Double Journey

I’m trying to get back into the swing of reading. Of course, I naturally gravitate toward financial investment books.  As I’ve posted before in my blog about the best investment books to read, the best books are those you will actually pick up and finish.  I’ve been hard for time lately, so I decided to pick up another book in “The Little Book” series.

This time, I picked up The Little Book That Builds Wealth by Pat Dorsey.   You will notice that this is the same Pat Dorsey who wrote another one of my recommendations, The Five Rules for Successful Stock Investing.  I like his style of writing, even though some might find it dry.  I find it to be easily understandable for even the average person with little investing background.

The book focuses on the concepts of economic moats.   It is a concept used heavily by the likes of Warren Buffet as well as the company Pat Dorsey works for, Morningstar.  The idea is simple.  Those companies that have sustainable and strong competitive advantages, will in the end be worth more money than those that don’t have such advantages.  Despite the rather simple concept, the book does spend some time trying to convince the reader why the concept is important.  It actually is something that needs to be explained, because it is a rule often ignored by so many (myself included).

For me personally, the most useful thing was not how to think about companies that I am looking to invest in.  It was most useful to me as a way to think about my own company.  It got be thinking about the industry I am in as well as my company’s position in it.  The book made me think about ways I can help my company create a lasting economic moat or if it was a waste of time to even try given my industry’s dynamic.  I actually recommend it highly to anyone who has major influence in a company and is looking to jump start ideas on how to create strong competitive advantages.

So overall I recommend the book.  Probably because it fits in so nicely with my own investment style.  Just take a look at my Shopping List (which I know needs to be slightly updated) .  Almost every single one of those picks are a wide moat company.  All of them were picked before I ever read this book.    Great minds just think alike.

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.

A while ago I took a position in some Natural Gas drillers.  Specifically Grey Wolf and Nabors.  I never really planned on owning them long term.  I just took positions because I thought I wanted a few different energy plays and so I branched out into an area I wasn’t totally comfortable with (mistake #1).

I actually did OK on these at first, and saw some good gains.  As I was in this for a trade, I should have gotten out, but I didn’t.  Soon after, the price of Natural gas spiked down and never recovered.  Since I didn’t have a lot of money invested in either position, I didn’t really worry about it.   I figured that it was OK and that it would eventually come back.  So I held.  Held like a chump.

I should have just gotten out of the position when it reversed.  I made a classic mistake that so many of us make; I let a trade become an investment.  I held on to the position WAY too long in the hopes that it would eventually come back.  Hope, it’s the one case where it really isn’t a very good thing to had.  I kept telling myself that energy was a great story and it would continue to be so (it is, but this wasn’t the way I should have or wanted to play it).  I kept coming up with excuses to keep the stock.  But that was unnecessary.  It was a trade.  Trades don’t have reasons, only investments do.

I finally got out of the positions this week.  I did it to take the capital loss and offset some capital gains I have but it should have never come to this.

are a few great stocks. I’ve started my wish list where I will put all the stocks that I’m actually interested in buying. I might buy one out of ten stocks, but it will give you an idea of what I’m thinking. I’ll update it regularly so check on it often. One of my goals this holiday was to figure out what stocks I was going to buy for this journey. Thus far, I haven’t identified any, and have only listed some good long term plays. I’ll continue to plow through some ideas that I have and hopefully come up with a good play for tomorrow or later this week.

Hope everyone is having a good holiday. If you want to get me a gift I really need some short term trade ideas.

A quick financial lesson. While this post may not seem relevant to me telling my back story, almost everything I talk about will be based on this concept, so pay attention. If you want to be rich, one of the most important things you will ever learn is the power of compound interest. This concept is best learned through example.

Let’s say you decide to invest in a Roth IRA, my favorite investment vehicle. You decide to start one today and invest the maximum $4,000 every year. You invest it wisely in an index fund that follows the total stock market which has historically returned 10% a year. In 40 years, your $4,000 a year, ($160,000 in principal payments) turns into $1,947,407.24, All of it tax free.

Now imagine if you were a good little saver and have saved the last 4 years. With a modest gain over the last few years you have $17,000 in your account. With the same investment strategy above you now have at the end of 40 years 2,716,814.59, All of it tax free. That is almost $800,000 difference for saving a little bit earlier. That $17,000 turned into $800,000!

Still not convinced? How about this? You do the above strategy from the ages of 25-35 and then stop. So for 10 years you invest $4,000 and then nothing after that. By the age of 65 you will have an account worth $1,223,633,58. Your $40K turned into $1.2 Million.

Or instead, you do nothing from the age of 25-35 and instead save from the age of 35-65 with the same strategy. Your final balance will be $723,773,70. Your $120K turned into $720K. Not bad until you consider that that’s a half-million dollar difference from the previous example of $1.2 Million! And you put in 1/3 the amount in principal and saved 3x as long!

The lesson? Save early, save often. I can’t stress this enough to my young friends. I know it is hard to save money now, but in the long run, it makes a BIG difference. This concept applies outside of finance as well. Doing the right things today, can pay big rewards tomorrow. You should always have an eye on the future and understand that small differences today, can have big repercussions in the future. This applies to you choosing what school to go to, what job to take, whether or not you should buy that new TV, pretty much everything you can think of. The younger you are, the more important this concept is. Understanding this at a very young age, helped me to get where I am today as I will explain shortly.

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.