Double Journey

I’ve often been asked what are the best investment books for someone to read if they are just starting out. I’ve read a lot of books on the topic and I’m happy to share my opinion on what the best books are for someone just starting out.

Peter Lynch’s One Up on Wall Street - If there is one book the average investor should read about buying individual stocks, this is probably it. It is very well written and offers very pragmatic advice on how tho think about individual stocks.  It is written by Peter Lynch who became famous running Fidelity’s Magellan fund and it is written to show how an ordinary person has some rather large advantages over the boys in Wall Street.

Robert Hagstrom’s The Warren Buffet Way -Readers of my blog know how much I admire Buffet. I believe his technique (despite what I may espouse on this website) is the way to go. Buy well run companies that are easy to understand and that are attractively priced. Buffet himself has never written a book, but Hagstrom clearly outlines what Buffet has done to make himself one of the wealthiest men on the planet.

Pat Dorsey’s The Five Rules for Successful Stock Investing - This is a really great book to teach you the basics of how to evaluate a company and what the important metrics are.  I also like the fact that it has in its appendix how to evaluate companies in different sectors.  Evaluating a bank is much different than evaluating a tech company, and this book shows you the basics so you can get started.  

 Joel Greenblatt’s The Little Book That Beats the Market -  The best book is the book that you read and you finish.  That’s why I put this book on the list.  It’s very short and a very quick read.  The advice is actually half way decent, but more importantly it is simple to follow.  He even has a website that does all the work for you.  The thing I like about it most is that it should make it really simple for you to invest, and the most important thing when it comes to investing is to just start.

There are a lot more books I suggest you read, but this should give you an excellent starting point.  Like I said, start with the basics and then go from there.

Berkshire Hathaway disclosed a very large stake in Kraft yesterday. They are the largest shareholder and own a little under 9% of the cheese maker. I like this pick up because I too own Kraft. In fact it is one of the few stocks I do own. I have kept most of attention in the consumer staple area as I have believed for a long time that we were heading into a recession, and consumer staples will do well in this environment. In addition, I thought that a lot of value would be unlocked as soon as it split up from Altria.

I told someone else this and I will say it here too. Berkshire here is a good buy if you can hold on for several years. Stocks are getting cheap and Buffet is going to be like a kid in the Candy store. He is going to pick up some names that seem crazy in this environment, but his craziness has made him the second richest man in the world.

The market just loves to move up and down for no particular good reason. This has been especially true the last few weeks where the market has seen fit to gyrate up and down, mostly down, somewhat erratically. So today I go to Yahoo Finance to read the above as the top story.

Now really, this is a non story. But for some reason the so called “experts” are pointing to this as why the market has rallied. Is there really anyone out there who didn’t think Buffet would get in on this market? The entire sub-prime sector is in turmoil. People don’t know what is going on with these mortgages and there is wide spread panic. When people panic, Buffet makes a fortune. I for one have been one of the loudest voices for quite some time that the housing market has been over-inflated and that it would come bite us in the ass very soon. That being said, we have probably reached a point where most of the dust has settled and people are going to start looking around for bargains.

But these are the types of things that can infuriate novice investors. The markets can and will move seemingly randomly in the short term. I can’t tell you the number of stocks I’ve bought with solid reasoning only to lose my shirt because my stock was out of favor at the moment. The market determined what my stock was worth and it just didn’t agree with me. It wasn’t based on data, it was based on psychology.

Don’t be shocked if the market just dips on no news tomorrow, it went up today on very little.

The market has been quite turbulent. I myself have decided to walk away from it and not pay too much attention. Even in my regular portfolio, I’m not that heavily invested in stocks, so I can afford to not worry too much. That being said, with the wild swings of the market as of late, I have seen one day drops in my portfolio in the $1000 range which makes me nervous.

However, when things look bleak, it is time to start looking to buy things. You can essentially think of the market as going on sale, and don’t we all like a good sale? Like my man Warren Buffet says, “Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market”. Given this bit of advice, this little 10% drop or so at the beginning of the year is nothing. I’m in fact somewhat excited by it because I really want to buy into some good stocks.

That being said, wait a few more percentage points down. The perfect case study in this is Google. Google is down to about $500 from a high of $740. This stock is in no mans land at this point. I would not be a buyer of it, but I also might not be a seller of it. Google has good long term prospects, but right now the stock is getting beat up along with the rest of tech. Is this panic selling? Absolutely! But if you can’t stand to watch the stock drop another $100, you shouldn’t be in it. It can easily go down another $100 because it is so tied to online advertising, and in a recession, which everyone is predicting, advertising is one of the things businesses cut back on first.

If however, you can buy the stock and ignore it, than this would be an excellent time to consider buying into it. It is all about the type of person you are. Long term investors want to seriously start looking at the market, and trying to pick some stocks up that you have wanted for a while. All others who let their emotions ride the roller coaster along with their stocks are best to avoid the market until things start leveling out.

This is why you wait to invest right now.  The market is just sloppy right now and you have to be a pretty brave soul to tread into this quagmire.  My advice to you is this, if you have some stocks you have been looking to get rid of, do it now.  Sell on this bounce, because the market is going down from here.  Take something off the table.

Some stocks are starting to look pretty interesting here.  I still like Altria here.  It is down with the market and there is no good reason for it.  You can buy this stock on the dips.  I haven’t been a big fan of Google stock and was strongly advising people to sell at the $720 level (it topped out at $747).  However, it is back in the $500’s and went as low as $519.  If it comes down to around $510 I’ll have to take a very hard look at it.  I also would love to buy into Berkshire.  This is exactly the environment that Buffet will kick some ass in.  Great long term play if you have the cash right now.

A few weeks ago, Aaron had asked me why I buy individual stocks rather than invest in index funds. He makes a good point. Index funds beat 80% of the market. When you factor in their very low cost, it would seem silly to invest your money any other way.

And I generally agree with the principle that for most people, the right thing to do is to invest your money in index funds. However, I’m not most people. I love thinking about what trade to make. I love doing the research before I buy a stock.

Some liken stock picking to gambling. I really don’t think anything could be further from the truth. True, short term stock picking can be very hard. There are random fluctuations that happen for no other reason than the sentiment “feels” something is going to happen. That can be quite scary.

However, a stocks long term price is 100% correlated with its earnings, and with enough homework, you can figure out which stocks have the best earnings potential. You won’t be right 100% of the time, nobody ever is, but you can certainly pick more winners than losers.

I take the Warren Buffet advice on investing. Put all your eggs in a basket, and watch the basket closely. My portfolio at this time is relatively small, and I watch it closely. That being said, I’m getting hammered along with the rest of the market. So who knows, maybe I’m totally wrong about picking individual stocks, but I’m having fun doing it.

Update: It occurs to me that my point wasn’t totally clear here.  I actually think that index funds are good things.  Most of us are dummies when it comes to the market.  Most people don’t need to be experts.  If you aren’t, then you should invest in index fund.

I’m actually not one for New Year’s resolution. I’m much more the type to just start something whenever the mood hits me rather than wait for a specific point in the year to take on a new challenge. However, since I have this blog up, I’ve decided that it would be good to lay out some financial resolutions for myself and see how it stacks up at the end of the year. So my financial goals for 2008:

1. Double my $20,000 - Obvious but worth mentioning.
2. Develop another source of Income - Right now I have two. I have my job and I have my investments. I really would like to have at least three if not four. It would be great if I could get this blog to make money. But if not that, I really want to at least come up with an idea on how to get my income to go up. I could probably save myself to being rich, but it will be a much easier journey to get there with another income.
3. Watch my basket more carefully - Warren Buffet advises that you put your eggs in one basket and then watch the basket very carefully. That is something I got away from in my investments this year with all the other things going on in my life. I need to be more choosy in picking stocks for my long-term portfolio, and watching that basket like crazy. I made a big mistake with ETrade, and should have gotten out much earlier. I paid the price for it.
4. Spend more money - OK. I know, this is usually the exact opposite of what most people try to do. Problem is, I’m not most people. I suffer from the exact opposite problem that most people do. I save way too much. I probably save about 60% of my net take home pay in one form or another.

That’s it for now. They are actually pretty big goals. #4 may seem easy to some, but it has proven very difficult for me in the past. I even started a “spending” plan about two years ago, and it didn’t work. I couldn’t make it stick. Odd huh?

What are you New years resolutions?

This is somewhat off-topic because I believe this to be a good long-term investment, and not appropriate for the goals of this blog.

It was disclosed yesterday that Buffet took a stake in the used car dealer Car Max. It’s funny that he would do this, because I’ve thought long and hard about investing in them myself and I consider myself to be more of the Warren Buffet school of investing, slow and steady wins the race. The stock was near its 52 week low after a pretty decent run up in 2006. I liked their business model, and even told my friend Mona to check them out when she was in the market for a used car. However, the stock was punished after they announced they reduced their forecast.

Used cars have generally been the domain of sketchy used-car lots and individual sales. Carmax is changing that and making a business of having a national brand. I believe they can succeed because it’s a niche I believe somebody needs to fill. People feel safe when they buy a known brand. That’s why McDonald’s and Starbucks is so successful, despite the fact that there is almost always a better local alternative. For a business that people distrust as much as used-car sales, having a recognizable brand will help to alleviate some of those fears. With only 86 stores in 39 markets, they still have lots of room to grow.

Again, I am not going to invest in them for this blog, but I may take a position in my long-term portfolio. This is a multi-year play. I don’t buy everything Buffet does, but when he and I have the same idea, I use it as an additional data point. I might hold out a little bit longer. I’ve avoided almost all things consumer related, as I have believed for quite some time that we would hit a recession soon. Car purchases, even used-car purchases, will be affected if this happens. However, this is still a bearish call on the economy, which I have, so I might look into buying in soon.