Buy Low, Sell High: How it Works in Real Life

They make it sound so easy, don't they?

Buy a stock low.  Wait a little bit.  Sell it after it goes up and then buy something else that is low and repeat the process until you have so much money you don't know what to do with it.

But the most oft repeated rule of good investing is a gross oversimplification that puts way, way too much pressure on the investor.  You are never - not in a million years - going to be able to time markets or purchases, at least not on a consistent basis.  Let's take an investment I own to see how it really works.

I like Google.  When I use a search engine, I prefer to use Google.  I like the Google doodles.  I'm used to the format and over the years I've appreciated the other services the company has developed to earn my loyalty.  Stuff like Google Docs, Google Chat, Images, Maps, Google Earth.  They offer a high quality product and make my life better on a daily basis.

But it's always been an expensive stock.  So the first time I bought it, I purchased 5 shares on November 16, 2007 for $627.75 a share.

Then the world fell apart in September of 2008.  Remember that?  I sat there watching the collapse in absolute and complete terror like every other sane person who owned financial assets.  But good investors learn not to freeze.  You have to take a deep breath, open your statement - the one where the entire portfolio has declined by 20 % or 30% in a matter of weeks - and you have to get very quiet and learn to think for yourself instead of like a sheep.

Is the world really going to come to an end?  No.  Assuming an absolute worst case scenario which companies will survive?  You sell your weakest companies, the ones that had been struggling before the downturn and you take that money and  reinvest it in the strongest parts of the economy.  Or at least that's what I try to do.

On October 7, 2008 I bought 5 more shares of Google at the half-price sale:  $355.05
I got a little braver and bought 25 shares on October 13, 2008 at $365.45 and then in a different account on October  17, 2008, 20 shares at $385.11.  After watching, learning, getting to really know Google over the next five years, I liked the direction they were taking and was pleased with their acquisitions.  On February 28, 2013 I added another 70 shares at $805.10.

Today the stock closed at $1,192.10 and I'm pretty pleased with my investment.

Does that mean it's time for me to sell?  Nope.  Someday it's very possible that their self-driving cars will fundamentally change our ideas about transportation.  Google is working on contact lenses that monitor blood sugar for diabetics and automatically transmit regular data to their health care professionals.  In December alone, they bought seven robotics companies.  Recently Google announced a 2:1 stock split to be distributed on March 27.

This is a company I plan to own forever. But forever is a very long time.  And there are always bumps along the way. That's the way it really works when I buy low.   I know I may get the chance to buy even lower before I ever think about selling high.  My objective is to build wealth, not to be perfect.

I'm still in Italy, far, far away from the stock market.

Sitting next to an American businessman during my most recent flight to Europe, he asked me the same thing lots of people do when I tell them I'm going to Italy for a few months.  "What do you do over there?"  They can't imagine, especially when I'm traveling alone.

It's the last week of February and our weather is mild on the Italian Riviera year round.  Today there isn't a cloud in the sky and it's sixty degrees, warm enough to get by with a sweater.  So I did what everybody in Savona was doing today.  I walked down to the Lungomare, the walk by the sea, and I sat on a bench in the sun looking out at the shimmering blue water.

I didn't understand what walking was really about until I started to spend longer periods of time in Italy.  It's not just a way to get from Point A to Point B for the Italians.  Walking is what people do.  It's a social activity, a hobby, a chance to get dressed up in your best pair of boots, window-shop and chat with your neighbors. It's built into the fabric of everyday life.

Even though I brought a book to read, I didn't open it, transfixed by the normal, everyday pageantry of the Savonese. The whole town was there.  Middle-aged daughters with their white-haired mothers on canes. Young couples cooing at babies in strollers.  Thick-wasted lovers, married forever, strolling slowly hand-in-hand - the same way they've done for years. The wifeless men, widowers, clumped in their own little groups.. A random tourist or two from the cruise ship in the port.  Families with young children on their first two-wheelers - they'd ride and wait, ride and wait. Everybody talking, everybody telling stories, everybody touching and kissing each other on both cheeks. All of them walking their dogs. "Say hello to your wife," they'd call.  "What a beautiful day."  An hour or so later, I knew the sidewalk would be almost empty, everybody home with their families for Sunday lunch, the same routine they follow every week.

In the United States, I'm always trying to accomplish something.  I need to exercise more or study Italian harder.  I need to fix things, get a better hair cut, make lists, solve major social problems, write books, figure stuff out.  I'm always figuring stuff out.  If I just read one more research report, I can beat the S&P 500.  But in Italy I am perfect exactly the way I am.  I already have everything I need and sitting on a bench in the sun on a beautiful day in February, it's all I can do to keep myself from bursting into tears out of a gratitude so pure, so complete, it can scarcely be contained.

That's what I do over here in Italy. Not all that much.  I sweep the kitchen floor every morning.  Maybe I'll run across the street to grab a wood-fired pizza.  Sometimes I write.  But mostly I take walks and refocus my heart on the everyday beauty of being alive..

Do's and Don'ts of Market Corrections

Anybody can be a good investor in an up market.  It's the corrections that weed out the amateurs.

If you want to get rich with stocks, here's what you're not allowed to do:

1.  Sell everything because you are absolutely positive the market's going lower.  Even if you're right, even if the market drops another 5 or 10% before it turns around and goes back up - you will screw it up.  Because you will not buy back in.  You will be all puffed up from having been right about the decline and that smug pessimism will turn into your pride and joy, your guiding star.  You will keep sitting there with your cash in a money market fund paying a tenth of one percent and you won't believe any bounce up is real.  You'll miss the whole damn thing.  I've seen it a million, gazillion times.

If you want to get rich with stocks, here's what you have to do:

1.  Catch your breath.

2.  Wait for the market to stop collapsing.

3.  Look at your account with a steady hand.  

4.  If you have losses in a taxable account (not your retirement accounts), this is where you should be ruthless.  Lock in losses and bank your tax-losses against any future realized gains.  If you like the stock you just sold, immediately repurchase it in another account (in your spouse's name, in a retirement account).  Do not wait.  When the market starts to recover, you want to be an owner and participate.  This is just a strategy to get some use out of your short-term (normally unrealized) losses so that you are making maximum use of market volatility.  

5.  If you have cash, add to best quality favorites.  

6.  If you have stocks you really don't like, once again, be ruthless.  Don't worry about "getting back your investment" or "waiting until you break even."  That's yesterday's news.  Go ahead and re-position the money into your favorites. But if you sell something, don't try to get too smart and time the turn around.  Buy now.

Why I Hate, Loathe, and Despise Mutual Funds, Second Verse

Let me clarify my hatred.  I don't hate all mutual funds per se.  I hate the way they are used by the vast majority of financial advisers who charge a fee for their services.  It makes my blood boil.  It makes me so mad that I woke up this morning and had to come straight to DIY Stocks to tell you about it.

A friend of mine volunteered to act as a case study for the experiment that is DIY.  I figured it's easier for people to learn about their own situation if we use specific examples from real life.

At first I was kind of disappointed because my friend and her husband have done everything right.  They are super-organized, savers at heart, have already retired (which is the feet-to-the-fire test of how good your investment program is), and are living the life of everybody's dreams.  How could anything I have to say possibly improve their situation?  Nothing was broken.

Of course their investment accounts came with personalized annual reviews, fancy booklets printed in vibrant color at least 30 pages long and full of bar charts, pie charts, line graph comparisons, risk-reward scatter-plots, graphs in the shape of triangles, graphs in the shape of cubes, maps of investments by geographical region.  Alpha, Beta, and R-squared indicators. Weightings and Valuation Multiples.  Equity investments were divided down into High Yield, Distressed, Hard Asset, Cyclical, Slow Growth, Classical Growth, Aggressive Growth and Speculative Growth.  This template is a Morningstar product, one of the most highly respected names in fund analysis and widely used throughout the industry.

I've been reading the language of investing since 1979 - and I'm really good at it - but I couldn't figure out what the heck this report was telling me.

Except I did understand one thing:  buried in the middle of the report were the actual performance results of my friend's investments.  Her husband's assets had realized 7.44% versus 14.39% during the same period for the S&P 500.  Her accounts had realized 5.74% versus 20.22% for the S&P 500 since she had used their services.

But that's not what made my blood boil.

What made me absolutely furious was when I happened to notice that all the graphs in the annual review read Year-to-Date for 2013 and yet they started in February.  What the heck was that about?  So I went back and checked the market performance in January of 2013.  Turns out the S&P had gotten off to its best start since 1997 and returned 5.2% in a single month, the month their adviser so conveniently forgot to include - because if he had, my friend - my honest, hard-working, trusting friend - even she might have noticed how much she had under-performed a non-managed index and asked questions.

The one fact I couldn't find anywhere in the report was how much this firm was charging for their advice.  Let me guarantee nobody in this business works for free.

Normally I try to give people the benefit of a doubt.  But these reports are pure and simple gobbelty-gook designed to make people feel stupid.  If you can't figure out what you are paying or what you own or why you own it, it's not your fault.  It's a system that has been designed to produce maximum revenues for service providers while keeping you helpless.  What is presented as objective fact, is not. It is carefully selected facts chosen to make the adviser look good.  In this case (not at all uncommon), I'd call it outright fraud.

And if this were my money, I wouldn't pay this guy another dime.*

*www.vanguard.com is the web address for Vanguard funds.  The symbol for the un-managed S&P500 Index fund is VFIAX - and last year it returned 32.33% JANUARY to December.

Do You Really Want to Be a Grown-Up?

I have the advantage of having kept a journal since I was fourteen years old.  Never very consistent about making entries, large chunks of my life are missing.  Writing is where I go when I'm confused so most of what I saved are the hard, annoying questions.

If there's a theme to my first forty plus years, it was, "What do I want my life to look like?"  Which was almost always followed by a long list of the things I thought would make me happy.

Periodically I look back over my lists and, it's weird, I got most of what I wanted.  New furniture for the screened-in porch. Christmas in Costa Rica with our kids.  I was the first female producer to make Chairman's Club at Merrill Lynch.  My picture was often in the newspaper.

But it didn't matter what I got or achieved.  I just kept on asking.

"What do I want my life to look like?" - contentment always just out of reach.  Even after I got divorced, quit my job, and remarried.  It seemed like I'd never get there.  Wherever there was.

One day I happened to stumble on a new book at the Public Library called, How to Live Well Without Owning a Car: Save Money, Breathe Easier and Get More Mileage out of Life by Chris Balish. The author had gotten in over his head in debt, was forced to give up his car and liked his life so much better he never bothered to replace it.  Inspired, I decided to limit my driving and ride my bike 5 days a week even though I lived at the top of a steep, one mile hill.  It was 2006 and I was fifty years old.

Riding the eight miles downtown and back made me feel like I was twelve years old again.  Free and powerful and independent.  Do you remember?  How it felt to be able to go anywhere you wanted without your parents for the first time.  I loved being twelve.

There was one special morning in particular.  It was June, just after school had let out for summer vacation and my mother was in the backyard watering her azaleas - that part of the day when the air is still cool, but you know it's going to get really hot in the afternoon - which was something you noticed and appreciated before everybody got air-conditioning.  I was standing in the grass in a patch of sun, my whole summer ahead of me.  The birds were singing and I could smell the wet dirt in the garden.  My best friend, Paige, and I had plans to spread a quilt under the elm in the backyard and work on the novel we were writing together.

Bingo. It took me fifty years but I finally figured it out, what made me happy.  The exact same things that made me happy when I was twelve.  Riding my bike.  Sunshine.  Free time to do anything I want. Writing. It had been there all along.  I just couldn't see it.   So that's the way I live my life these days, the same way I did when I was twelve. There is nothing I can pay for with money that could make me feel as good and have it last.

Of course, I still make lists every once in a while, but now they say things like, "Make pot of lentil soup."  "Return library books."   "Take a walk down by the river."  And I never, ever, ever have to ask myself what I want my life to look like any more.  Because I'm exactly where I want to be, doing exactly what I want to do.   And I'm very, very happy.



 

The DIY Stocks Guinea Pig Tells All

The DIY Stocks Concept was started because I ran into a former client at a social event.  He asked me for a recommendation for a new financial consultant and when I couldn't think of anyone, I offered to help him learn how to make his own investment decisions.  After two years, these are his impressions so far:

What prompted us to move from our broker?

·         We didn’t feel as if we were getting any personal attention such as advice or suggestions.

·         After 2008, we saw our portfolio decimated and the rise back up was too slow for our liking.

·         I ran into Kathy again after years and remembered our long and informative conversations peppered with what struck me as very personally targeted advice.

Why DIY Stocks?

      Kathy took a genuine interest in our personal situation and our short- and long-term goals.

·         Kathy offered to teach me about her approach with the goal of weaning me from her services

·         The payments to DIY Stocks were a flat rate as opposed to regular payments based on a percentage of growth.

Why individual securities as opposed to funds?

·         Well, they are more fun! What I mean is that Kathy’s approach is to research stocks of companies that are:

o   Already a part of our lives – examples for us are: Target, Starbucks, TJMaxx, P&G, GE, Facebook

o   Industries in which we are interested such as electric vehicles, solar energy, wind energy, 3D printing

 . . . and then buy ones that are strong with good potential. This makes it fun because our research is ongoing as we shop or listen to the news. This approach changed the way we look at and our interest level in our own neighborhood and chosen industries.

·         Stocks offered the growth potential that we wanted to get our portfolio back where we needed it.

Is this for everyone?

No. This is for people who:

·         Are interested in business and businesses.

·         Have a general understanding of business.

·         Enjoy some level of research (it’s not necessary to read the financial statements with a thorough understanding, but I must admit that I just read a book to hone my skills in this area)

·         Can stomach more risky investments than mutual funds.

Cons?

·         Riskier than funds

·         Requires more work on your part

Pros?

·         You become active in your future

·         You learn about the world around you

Socially Responsible Investing: My List of Stuff I Absolutely, Positively (almost never) Will Not Buy

If you watch enough television - especially the evening news and shows like American Greed – it’s a wonder we can get out of bed in the morning. While the fear-based perspective might sell advertising, this is not a complete or even accurate picture of where we are going as a species.  The nature of public companies is changing in a fundamental way, most of it for the better.

A great example is Google.  They’re working on all kinds of strange products, way outside their core of data collection from the search engine business.  Their most recent corporate announcement highlights the development of a smart contact lens for diabetics that will monitor blood glucose levels through tears once a minute and send the information to the patient and doctor’s mobile devices.  They are even planning to add an LED light that will flash when blood sugar hits dangerous levels.  In a recent blog post they explained why they entered this market:

"We're not going to do this alone: we plan to look for partners who are experts in bringing products like this to market. These partners will use our technology for a smart contact lens and develop apps that would make the measurements available to the wearer and their doctor. We've always said that we'd seek out projects that seem a bit speculative or strange, and at a time when the International Diabetes Federation is declaring that the world is "losing the battle" against diabetes, we thought this project was worth a shot."

They have sufficient excess cash flow to fund the research.  They have the expertise.  They plan to partner.  They want to help people live  better lives.  That’s the kind of co-operative world I want to live in and the a company I want to own.

Every investment decision we make should be in support of a better world.  The stock market is a giant voting mechanism and over time, good eventually triumphs over greed.  There’s some part of human consciousness that recognizes cooperation and a broader view is the right way to go on both a social as well as individual level.  There is enough for all of us if we operate from a place of faith rather than fear.

With that in mind, here is my personal list of industries I want no part of as I try to live a consistent life:

1.       Coal-mining Companies:  in every labor dispute I’m always rooting for the miners.  But in my heart, I hope the workers are forced out of business and have to retrain.  Oh, that they might find other ways to earn a living, one that isn’t so dangerous and doesn’t pollute the air.

2.       Automobile Companies:  I drive my 2005 Pontiac Vibe less than 2000 miles a year and will never buy another car if this one conks out.  Three years ago we moved downtown to a walkable neighborhood.  I ride my bike to do errands and take the bus to the airport.

3.       Weapons Manufacturers:  I don’t own a gun.  I’ve never touched a gun.  I long for a more peaceful world.

4.       For-Profit Prison Operators:  I don’t believe people should be financially rewarded by prisons full to maximum capacity. 

5.       Tobacco and Alcohol:  While I have smoked the occasional cigarette and enjoy a glass of wine while I cook dinner, I do not want to make money from the self-destructive addictions of others.

6.       Gambling Stocks:  Oh, the guilt.  I hate gambling.  It makes no sense to me and it upsets me to even walk through a casino and watch people put hundred bills down on the tables.  But MGM is one of my biggest positions.  They’re the biggest operator on the Strip in Las Vegas and I bought it as a uniquely American vacation destination that would benefit from the economic recovery.  My Italian mother-in-law is gaga about the place.  I rationalize my ownership by telling myself that lots of people, like her, go to Vegas for the neon lights, theme hotels, shows and fine dining. 

7.       Luxury Goods:  I don’t get them.  When I wear jewelry, it’s most often plastic, purchased on Ebay.  Shopping is a tedious bore and if you are going to judge me based on what I’m wearing, good luck.

8.       Drug Companies:  I stopped going to doctors 8 years ago.  All my well-intentioned physicians wanted to do was write me prescriptions.  The pills didn’t help.  I had to change the underlying problems in my life.  Now I take no pills.  Michele takes no pills.  I wish people would rely less on pharmaceutical intervention and listen more carefully to the messages from their body and not wait until they are in crisis to do it.

9.       Oil Companies:  Don’t like fossil fuels.  But, boy, we sure are dependent on them.

10.   Financial Service Firms and Banks:  I’m still mad at my former industry for what happened in 2008.  They continue to make way too much money.  Besides, I’m a firm believer that the internet is really going to turn this sector upside down eventually.  Micro-lending will eat the banks for lunch in the not so distant future.