and           

Two of my favorite organizations have just jointly announced a wonderful program to offer investment clubs an opportunity to move up to the next level of convenience and efficiency in executing their trades, and to do so without paying any commissions. For clubs, which frequently trade in small, odd lots, this can substantially cut down the cost of each transaction and increase the return on their shares. And there are other benefits as well.

FolioFN, recently renamed “FolioInvesting,” is a folio brokerage, which means that they have the technical capability to not only execute trades conventionally on the various exchanges, they also can execute window trades, an exciting new means of permitting their clients the benefit of inexpensively trading on a dollar basis rather than a per-share basis.

Read more…

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Let’s talk about unrealized gains. Are they real? Or are they “only on paper?”

As you can probably tell, I’m spending more and more time trying to widen the gap between us “real investors” and the herd out there whose members think investing is gambling on the stock market. So, this topic provides a good opportunity to highlight that distinction.

When the typical trader out there buys a stock, her sole focus is on buying it at a low enough price so she can sell it to someone else at a higher price and make money on it.

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A while ago, my wife, Dianne, came home from an afternoon of shopping and couldn’t wait to show me something she’d had her eye on in the department stores for a long time but would never spend the six-hundred bucks they wanted for it. She had come across it for $29.95—a price at which it had come to rest after a series of automatic markdowns in one of the outlets she occasionally visited. The item was still selling in the mainstream stores for the original price; and, after carefully checking to be sure it was not counterfeit, imperfect or irregular, she had triumphantly carried it home.

That item—I think it was a leather, vanity-labeled purse—had a value of around $600 because the department stores could buy them at wholesale, mark them up enough to make a decent profit, and there was plenty of demand for them at that price.

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Today, I think I’ll post something about investing for a change. You’ve been pretty patient about my indulging myself and mouthing off about current events. So I owe you one!

Some years ago, I accepted an invitation by the American Association of Individual Investors (AAII) to participate in their regular feature: “Pro Pix,” a contest that, until I came along, was restricted to professionals who were willing to vie with each other to produce the best performing portfolio over a six-month period. I accepted the challenge with the condition that I be permitted to use the required bi-weekly commentary to tout the virtues of long-term investing and make it clear that a six-month time horizon was not a reasonable basis on which to judge success.

s Food for Thought, How to Invest, NAIC Veterans' Lounge, Successful Investing AAII, Calpine, Lawrence G. McDonald, Lehman Brothers, long-term investing, Pro Pix, when to sell

Some years ago Patricia Edwards, a fine lady for whom I had—and continue to have—a great deal of respect, came to me with an idea for a book. It seems that she and her friends had enjoyed the benefit of having formed an investment club, had struggled with all of the decisions that needed to be made, and after a number of years were ready to declare it a success and pass on their acquired wisdom to others.

She asked if I might help them get their book published, which I agreed to do. But, for a number of reasons, I was unable to follow through with all they needed. And so, having allowed too much time to pass before doing so, I finally had to acknowledge that I couldn’t help them and suggested they might consider self-publishing.

I can’t tell you how delighted I was when, in Atlanta last weekend, I ran into Pat and had a look at the result of their labor of love! Several weeks ago, I wrote a  piece in which I suggested that some of my readers consider forming investment clubs in order to facilitate their learning to select quality stocks and invest in quality companies for the long term. I would now go a step further and add that I recommend that those who do want to make that step latch onto this wonderful book, brimming over with sound advice, offered with good humor, and in a very practical and easy-to-understand way!

Although belatedly, I want to congratulate Pat and her Beanstalk associates for having had the tenacity and will to overcome the obstacles and get such a delightful handbook out to their intended audience! [“In Search of the Green” may be obtained on Amazon.]

s Food for Thought, How to Invest, Investment Concepts, Successful Investing books, club, In Search of The Green, investment club, other efforts

Paraphrasing Gary Simms’ second question from his earlier comment:

Our methodology provides that we realize gains when we sell our shares because the  companies in which we invest steadily increase their earnings while we hold their stock. Assuming we paid a reasonable multiple of earnings (PE) when we bought it, by later selling it at a similar multiple, the sale price will reflect that increase in earnings.

As an example: if we pay 20 times earnings for the shares of a company earning $1 per share, and, five years later, the company is earning $2 per share. Selling it at a PE of 20 would produce a sale price of $40. Thus we’ve doubled our investment. 

His question is simply, "What if the earnings growth is right on schedule, but the PE isn’t near what it was when we’re ready to sell?"

The answer is a corollary to the answer to the first question. The PE is the price divided by the earnings. Therefore, if the earnings have grown as expected, the PE is low only because the current market price is low. The herd was simply not paying a reasonable price for the shares because of some fantasy; i.e. a story, rumor, or other event or opinion that drives the market prices down. You should, therefore, be patient and wait for it to come back up. It will.

The very same rule applies here: "If the price of a stock has declined for any reason other than a decline in the fundamentals; i.e., growth of sales, profits, or earnings, then it will return to where it was. What goes down must come up and vice versa."

It’s probably a good time for a refresher. Read “What’s a PE and What’s It to Me?

s How to Invest, NAIC Veterans' Lounge, Successful Investing fundamental analysis, fundamentals, Patience, PE ratio, the herd

If ever there was a vehicle that seems perfect for the amateur or inexperienced investor, it  has to be mutual funds. Considering NAIC’s excellent mantra: “1) invest a fixed amount regularly, 2) invest only in good quality growth companies, 3) reinvest your gains, and 4) diversify,” mutuals would seem to cover all the bases. Not so!

Of course, if your employer is matching your investments in a 401(k)—if he contributes 20% to as much as 100% of your investment—you should put as much as you can into it, because you’d be hard put to get that kind of return on on any other investment.

Or, if you’re just beginning to accumulate a nest egg while you learn to invest on you own and gain confidence in your ability to do it, it’s a convenient and reasonable place to park your funds until you “graduate.” But….

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While we advocate expending the least amount of effort necessary for investment success, one urgent requirement is monitoring your portfolio to catch the poor performers before they do too much damage.

Our “rule of five,”—a convenient, statistical pigeonhole into which we can cram every failure—suggests that fully four out of five companies we select will do just fine, one even doing better than we had expected. The nice thing about that is, if we’ve selected carefully, the eighty percent of those we’ve selected will perform well enough to keep our portfolio’s performance from being too badly damaged. Read more…

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There are three—and only three—situations when you, a long-term investor and company part-owner, might want to sell stock you own:

1. When you want or need the money – After all, that’s what you’re doing this for, isn’t it!
2. When revenue or earnings growth declines – the company can no longer maintain the fundamentals that induced you to buy the shares in the first place. (Defensive Strategy) Or,
3. When expected total return declines – an excessively high market price puts your five-year plan way ahead of schedule. (Offensive Strategy)

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Don’t think I’m the only one who looks at investing as I do. There are many more out there who have been promoting the investment methodology that George Nicholson gave us, and doing it longer than I. And, among them, there are actually organizations that stage educational events to which the public is invited. Over a two or three-day period, they offer a number of parallel tracks to satisfy as many levels of investment experience. And they teach this methodology exclusively.

 If you’re new to investing and are starting from scratch, for example, they have seminar tracks just for you. These provide the “newbie” with a good grounding in the fundamentals behind this superb, successful method. And, by the end of the event, that new investor will have learned enough to be able to jump right in and start investing on her own. These events also bring hundreds of people with the same needs and experience levels together; and, typically, many friendships are formed—often with folks in the same area—which result in opportunities to network and support each other in their journey to investment success. Read more…

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