Friday, June 05, 2009

Stock picks

I mentioned in my last post that I purchased some GM stock last year. I have never made public my stock picks in the past, so I decided this might be a good time to explain.

I'm not a big believer in buying individual stocks and in fact, I'm not sure I'm a believer in mutual funds. The former bears more explanation, the latter, well, it's just not time to discuss that now. With individual stocks, you put a lot at risk. One of my MBA professors said that a stock's value represented the market's opinion on future value. It's sorta like taking a vote on how good you think the company will be 5 years down the road. And if you think voting is the right way to determine value, take a look at our presidential elections over the last several cycles: Reagan, Bush I, Clinton, Bush II, Obama - I think the word "fickle" applies.

So if you assume the market is fickle, individual stocks are scary. However, I decided several years ago, that I could afford to invest a small amount of money in individual stocks. My first attempt to beat the market was by buying Palm stock. I was impressed with the product, they were way down in price and I thought they were making some good technical and marketing decisions.

After about 2 years, my value was up about 50%. I saw some folks using Blackberries and decided to sell. Timing on the buy and the sell was not perfect, but who can argue with 50% over 2 years.

My second attempt at stock picks was a company named Ahold. Years ago, Ahold moved into the U.S. by buying the grocery chain I worked for, Bi-Lo. They had grown since that time and reached a peak. Then they hit some accounting scandals. When I chose them, they were making several corporate decisions to restructure and to sell Bi-Lo. To make a long story short, there were some good days and some bad days, but I made about 100% over 3 years. Again, no one can argue with success.

My goal has been to pick stocks on companies that are down, but have a solid product and a decent plan. Then hold the stock for at least 2 years. Don't try to time the entry or exit to the best day, but choose a "season" when it's low to enter and a "season" to exit when it's high.

In August of last year, I chose GM & Ford. I did this because I thought they were "too big to fail" and the government would bail them out. They did, several times, but finally, the downward momentum killed GM. Ford is up about 30% from where I got into it and I think it will go on up. I'm not sure it will go up enough to recoup my GM loss.

My fundamental mistake here was buying not what I thought was a stable company, but based in what I thought the government would do. I should have remembered the word "fickle" (see above).

I should also point out that this is not a pump-and-dump blog. You won't see other stocks mentioned here, at least not daily. I won't try to convince you to sell or to buy. If comments show up about the latest greatest thing or something "they" don't want you to know, I'd strongly advise you to ignore them or at least investigate before you make a decision (I typically don't edit comments out, but may if needed). I just wanted to share my experience and see/hear your opinions...

1 comment:

"The Edge" said...

Edge's unscientific, but really practical stock/bond tips:

1. Never, ever put money into the stock/bond market unless you don't need it to live on. Period. If you figure it is worth zero, you won't be disappointed too much if it does happen to crash.

2. Start small, like maybe $500 at a time.

3. Watch for long term trends and expect to stick with stuff for a while. My dad had Isuzu stock and got it really low. After about 5 years, nothing much was happening, so he sold and about broke even. 2 months later, they got bought by GM (or Chrysler). It shot through the roof.

4. As a general rule, commodities (gold, oil, etc.) are always in demand, but not always a good buy. Gold has bucked the odds, continuing to rise steadily over the past 20 years.

5. Remember dollar cost averaging. If you buy 10 shares at 1.00, and then 10 more at 1.27, and then 10 more at .97, your total cost for the 30 shares is 10.00 + 12.70 + 9.70 = 32.20. This comes out to 1.08 per share. Your stock doesn't have to go back up to 1.27 to make money....

6. Consider the possibility of investing in short term bonds with decent repayment rates - like a church bond or a school bond. You can usually get repayment ranges of anywhere from 1 to 15 years, and usually anything around 3% to 10% return, depending on the situation.

7. Keep your money fluid enough to get at in an emergency. There is no sense grabbing a 30-year bond if you think you might need the money in 5 years. (Duh.) Instead, maybe invest 25% each in 3-year, 6-year, 9-year, and 12-year bonds. This way, you always have money available in a short term scenario.

Again, nothing earth-shattering here. Just some handy advice I'm come across in my travels. I hope all your readers can benefit from it.