep or deeper. We had to wait for oncoming traffic to clear so we could drive up the wrong side of the road to avoid the deepest parts of these temporary streams. After about an hour of this I reached the turnoff to my little town. The police were blocking the road. I went up to the next cutoff and turned onto the road home. Where I entered the road the water was probably deeper than was appropriate for my automobile, but I made it. Then things were much better until I was about ¼ of a mile from town. Once again the police were blocking the road. Everything came to a dead stop. We all turned off our cars. When the rain let up we would get out of our cars and exchange information and rumors. Then when the rain started up again we would scurry back to the shelter of our vehicles. After about an hour of this the police began to let cars through the water that was now about six inches deep.

Most everyone was in pretty good spirits. I believe if we had some beer and barbeque we could have had a party. Together we devised potential methods for avoiding the police barricades. Then someone called the nearest police station on their cell phone and we discovered all the roads into my little town were temporarily closed by local flooding. A few people were angry, wanting to blame someone for their inconvenience. Others were frightened by the prospect of spending the night out on the road. Generally the good cheer of the majority calmed the angry and comforted the frightened. One driver, sputtering with rage, turned his car around and headed back up the road into more flooding.

Sometimes your plans just come to halt, then what? In this case, when the rain let up, I talked to my neighbors, not something I do very often. Then when the rain returned I scurried back to my comfortable car and listened to peaceful “massage music” on XM radio. Things could be worse. Accepting the truth of where you are in the present moment with equanimity is a good first step on the road to freedom.

Like the one enraged driver that headed off back into more flooding, we could shake our fist at God or blame the police for our problems. Really it is pretty easy to forgive the police for keeping us from harming ourselves. Sometimes in life forgiving others for what they have done is hard, but it is the beginning of wisdom.

In such situations, extending compassion to others is pretty easy and natural. Sharing information and just listening to others worry makes everything better for everybody. Can you extend compassion in other instances where your best just isn’t working? In such situations, can you extend compassion to your own fears and anger? Compassion can be hard work, particularly extending compassion to your self.

I could have been envious of those who started the trek early enough to make it home safely before the police closed the roads, but what sense would that make? It didn’t occur to me to think envious thoughts about those who through foresight or luck reached a goal that was, for the moment, beyond my reach. Why do we spend so much time and effort envying the success or gifts of others? Wouldn’t it make more sense to smile at the happiness of others, and pray that we too might be blessed even as we bless others?

Of course there are applications here for other, more important, life issues. The road home always begins with the heart.

Monday, September 5, 2011

Labor Day 2011

The numbers are well know, U-3 unemployment 9.1%, the more accurate U-6 measure stands at 16.2%, roughly 22.8 million Americans are unemployed, discouraged and no longer seeking work, or forced to work at a part time job, 45.8 million Americans currently receive food stamps. This is the third time I have written a Labor Day post for this blog. In my mind it is becoming my most important post of the year.

“The harvest is past, the summer is ended, and we are not saved.”

The so called recovery following the Great Recession of 2008 has been called the Jobless Recovery. I do not call it a recovery at all. Employment numbers started down 43 months ago. In that time over 8 million jobs have been lost, less than 2 million have returned. I contend this is not a recession but a depression. It doesn’t feel like a depression because 45.8 million Americans are receiving food stamps. The most recent number I could find (not referenced to an original source) indicates 13.8 million Americans are receiving unemployment benefits. These benefits have been extended to 99 weeks, essentially becoming a new form of welfare. Finally, a lot of people are taking Social Security at 62 because they can not find employment. While I am glad this social service net still exists, we are paying for it with borrowed money we have no way of repaying.

I fear we are facing something new, the beginning of the end. The United States experienced an extraordinary run. At the end of World War II we were the only industrialized nation in the world with an infrastructure not bombed into ruin. The run from 1945 to 1965 was completely unprecedented. For the first time in history, unskilled labor earned a solid comfortable middle class wage. Then hubris began to take its toll. We attempted to put a man on the moon, fight an extended mid-sized war in Vietnam, and end poverty in this country all at the same time. To paraphrase the song, “One out of three ain’t good.”

Ronald Regan, Paul Volcker, the PC and Internet revolution, and most importantly historically unprecedented numbers of women in the workforce gave the American Dream a good 15 year run from 1985 to 2000. Since then, as a nation, we have been headed down.

The following is a work in progress. I have shared a couple different versions with a couple of different people. I am not yet completely happy with it but it captures the spirit of my fears. All of it is true, but it did not all happen at the same time. Imagine that it was written by a Roman Officer on his reassignment from Britain to Gaul.

I feel deeply ashamed that we are leaving our British allies to the mercies of the barbarians who live north of Hadrian’s Wall, but the truth is we can no longer afford to field the 35 legions necessary to defend our empire and still provide bread and circuses for the unemployed masses in Rome. Our leaders pretend that they can solve the problem by just adding a little copper to our gold coins or shaving a bit off their edges. They think no one will notice. However, even out here on the frontier the old money has gone out of circulation and the prices of necessities purchased with the new coins are rising quickly.

I am sorry to hear so many of our neighbors are losing their farms, but with such high taxes they can no longer compete with cheap imported Egyptian wheat tended by slave labor. It is disturbing that such good people are being driven into the capital to live on the Emperor’s (May he live forever) bread. I have always believed the freeman on his own land was the backbone of our Empire. Now they are wards of the state.

Perhaps with our legion reassigned to Gaul we can stop the flow of German tribesmen into our heartland. I know members of our senate view these aliens as cheap labor and a good source of new recruits for our army, but I fear if we do not stop this invasion soon the light of Rome will be extinguished. We in the West could be facing a 1,000 years of darkness.

The way I see it, our biggest problem is too much bad debt. Our national debt is following a predictable pattern. As it approaches 100% of GDP the increase is becoming less linear and more parabolic. If we do not get a handle on it soon, our economy is doomed. Only one country in history, Maggie Thatcher’s England, ever returned from a 150% debt to GDP ratio without a revolution and/or a major economic collapse. The individual American family is carrying almost an identical debt load as the Federal Government, about 14 trillion dollars. All this debt is strangling potential productive economic activity, as interest payments are bleeding our nation and our families dry.

I fear our leaders from both parties have run out of ideas. We have tried over 3 Trillion dollars of various kinds of stimuli. The bank bailout was going to generate a huge increase in investment and spending through the magic of fractional reserve lending. It hasn’t happened. The banks are finally afraid of lending money to people who can’t repay. Sensible individuals and corporations are refinancing at lower rates and paying down their debt totals. They don’t want to borrow any new money.

Infrastructure projects are not the answer. I am all in favor of filling pot holes and repairing bridges, but then what? They are temporary jobs paid for with borrowed money. Given the current demographics of the construction trades, it is reasonable to expect some of the wages paid will be handed off untaxed under the table at less than minimum wage. Undoubtedly some of those funds will be repatriated by electronic transfer to other countries.

While increasing taxes almost certainly will result in more lost jobs, cutting taxes does not guarantee an increase in employment. Companies large or small only hire new employees when they are certain that the potential profit that could be generated by these individuals exceeds the cost of such a commitment.

We are often told new technology is the answer. What new technology? There is nothing on the horizon to replace the 20,000,000 factory jobs we have lost in the last 20 years. In our current situation, the only thing that matters is the creation of wealth producing (as opposed to service sector) jobs in the private sector. These are the kind of jobs that can pay our debts and build a surplus of wealth to invest in more wealth producing activities.

20,000,000 additional taxpayers would solve a lot of problems.

Sadly attempts by the Government to cherry pick technologies in the alternative energy field have been a disaster. Recently a solar energy company that received over $500 million in Federal largesse declared bankruptcy. Fraud is suspected. Our Government’s attempt to encourage the development of a wind energy industry was somewhat more successful. As a result there are now several new wind energy factories -- in China.

Education is not the answer. First of all, most people are just average. It is extremely unlikely that education can turn an assembly line worker or a roofer into a chemical engineer or a medical doctor. I went back to college in mechanical engineering when I was 30 years old. I was married and extremely motivated. Engineering school damn near killed me. I thought I was pretty smart until I ran into integral calculus. I literally studied some of that material until I was in tears. There were concepts I never understood. I simply memorized the derivations and moved on. Even if successful, who is going to hire a 50 year old computer programmer with no experience when 4.5 perfectly healthy young computer programmers with 5 years of relevant experience are available at a lower cost? Who is going to pay for all this education? If the taxpayer, we have increased the nation debt. If the individual, we have increased the very serious problem of student loans that cannot be repaid.

We are past the point of fixing blame. We need to fix the problem. It won’t happen in a year or even ten years. It took us roughly 50 years to get ourselves into this mess. There are things I believe we could do to help turn around the situation if it is not already too late.

Offering tax credits for corporate research conducted by American citizens in this country might trigger the discovery of the next big thing. Comprehensive tax reform that eliminates loopholes and subsidies in exchange for a lower overall corporate tax rate seems like a no brainer, except to the beneficiaries of those loopholes. A tax code that rewards good behavior, like bringing corporate profits back to this country to create jobs in this country seems like a good idea. Currently we reward companies for exporting profits and jobs through the tax code. Insanity.

Carefully, ratcheting down safety and environmental regulations will help encourage a return of industry to this country. When I worked in the textile mills of South Carolina in the 1970s I watched the destruction of about 250,000 American jobs by a single regulation. Brown lung was a real problem in the greige mills that wove cotton cloth. Cotton dust really caused lung cancer and emphysema. Taking out 90% of the cotton dust was accomplished with inexpensive simple technology. Misters placed over the looms that knocked the dust out of the air. Charged plates in sheet metal ducts pulled the dust out of the air as it was sucked through these contraptions by a fan. When OSHA demanded a 95% reduction of airborne cotton dust, expensive new technologies, like enclosed looms were required for compliance. At the time the return on investment for textile equipment was about 3.5%. A pass book account at a savings and loan was paying 5%. The textile companies just threw up their hands in despair, shut down their factories, and sold their surplus equipment to places like Korea and Pakistan where it was operated by 14 year old girls working 12 hour shifts for near slave wages with very little in the way of safety or environmental regulation.

Most importantly, we need some kind of reform in the current free trade laws. They haven’t worked, they aren’t working, and they aren’t going to work. In the early 1980s our country was threatened with an invasion of high quality, low cost Japanese cars, subsidized by a government intent on exporting its unemployment problem to other countries. The Regan administration threatened the Japanese with extremely high tariffs unless some of those automobiles were produced in this country. Today every major automobile manufacturer with exception of Volkswagen has an assembly plant in this country, more of that kind of thinking in necessary if we are to have a future.

Our situation has been compared to a family earning $40,000 a year, spending $70,000 a year, and carrying $300,000 in uncollateralized debt. We are in deep trouble. The only bright spot is that family has a press in the basement that can print money. However, some of their creditors are growing suspicious of their paper. It isn’t my little holding of gold in an exchange traded fund that is driving the price of precious metals. The price of gold is being driven primarily by the Chinese and Indian governments hedging their position in US Government securities. Now even the European Central Banks are net buyers of Gold.

Hopefully, there are enough men and women of good will in our Government who are not bought and paid for by special interests to begin to turn the tide. At this point we can only pray and support these men and women if we can find them.

Let me end this post with the same words found at the conclusion of my column for Labor Day 2010. To me, they are more meaningful than ever.

On this Labor Day, let us take at least a moment, look into our own hearts, confess our sins, and ask God to extend his hands in mercy to our Nation. Let us try and understand that when we stand with Christ we can not separate ourselves from our neighbors.

Psalm 70

[1] Make haste, O God, to deliver me; make haste to help me, O LORD.
[2] Let them be ashamed and confounded that seek after my soul: let them be turned backward, and put to confusion, that desire my hurt.
[3] Let them be turned back for a reward of their shame that say, Aha, aha.
[4] Let all those that seek thee rejoice and be glad in thee: and let such as love thy salvation say continually, Let God be magnified.
[5] But I am poor and needy: make haste unto me, O God: thou art my help and my deliverer; O LORD, make no tarrying.

Sunday, September 4, 2011

The Guns of August

After writing a post on what I wasn’t, I thought it might be useful to write a post about who I am and what I am attempting to accomplish with my investments. I thought about two titles for this article, The Guns of August, a marvelously well written history of the opening days of World War I, or “How’s That Working Out for You?” Dr. Phil’s go to question. I chose the former title. Although my portfolio survived the assaults of an August that featured the first ever downgrade of the United States of America from its coveted AAA status and the wildest rollercoaster gyrations ever seen in a single month, I fear this is only the beginning of a long and unpleasant period for individual investors.

First and foremost I want to retire, in comfort and dignity if possible. More than that, I want to provide for any probable contingency my wife might face after my death. Yes, I know I might outlive her, but the odds are she will live for about seven years as a widow. When I started a systematic investment program about ten years ago, I decided I needed to increase my net worth to a point where I had enough to supplement Social Security and my small pension, giving me a reasonably safe chance of sustaining my lifestyle for the duration of my declining years. I have relentlessly focused on the bottom line. Every month I total my net worth excluding the value of my home. If it is not headed in a upward direction, even for perfectly good and understandable reasons like buying a new car, I increase my efforts at saving and systematically investing my money.

Further, I decided not losing money was more important than making money. For this reason, I split my money, roughly 50% in stocks and 50% in cash, bonds, gold, silver, a CD, and most recently a foreign currency fund. I don’t pay a lot of attention to how well I am doing in comparison to the market when my stocks are going up, but I pay a lot of attention to how well I am doing in comparison to the overall market when my stocks are going down. Needless to say most of my holdings would be considered defensive in nature.

I am a big believer in diversification. I currently own shares in 16 individual stocks, 8 mutual funds, two exchange traded funds, three money market funds (each of these has a different purpose), and one CD. Without checking the numbers, roughly 15% of my total investments are in foreign shares. I expect this number to increase slowly over time as America’s share of the world’s wealth continues to decline.

I believe in companies that sell things I understand, things that people have to buy or are going to buy anyway. Oil, telephone service, soft drinks, alcoholic beverages, medicine, soap, toilet paper, regulated utilities, pipelines, and forest land are all well represented in my portfolio. I don’t feel like I understand technology stocks, so I avoid them missing out on opportunities like Google and Apple.

Almost all my shares pay a dividend, often a very good dividend. Any company that wants to keep all its profits for its management is not a company that interests me. I have always thought it only fair that the company share its profits with me, the shareholder. As my net worth has increased and as I move closer to retirement, dividends are becoming more and more important to me. What I really need in retirement is income. If my investments allow me to live off the interest and dividends they generate, then I will not need to start withdrawing principal in order to maintain my lifestyle. It appears, barring a catastrophe, I will be able to live comfortably off Social Security, pension, and a 4% draw, but I will be eating into my principal.

“How’s that working out for you?” Well, my net worth, excluding the value of my home, has increased roughly 5 fold in ten years. Since this past decade is commonly called the “lost decade” for good reasons, I consider myself very fortunate, indeed blessed.

Find yourself! Find an investment strategy that works for you, a proven discipline that produces results and apply your intelligence and your energy to your goals. If you persist the odds are good that step by step, here a little and there a little, you will find what you seek. Don’t look for shortcuts, get rich quick schemes, or things that are too good to be true. Just keep working, saving, and investing.

Proverbs 10

[2] Treasures of wickedness profit nothing: but righteousness delivereth from death.
[3] The LORD will not suffer the soul of the righteous to famish: but he casteth away the substance of the wicked.
[4] He becometh poor that dealeth with a slack hand: but the hand of the diligent maketh rich.
[5] He that gathereth in summer is a wise son: but he that sleepeth in harvest is a son that causeth shame.
[15] The rich man's wealth is his strong city: the destruction of the poor is their poverty.
[16] The labour of the righteous tendeth to life: the fruit of the wicked to sin.
[21] The lips of the righteous feed many: but fools die for want of wisdom.
[22] The blessing of the LORD, it maketh rich, and he addeth no sorrow with it.

Saturday, September 3, 2011

I am Not a Day Trader

Let me be honest. I am not a trader. When I buy a stock, I do so with the expectation of keeping it forever. Of course, if a stock gets so high I can’t sleep at night or it drops and doesn’t come back, I will sell it. However, trading is not what I do. I tried it twice, made money once and lost money once. I decided that trading just wasn’t me. It is a perfectly good and proven discipline for some people. However, I am not one of them. Some of these ideas come from two books I read a long time ago, Futures and Options for Dummies and Technical Analysis for Dummies. The financial books in this series are actually pretty good places to start. They are written by knowledgeable professionals in a style that assumes you are bright but pretty low on the learning curve. The rest of it I just picked up somewhere along the way.

Before you start, count the cost. How much are you willing to lose in this experiment? Set that amount and no more aside and account for it (including all brokerage fees) in an Excel spread sheet.

Become an expert. Decide what you are going to trade, a particular stock, stocks from a particular area, an individual commodity or something similar. Learn all you can about that stock, its price history and absorb all the fundamental research you can find. Yes, just like all value investors are aware of technical analysis techniques, all traders need to understand the underlying fundamentals of their stock. Consider, Bank of America. Its price is extremely sensitive to public perception, changes in accounting rules, law suits, and major moves by powers like Warren Buffet. Even as you buy and sell on price movements, you still need to understand what is driving these changes.

Before you make a buy, write down something coherent in your Excel spreadsheet explaining why you are making that buy. Recording your logic for further study is an important part of the learning process. It will help you build your decision making model and then constantly refine it.

Likewise, when you sell a stock, write down why you sold it and study the results.

Successful traders recommend setting price targets and using stop loss orders as a further discipline that will take emotion out of the decision making process. Emotion is always the enemy of successful investing. It will cause you to buy at market peaks and sell at market bottoms, exactly what you should not be doing. Here is how the process works. At the time you put in your order to buy a stock at market price. Set a stop loss limit. What this limit might be is up to the individual investor. Some people recommend 10% as a maximum acceptable loss in any given trade. The stop loss order will trigger a sale if the price drops to your predetermined number. Do this on the day you purchase the stock and never, ever, for any reason change it to a lower number. If you lose 10%, so be it. Learn from your mistake, take the tax loss, and move on. If your stock goes up in value, reset the stop loss number to reflect that increase. That way you will never lose more than 10% of the current value of your investment.

Some traders take it a step further. They will set a price target on the same day they buy the stock. I remember one author thought that if one of his trades went up by 25%, he should take his winnings and look for a new opportunity.

As you make your trades, always entering them into to your spread sheet calculating the gains or losses, you will watch your starting number (the maximum you are willing to lose) increase or decrease. If you lose all your money, you are obviously not a trader. If the process makes you excessively nervous, you are not a trader. If your stake increases and you find the adrenaline rush of buying and selling is better than sex (just kidding) you are a trader.

Trading, like value investing, is a discipline. Study and learn before you try it out. Keep a practice log in Excel (just like the real thing but without using real money) before trying it out for real. Also, remember if any given investment is small, say 1% or 2% of your total portfolio, even a bad loss in that particular stock won’t kill you.

Take this article as nothing more than a starting point for further research. I am not a professional advisor. If I was all that smart, I would be retired and living in Hawaii. However, I want to share what I have learned with my readers and hope you will find it of benefit.

Now, let’s be careful out there.