In The Money

You do not need to be an accountant or a financial wizard to handle your investments. There are some basic principles to follow, known as the KISS principle. KISS is generally know to stand for “Keep It Short & Simple” but I think the acronym can also apply to investing:

K – Keep invested

I – Invest in stocks

S – Self-direct your investments

S – Small investments possess an advantage

K – Keep invested and don’t become discouraged

There are lots of people who enter the stock market, get burned, drop out, and then hand their finances over to a broker or mutual fund seller. That is the wrong thing to do. Losing money in the stock market is all a part of learning how to invest.

I have lost thousands on bad investments but I have also made more thousands on good investments. I still come out ahead because the good investments are that much better and I have invested wisely. The worst thing I could do is become discouraged and drop out of the market.

Investing is like any skill. It takes practice and knowledge to master. You need to keep investing and learning. The trick is to start small and increase your investments as your mastery develops.

Consistent contributions are critical especially if you are depositing into a retirement account. Every contribution will help reduce your taxes payable and all of your gains are allowed to grow tax-free.

I – Invest in stocks and instruments related to stocks

The best place to park your money is in stocks. There are thousands to choose from but for long term planning it is best to pick sold big capital stocks that are the basis of your long term plan.

You can invest in mutual funds but be prepared to get poorer results. Diversification is taken to the negative extreme in these financial instruments and the fund has to overcome its own hefty management fees before it can even turn a profit for you. You can find better results by investing in a few sold companies and in Exchange Traded Funds.

Stocks come in five basic varieties. You want to avoid the last one and invest in the others depending on your investing philosophy.

a) Blue-Chip Stock – Solid companies whose steady profits allow it to pays out dividends. These should make up a majority of your stock portfolio.

b) Growth Stock – Typically technology or biotechnology companies that grow and expand. Rarely do they pay out dividends because they plow their profits back into the expansion.

c) Value Stocks – Companies that the market has undervalued. The market is not always rational and sometimes these companies make great buy-out opportunities for other firms.

d) Mad Money Stocks – Very speculative stocks that are not making any profits but have a product you believe in. Depending on your investing constitution, set aside 0-10% of your portfolio for some speculative fun.

e) The Dregs – Companies that are losing money, revenue, and leadership. Avoid these unless you are interested in betting against their decline in what is called ‘shorting’.

Some investment firms will value stocks by the size of the company in stock value. That is useful to tell you how big a company is, but it would be like valuing the denomination of dollar bills – a $100 is always worth more that a $20 bill – so what? Two companies might trade for $100 but in actual fact the worth of the company behind the stock price is like a $100 bill in US money and a $100 bill in Mexican money. They are not worth the same amount.

General Motors is one of the largest publicly traded companies but should not be considered a blue-chip. GM has had declining revenues, has debt problems, and faces very stiff competition from the Asian automakers.

S – Self-directed accounts ensures lower trading costs and control

Get a self-directed/discount brokerage account. Do not go with a stock broker if you have every intention of taking control of your financial future.

This allows you to both save money and act in contrarian ways when the rest of the market is panicking. It is possible to double your money on stocks that everyone has given up on. The fact is most investors operate on fear and emotion. You can win in the stock market if you are one of those people who blink last.

S – Smallness can be an advantage in the investing world

Not having millions of dollars is an advantage you can leverage to your benefit. Large institutional investors like pension plans and mutual funds cannot enter the market without hurting some of their investments. You on the other hand, can purchase stocks at great prices without driving up the price. You can also get out of a stock investment without worrying about driving down the price.

Having millions of dollars to invest has its own set of headaches, one you likely want to experience, but until then, you should take advantage of your smaller size as an investor. Nimbleness has distinct advantages in the stock market. Enjoy it while you are still small.

There you have it: the KISS principle for the investing world. Hopefully, you will be inspired to take control over your investments with these principles.

My first investment was in mutual funds which is what most people invest in because the mutual fund industry is very effective at promoting its products. There is a certain sense of security knowing that everyone else is also buying mutual funds.

Unfortunately for the most part we have been sold a product that does what it says but does not deliver what you need.

Yes, mutual funds do invest in the stock market.

Yes, mutual funds do diversify the risk over hundreds of stocks but…

No, most mutual funds do not give you the returns you need.

Diversify and Die?

Mutual Funds will give you built in diversification. Some of them invest in entire stock market indexes, others invest into a combination of stocks and bonds, and some invest into other company mutual funds (which are called Fund of Funds, yikes!).

Diversification of your investment money is important. You should never put all of your money into one company. Because you have no control over how that company does or how other investors react to the company’s news, it is best to hedge your dollars by spreading the risk around.

Yet it is possible to over-diversify. Because mutual funds have so much money to invest, they struggle with finding good companies to buy. To keep to the rules of diversifying the portfolio, they cannot invest usually more than 5% of their assets in one single company. This results in lots of dollars being invested into companies you would never consider.

Mutual Funds have to buy lots of mediocre or bad companies because they need to diversify and do something with the billions of dollars they have. It gives the fund shareholders the impression that their money is being invested and the fund managers gladly charge you a healthy management fee.

Active Management is an Expense

Professional management of millions of dollars does not come cheap for most mutual funds. You can expect to pay 2% up to 8% for some specialized funds. These means that if you make 5% return, you would have actually have earned 8% if the Management Fee is 3%. That means that the Mutual Fund has to earn 3% before they can even pay you.

Dollar Cost Averaging is not a benefit if you are getting poor returns. Believe me, I invested consistently for fifteen years directly into various mutual funds. I bought over $125,000 in mutual funds with the biggest dealer and ended up with an averaged return of a criminal 2.05% a year!

It makes far more sense to contribute to a money market fund where there are no fluctuations and then use that fund to make your investment purchases.

Mutual funds do have the advantage of providing liquidity. You can sell and have your cash within a couple of days. But the question is begged why are you pulling out? Investment money is money you should not need right away.

Mediocrity is the Name of the Fund

The sad fact about Mutual Funds is that most them rarely beat the market. It is estimated that only 1.3% of American Mutual Funds will beat the S&P 500. Mutual Funds are investment products and should not be seen as a complete investing solution.

Mutual Funds that get 20% returns in one year have a poor chance of duplicating their results. Companies do a better job of providing consistent performance compared to MFs. If you buy a mutual fund that did well you have a greater chance of it doing poorly the following year.

But just like the stock market where most of them are not worth investing into, the same thing exists in the mutual fund industry. There does exist a small segment that does capture decent, but not market-beating returns. If you want to delegate some of your investment dollars to the responsibility of another, then mutual funds are the way to go. But when doing so, you need to lower your expectations.

The Best Solution: Take Control

If you want diversity protection, low management expenses, and equivalent to market results get Exchange Traded Funds. They should make up a decent portion of your portfolio. You can only get those by opening up a brokerage account.

But while you are opening up a brokerage account and doing dome research into Exchange Traded Funds, you might as well look into investing into stocks. It is only in the stock market where you can get market beating returns and stay way ahead of inflation and taxes.

Stop accepting the pale imitation of stock market returns through the veil of mutual funds. Invest directly and take control.

Just like there are thousands of stocks to pick, there are hundreds of stock picking systems. And more are being created all of the time.

But just like most stocks, most of them are not worth your time.

This article will tell you what is wrong with most stock picking systems and what to look for in a system that works. There are basically three fundamental mistakes that need to be avoided.

They are:

1)    Choosing a system that is too narrow.
2)    Choosing a system that is too broad.
3)    Choosing a system that is too inflexible.

Mistake #1: Picking a System that is too narrow

Some systems will base their entire strategy on just technical indicators, multi-day candlestick patterns, or some form of divergence. The problem is that all of these systems are only using two factors: price and volume.

Imagine if you were about to invest in a horse that competed in racing. Would you be satisfied with only the weight and speed of the horse?  No matter how you graphed those two variables, they are only two criteria. You should also be interested in the breed of the animal, the competition it was racing against, the jockey’s qualifications, and the horse’s age, to name just a few important details.

Most stock systems do not factor in anything but price movement and volume. These systems do not screen for overall market conditions, industry type, company specifics such as profitability, and much more.  You need to take in the factors that matters as we investing is more than finding a magical pattern that you hope will be like Midas’s touch. Finding the right stock and timing your buy and sells takes expertise and common sense.

Mistake #2: Picking a System that is too broad

A stock system should not be too broad in its scope.  Many well intentioned professionals give vague tips and broad guidelines to follow.  Why? Most are afraid of being wrong. You cannot be right all the time but this is exactly what they may try to do.  By giving too many choices they always leave themselves a back-door to rationalize, after the fact, that they were still right.

You need to covers many areas, but also recognize the need to give precise signals to buy and sell.  Is it right all the time? Of course not, but you also do not need to be to make amazing gains.  You merely need to know the secret of riding the profits as long as possible while minimizing your losses and cutting them short.

At the end of the day you want an expert opinion that is clear and precise. That is what you get if you find a system that is neither too narrow nor too broad.

Mistake #3: Picking System that is too inflexible

Most stock picking systems available now come as plug-ins to an automated piece of software. While helping to automate the process it also takes the power away from you as the investor. What happens when the market changes? Does your rigid piece of software change with it? Will you be able to detect what variables have changed and alter them to keep your profitable streak or will you keep hoping while it drains your account?

As well, all investors are different. Your system should be able to conform to your ideologies and values and not the other way around.

You need a system that adapts to you. Are you into high reward with higher risk?  You can alter this system for making a double-bagger each month while raising your risk levels.  Do you prefer to buy and hold winning stocks for a longer period of time and squeeze every last cent from it and only trading a few times per year? Do you prefer to trade the best of the gold stocks, or high tech, or some other industry?

The best system takes the best of the stock market and fits it to your goals, comfort levels, and style.

The Solution is to Ask the Right Questions

When it comes to picking stocks you need a system, and you need a system that avoids the three mistakes. The best option is to find a stock picking system that provides to you the control and precision that you need to win the investment game.

Do some search engine research with the terms “stock picking system” and you will find lots of possibilities. You need to evaluate them by asking the right questions. Make sure you ask if the systems you are looking at provide precision and adaptability. When you find the system that answers those questions, you have found your solution.