I. overview
II. pay down your debt
III. own a home
IV. get health insurance
V. spy
VI. be a boring coward
VII. market is rigged
VIII. initiating a position
IX. trading around your position
X. picking stocks
XI. buying/selling stocks
XII. why good stocks go down
XIII. baby sitting your investments
XIV. example for retirees
XV. creative accounting
XVI. don't forget what is money
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I. overview
i’m writing this blog for my dear family and friends who’s been asking me for investment advice. investing is like driving a car. you can drive safely or drive drive like a maniac at 120mph. driving can also be very dangerous if you don’t know how to drive or you lack information so it would be irresponsible of me to give snippets of incomplete advice here and there. so i told them to wait for my complete blog. here it is. this blog is probably the mother of all investment advice for the common individual.
my friends and family ask me for investment advice because i play with an open hand – i post my buys/sells in facebook and they know i have an amazingly high success rate. in mid 2011, i kept screaming in facebook recommending those with credit or cash to buy the dirt cheap US homes - https://ian-crystal.blogspot.com/2011/09/once-in-a-milenia-opportunity.html and now the home prices have doubled. i also wrote this in mid 2011 - http://ian-crystal.blogspot.com/2011/07/you-may-be-burning-120k.html
i will try to avoid spoon feeding the reader. my goal is to give the reader a solid framework which they can build upon by getting more information in the internet. for example i will not explain here what s&p500 etf (SPY) is. the reader should google this to learn more.
investing is a never ending learning curve. especially that an investing strategy only works if a few people use it. example, if everyone is buying gold and nobody is selling, how can you buy if nobody is selling? TOINKS !!! somebody will only sell at an astronomically high price which defeats the purpose of investing.
how you invest depends on your net worth.
investing is a guessing game. a good investor knows how to make a good guess. my article https://ian-crystal.blogspot.com/2019/06/politics-for-dummies.html contains lots of tips on how to make a good guess which are too numerous and lengthy to include here.
II. pay down your debt
the top priority is to pay down your debt before you even think about investing. it would be very stupid for you to be buying stocks or bonds while also paying those high interest rates on your credit cards. the best investor of all time, warren buffet, achieved 15% a year return on his investments. you will be very lucky to achieve 10% return. credit cards have 15% interest rates. that means even if you achieved a spectacular 10% return on your investment, you still lost 5%, or you would have gained 5% more by simply putting that money to lessen your debts.
but of course if your company matches your 401k contribution you have to take advantage of that first.
III. own a home
the next priority should be buying your own house. you should not be putting money in stocks if you are just renting. real estate should be your highest priority. but you also need to balance between stocks/bonds, real estate and cash. example if the equity in your home is $10k, then it is ok to put $10k in stocks/bonds and keep $10k in cash. equity means if the value of your home is $300k and the loan amount is $250k, your equity is $300k - $250k = $50k. always know your approximate net worth and the break down or allocation of your wealth.
IV. get health insurance
make sure you and your family have health insurance. it would be just as stupid if your wealth can easily be wiped out at any time by medical bills because you don't have health insurance, yet you are investing in the stock market. if you live in the philippines, there's no health insurance similar to the US. but if you already have enough wealth or properties that needs protection, it might be a smart move to sell a portion of your properties and diversify it into mutual funds(stocks/bonds) and get free health insurance along with it. the minimum investment for getting the health insurance benefit is quite big but it doesn't hurt to inquire and find out if this would be good for you. contact my sister-in-law, search chiqui c. crystal in facebook and pm her.
V. SPY
you are very lucky. just a few years ago, you can only buy/sell the S&P500 through a mutual fund, with high trading fees and penalties for early withdrawal. now you can buy/sell the S&P500 just like a stock through SPY with the same low trading fee as a stock. on my ameritrade the trading fee is $7 and on my fidelity IRA it's only $4.
if you are investing $10k, just buy the s&p500 etf (SPY). putting ALL your nest egg in a savings account is more dangerous than investing responsibly. example if today, $120k can buy a $100k condo and a $20k car. 10 years from now the price of that same condo is $150k and a similar car is $30k. if you placed all your $120k in a savings account you practically lost $50k + $10k = $60k. unless there was a 10 year deflation which has never happened in US and Philippines (although it happened in japan). but even then if you invest properly, even if there is deflation, your buying power is still ok. example if you bought a property and the value goes down because of deflation, chances are prices of everything else like food is also down so your purchasing power has not really diminished.
japan had multi-year deflation because of a stagnant population. this is not a problem in the philipines and US. it is also much more difficult for japan to bring in immigrants to boost their population or workforce because of their language barrier. an immigrant needs to learn japanese to live in japan. the US has no language barrier problem. besides, government policies always favor inflation because powerful people own properties and powerful people influence government policies. so never bet on deflation. always bet on inflation. do not put your nest egg in a savings account. only keep enough money in a savings account for your short term needs or plans.
VI. be a boring coward
in investing, bravery is for very smart people. if you are reading this blog chances are you are like me. i’m not smart enough to make brave decisions. investing involves so many decisions. i only have 1 word of advice when it comes to investment decisions:
DON’T
don’t try to decide. for example, you have $10k and you are trying to decide whether to buy stocks, the answer should always be – YES AND NO. this means you put $5k in SPY (yes) and $5k in cash (no). if you don’t buy stocks, inflation will wipe out your $10k. if you put all your $10k in stocks, you could lose a lot if the market goes down. if you put $5k in SPY, you are happy when the market goes up. if the market goes down, you are also happy because you can buy some more at a much cheaper price.
the trick is not to worry. do not beat yourself up. any decision that follows the basic rules pretty much has the same chances. do not try to predict what will happen because what happens next depends on the complicated feelings of billions of people.
the most important rule in investing is to be diversified as much as possible.
most investment rules really just means 1 thing – DIVERSIFY !!! this means you should never make any big decision. you should break up any big decision into small, almost insignificant decisions. example, buying $5k of SPY is actually 500 small decisions because it’s an etf composed of 500 big companies all over the world.
if the outcome of any decision excites you, THAT’S NOT GOOD. the rule of thumb is – when a decision goes your way, you should just yawn. if you are jumping up and down for joy, you are basically playing in the casino meaning the law of averages is not on your side. watching your investments grow should be like watching your hair grow.
google "difference between investing and trading". stock trading individual stocks (instead of just spy) is like a jungle. it’s not for the faint of heart. if you have lots of real dear friends, chances are maybe trading is not for you. i am a happy lone wolf.
i have this investing battle cry – “why don’t you just go to a casino you moron !!!”.what does this mean? consider this fact – if you have $10k right now you *** CAN *** double that by going to the casino and betting it all on red or black in the roulette table. so why don’t you? (if you are not laughing at this joke or don’t understand my point, you should not be trading individual stocks – stick to SPY). similarly, if your investing rules forbid you to buy a stock or wait for a certain price and the stock doubles in 2 months, you should not regret your decision. regret is for morons. you should only regret if you disobeyed your rules. even if you lose money on a trade, you should never regret it or feel bad as long as you followed your rules. you can improve your rules of course as time goes by.
just follow the rules in this blog and the law of averages will be on your side.
VII. market is rigged
the market is rigged and that’s great. this blog will show you how to use market or stock manipulation to your advantage.
nobody knows the direction of the market or price of any stock. it's mostly just instinct or luck.
do not believe any prediction you read in the news. however, keep reading the news, opinions and even predictions to learn:
- what is going on
- what are the possibilities
- why something happened or how the market works
- detect possible manipulation and take advantage of it
- which stocks are popular or highly visible (i will explain later why you need to stick to highly visible stocks).
avoid stocks/bonds from countries with corrupt/shady governments. US is always the most solid investment. don't worry about our debt - https://www.oppenheimerfunds.com/advisors/article/how-i-learned-to-stop-worrying-and-understand-us-debt
there are many kinds of stock manipulation (google for more info). the most common is pump and dump. paid pumpers write articles or flood the media to raise the price of the stock so that their bosses can sell their stocks at a higher price. stock bashing is similar to this but instead the intent is to drive the price lower so they can get in at lower prices or the shorts can cover. example if i were the koch brothers i would hire people to bash solar so that i can rotate my fossil fuel assets to buy solar stocks or companies at a much lower price (koch brothers has $50 billion net worth they need to put at least $5 billion in solar to make an impact. there won't be enough sellers to fill their order. they can only buy slowly or at much higher prices. so they would pay sean hannity to bash solar so they can get in at lower prices).
avoid over hyped or spectacular stories or speculatives. if you read an article about a stock or emerging product or technology that is so spectacular and exciting – do not buy it. just keep it in your radar. chances are – the story may be true but the prices are already overvalued and they want to cash out so they pay pumpers to entice ignorant investors to buy. these big guys have millions of shares. they can’t just sell anytime – they need lots of buyers (unlike small time individual investors like me, i can sell and buy anytime). note this rule only applies to speculatives - companies with no earnings).
i have a 50% rule on spectacular stories or speculations. i wait for the prices to go down 50% before i buy. even then i treat them as speculative so i only allocate 1% of my portfolio instead of the normal 2%. sometimes they only go down 25% and i'm stuck in the sidelines just watching the stock double and triple while i get left out. but that’s ok. because most of the time, they do go 50% down, sometimes even more. remember my “why don’t you just go to a casino you moron” battle cry. as long as you follow my rules on stock picking and buying/selling (later in this article) you should be protected.
never believe anyone who claims they know a stock or a strategy that will double your investment in a year because 1) it’s probably illegal (insider trading) 2) why the hell would they share it with you? a strategy or information is only useful if only a few people knows about it.
always take stock or market predictions and advice with a grain of salt. even from analysts with phd in economics. a phd in economics in investing or trading is just as useful as knowing the rules of golf when playing in a golf tournament. it's just the easy part. time, experience, perseverance and discipline is the only thing that makes you better.
VIII. initiating a position
i will discuss initiating a position first before stock picking because most readers will probably just trade SPY. if you are investing $20k and the market or SPY is down 10% from it’s highs, $15k would be a good starting position. if it’s down 20%, i would just go all in and put all my $20k in SPY. if the market is at an all time high, i usually just put 50% in ($10k in this example). note this is just an example. for individual stocks, it depends on the stock’s risk/volatility based on the stock’s historical chart (i use yahoo finance charts).
the remaining cash is like your ammo when you go into battle. you need enough gun powder (cash) to defend your stocks. example apple went down from $700 to $350. that means if your limit is $10k per stock, maybe your initial position should just be $5k if apple is near it’s all time highs. then you buy $1k everytime apple goes down 10% and sell $1k everytime apple is up 10%. if apples is down 20% from it’s highs, $7k would be a good initial position. 10% of 1k is $100 profit maybe in a span of 2-3 months. (this is called “trading around your position” which i will explain further in the next section). does this excite you if your portfolio is $200k? of course not, so congratulations – you are a “boring coward”. however you have 20 other stocks. so you are not really waiting 3 months for some action. chances are twice a week you are getting some fun action (albeit cheap fun). i was having fun posting my apple trades in facebook when apple was range bound between $350 and $550 (google and learn about stock splits to know why apples is now just $100)
one of the big challenges in investing is to temper your love for a stock and resist the temptation from buying too much or being overweight, especially when everyone is saying super awesome things about the stock. always stick to your rule. again, my rule is never be excited on any single event or outcome. for example, if your portfolio is less than 50k, it’s ok to set a 10% limit, meaning no single stock should be over $5k (10% of 50k) in your portfolio. for bigger portfolios, the percentage should be lower. example for a $300k portfolio, 5% would be a good limit. but then again this depends on the stock’s risk and volatility. for wild speculatives, 1% is a good limit. for boring consumer staples like general mills or kellogs, 10% is ok. my examples later will explain this better.
IX. trading around your position:
if your net worth is $10k-$20k, you still should avoid individual stocks and stick to SPY. but this time you can trade around your position. you could buy $10k as your initial position and then everytime SPY is down 5% you buy $2k and whenever it’s up 5% you sell $2k. 5% of $2k is $100 profit. but note the usual trading fee in a typical US brokerage account (td ameritrade, scott trade, fidelity, etc ...) is $8. so $8 buy, $8 sell trading fee = $16. so your profit is down to $100 - $16 = $84. this is why it’s not worth it to do this if you only have like $5k to invest because the trading fee will just bite a big chunk out of your profits.
the advantage of this technique is if the market gets stuck in a trading range for a very long time, you will still make money. if the market goes up you are happy because your core positions goes up. if the market goes down you are also happy because you can buy more at a cheaper price. the disadvantage is if the market goes up in a straight line you will under perform. but since when does any investment ever go up in a straight line? maybe short term it does, but not long term. don’t worry about beating the market. if it happens it happens. your goal is to beat inflation and get decent sustainable income.
i believe the market will be range bound long term because:
1) the size of the US economy is 14 trillion. In the 1950’s it was around 200 billion. It is easy to double 200 billion or even 1 trillion but how in the world do you double 14 trillion at the same growth rate of the past century?
2) technology has plateaued. There was the steam engine, then came electricity, cars, telephone, then computers, video games, then cell phones then smartphones. Of course there will still be new stuff coming but I don’t believe it will be enough to sustain the growth rate.
3) Only population growth will grow the economy, but I believe it will be at a much slower growth rate, with a lot of ups and downs along the way. And that is why I believe the market will be range bound. population growth will slow because technology increases standard of living. humans make less babies when they are pre-occupied and having fun with other stuffs.
so don’t feel uncomfortable with 50% cash in your portfolio, especially we are at the market highs. but if the market goes up in a straight line, you will still make good money, although you will under perform. which brings me to one of my favorite rule:
never worry about under performing the market. the goal is to beat inflation.
this rule not only protected me from the tech crash and housing bust, it allowed me to profit big from other people’s misery and retire at 39 years old.
with climate change causing more extreme and frequent natural calamities, this increases the probability a recession. example a strong storm could easily flood the financial district of new york which could cause a global recession - Predicting the 9 biggest weather disasters in the next 30 years | Jeff Masters
next you choose the number of trading stages or amount of trading chunks. in this example, i chose $2k for every 5% ups/downs. this also depends on the stock’s volatility. this should come easy by looking at the historical chart. historically a usual market correction is 20% down.
if at this point you are confused at what i’m talking about, that means you don’t have the instinct or natural ability for trading and you should let your money be managed by a professional stock broker. you can't teach a fish how to climb a tree. investing in mutual funds or getting advice from an investment consultant is perfectly fine. contact
note that you can apply the trading techniques i’m teaching here on any investment vehicle including real estate if your net worth is big enough.
you can even use this technique on SPY to simulate bonds. especially during these period of rising interest rates – bond prices are going lower. you can simulate bond like investment by putting 50% into SPY, and leave enough cash to trade $2k on 5% ups and downs of the market. then, when interest rates are high enough, you can start diversifying into bonds.
X. picking stocks
(i keep a log of my updated stock picks in - https://ian-crystal.blogspot.com/2018/11/stock-picking-for-dummies.html)
if your investment amount is above $20k, you can start investing in individual stocks (or a mixture of SPY and individual stocks. the trading techniques i use for individual stocks is similar to playing with the overall market (SPY). but this time, you need to choose among thousands of stocks.
i am not smart enough to value a stock well. i also don’t have the time. i only devote 30 minutes a day for trading. sometimes just 5 minutes if there is nothing special going on. i let the smart people in wall street do all the fundamentals/valuation and piggy back on their hard work. the disadvantage of course is that i’m always late to the party. i make less money because by the time i buy the stock, it’s already fairly valued and maybe already overvalued. i will never be super rich but my strategy gives me enough and stable income from my investments to support my lifestyle, even during market crashes, corrections and downturns. 7-10% average total return is good enough for me.
if i follow strategies that can easily double my money in a year, it means i can also easily lose all my money in a year. that is low reward and high risk because living poor is physically painful but becoming richer has diminishing returns after a certain point. example, in terms of physical comfort, there is not much difference between owning a brand new toyota corolla and owning 5 top of the line luxury cars. you can only drive 1 car at a time. you can only sleep at 1 house at a time. if your bed is comfortable and the temperature is comfortable, it’s not much difference from sleeping in a mansion.
“it is said that the two happiest days of a yacht owners life are the day they bought the yacht and the day they sold it.”
the #1 criteria i look for in a stock is – NON-DYING BUSINESS. it does not even have to be growing. i just need to avoid companies or stocks that has a remote chance of going out of business. example, i got out of cigarette companies 6 months ago. maybe it will take 50 years more before the cigarette industry starts to die out. maybe philip morris still has room to double or even triple. but why gamble? big fund managers buy cigaratte stocks because they have the time and expertise to evvaluate stocks and take advantage of short term discounts. they also have no choice because stocks are in short supply so if they mange $500 million or $2 billion, then they have to put money in stocks with very uncertain future (which is ok because they know how to price in the uncertainty of these stocks).
that is why my favorite stocks are food producers. humans will always eat. i avoid restaurants because they are more of a luxury. fast food is ok but harder to game. domino’s pizza is ok. my favorites are food manufacturers – lw, sjm hrl tsn cag wwav hain calm gis k krft. i sold hain and wwav because the drought in california might increase the prices of almonds and other crops.
detailed information about the products of companies is in their 10k report which you can download from the company’s websites. their profile in yahoo finance also gives more general info if you just want a quick glance. as i explained earlier, i normally just avoid the financial statements. that’s because these are usually already priced in. example if the company has too much debt, then the stock price will be lower and it’s ok to buy because as long as their products are something people will continue to need and buy in the long term, eventually these negatives will go away. if the company has pristine balance sheets, then the stock price will be so expensive.
you can also just google to know their top products. example, if you google "top products of pepsi" you will be surprised it owns quaker oats, lipton tea, doritos, lays potato chips, and tropicana fresh juices.
i even avoid apple. because what happened to blackberry or DELL could happen to apple someday and i don’t know when. i did buy apple when it went from $800 to $350. i range traded apple between $350 and $650 because it had too many catalyst that could easily send the stock higher, even if iphone sales continued to deteriorate. their cash was like 200 billion so they could increase dividends and buybacks, or buy growing companies like netflix (just like pepsi who’s soda business was deteriorating but they bought doritoes and tropicana which made their stock rocket higher). apple was just a trade for me not an investment. apple is probably a great investment if you really are smart enough to know what really is going on, but i’m not that smart.
the big reason why i got out of apple is i feel the smart phone technology has peaked so there is less reason to buy a new iphone. maybe i’m wrong. but nothing substantially new has come up lately. the same thing happened to the PC business. DELL was the #1 PC maker and it crashed and never recovered. the apple watch might be another blockbuster but my gut feeling says otherwise.
i also avoid any bricks and mortars retail like Best Buy because online retail is killing them. again, if you are smart enough to do your own valuation and computations, i’m sure there are still lots of non online retailers that are good trades, but that’s not for me. of course this is just a general guideline. example when it comes to home depot, you don’t expect anyone to buy their flooring tiles or a 5 gallon paint online. even when it comes to small items, customers usually need them immediately for their projects or they need to make sure it’s the right fitting or color which is hard to verify online. besides home depot has an awesome online store. note i don’t own home depot or lowes because i already own rental houses so i already have enough exposure to real estate.
i even avoid clothes and shoes because fashion is so unpredictable with fickle consumers. it’s very hard to game, unless you live in the mall. hanes and under armour is in my radar but i will only buy it during a huge market correction (i will explain this technique later).
i also avoid products that are so durable the customer usually just buys once. examples are farming/mining equipments (de cat joy) and guns. guns (swhc) can be passed on from generation to generation. another example is tools. apple is somewhat like this. i only buy iphones that are second hand (less than $100) and they never ever break. iphones works forever unless it gets stolen or falls in the water which is rare. i only upgrade if there is a new feature i need. i upgraded from iphone 3gs to iphone 4s only for the camera flash and 3g internet. since then, i got everything i need. and i’m a heavy tech user.
this means i like companies with the razor/blade business where they give the razor for free but the customer has to keep buying the blade. my favorite is pll, the top seller of filters. filters are something customers need to keep buying. similar to this are companies that act like toll booth operators. example are oil pipe line companies (etp kmi lng). i also like subscription based businesses like crm. i also like waste management/collection companies (wm) which is similar to utilities because humans will always produce trash.
however, i got out of utilities this year because of the possible threat from solar rooftops. same reason why maybe in 5 years, i will get out of oil and natural gas. this is also why i like solar. i have no idea which company wins eventually so i just buy the etf – TAN. i do keep a small position in fslr because they make one of the most efficient panels. it may take 10 years for solar to be economical but i have the luxury to wait because i don't have clients breathing down my neck pressuring me to perform year in year out.
i also avoid stocks with no moat or stocks with easy barriers of entry like home builders, apparel makers, travel websites and hotels. it’s good to own a hotel, it’s bad to own hotel stocks. i know food manufacturing has no strong barrier of entry and lots of competition but demand for food always overwhelms the supply. besides some foods do have a moat - taste. example, anyone can make soda at home nowadays but people have already gotten used to the taste of their favorite soft drink like coke and the recipes for these drinks or snacks are usually either a secret or patented.
i avoid businesses with easy barriers of entry because too much competition is never good for a stock. this is why airlines were not investable for a long time until recently where the mergers created an oligopoly (i’ve been range trading delta airlines recently). monopoly is illegal in the US, so i settle for the next best thing – duapoly (altera, boeing, google, ebay) or oligopoly.
how do i know they are extremely overvalued when i don’t do any valuation? because i’ve read many articles saying so. yahoo quote always has a “headlines” section or option which shows all the latest news info about the company.
before i pick a stock because i like their products, i always do 2 things:
0) google "XXX motley fool" and "XXX seeking alpha" where XXX is the stock ticker symbol. these articles usually give you the high level or long term factors to consider. look for titles that says something like "is XXX a buy?".. ignore the articles that talks more about the numbers or earnings. keep in mind you only care about the long term and you don't care about the short term performance of a stock.
1) scan the headlines
2) look at the PEG in “key statistics”. a PEG of under 2 is good. however for really stable companies with stable cash flows like waste management companies, PEG of 3 below is good enough. for oil pipeline operators 5 and below is ok.
3) if the company has negative PE, make sure their forward PE is low enough
4) if the forward PE is still negative and i really like their products (example diabetes plays – DXCM PODD), i still buy the stock as a speculative (i will explain how to play speculative stocks later).
choose only highly visible stocks. popular or visible stocks have less chances of financial fraud. top retirement funds usually own these popular stocks and you don't wanna mess with retirees because they are the ones who are politically active so the government will rain down on you if you mess with them. example, the CEO of enron is serving 24 year jail sentence. these are millionaires, they are not people who have nothing to lose. these people are afraid to go to jail, especially now there are stiffer penalties for fraud in the sarbanese-oxley act. the founder who is a billionaire even died of a heart attack before his scheduled hearing. avoid under the radar stocks because it’s easier for them to get away with fraud. enron fiascos don’t happen often. even if enron was one of your positions and you followed my rules in this blog, you should have been ok. yawn !!!
a good place to google for favorable stocks are:
1) 52 week high list
2) ibd top 50 list
3) warrent buffet’s portfolio
4) jim cramer’s charitable trust stocks
my other favorites (aside from those i already mentioned):
gld – gold bullion etf. there are many articles about the advantages of owning gold just google it. never buy gold miners because gold is getting harder to find. also NEVER BUY COMMODITIES TIED TO FUTURES (example ung (natural gas), uso (oil)). basically if the word “futures” appear in the profile summary, stay away – it’s like playing in the casino. the reason for this is "contango". google "contango" for more info but just to give you an example, just look at the chart of these etf's and compare them with the actual price of the underlying commodity. example, oil could go from $50 to $90 in 2 years while USO only goes from $15 to $16. slv (silver) is ok because the shares are tied to the physical asset just like gld.
my most up to date picks are in https://ian-crystal.blogspot.com/2018/11/stock-picking-for-dummies.html
when interest rates are high enough, bond prices have stabilized and it is ok to buy bonds, i will spread 50% of my portfolio among pgf, tip, hyg, tlt and ptrax (50% in stocks, no more cash).
to me the #1 long term investment right now is a farm, but only if you already have enough cash flow because farms are usually dead money unless you live in the farm and manage it yourself. but you are positioning yourself for the upcoming worldwide food shortage where farmland owners would be the new kings of human society. i found some stocks that are tied to farms but they are too risky because they are located in countries with unstable governments who could sequester the farms anytime.
after you have created a list of your favorite stocks, the next big question is how much to buy?
the most important factor to consider is the size of your portfolio because you need to be diversified as much as possible (at least 10 stocks from different sectors) and you need to trade around each position, but the trading fee is around $8. it’s not good to profit only $20 on a trade that cost $16 ($8 to buy, $8 to sell). set up your portfolio such that you will make at least $50 on each trade when you trade around your position.
if the market is at or near it’s highs, i maintain 50% cash (or 50% bonds during periods of high interest rates). example if your portfolio is $300k, $150k would be in cash, $150k in stocks. if you have 30 stocks in your buy list, this means you buy only 150k/30 = $5k worth of each stock. however, speculative stocks should only be $2k or even $1k depending on risk/volatility. in this example my initial position on highly speculative biotech stocks would only be $1k. however, for more stable and very strong stocks like boeing (ba), my initial position was $10k.
note that since you are maintaining lots of cash anyway, you should not hesitate to buy stocks with a long term catalyst. for example, when the consensus on predictions say oil won’t recover until 2017, it should be ok to start buying now (2015) because even if your position is dead money, it would be just like part of your big cash position. this way if the catalyst happens earlier, you can reap the rewards.
the next challenge is to plan how you trade around each position. this all depends on the stock’s risk/volatility and how much the stock has gone down from it’s highs. the first step is to predict a trading range, based on the stock’s chart. try to predict the bottom floor based on it’s history (look at the chart). example spy or gold has a bottom floor of 50% meaning it never goes down more than 50%. so if the size limit of your position in gld is $20k, the price is $130 and high was $180, the bottom is $90, you could buy $10k, then buy $2.5k everytime gld goes down $10. this means you have room for 4 buys. then everytime a buy is up $10, you sell it. however if gld goes up to $140, you sell $2.5k of your initial position. but you also need to set a minimum position where you don’t sell anymore even if the price continue to go up. a good minimum position is $5k in this example.
when gld goes up to it’s all time highs of $180, this means your position is probably now just $5k, which means you have now room for 6 buys of $2.5k each. so (180/2) / 6 = 15. so this time, you buy $2.5k everytime gld is down $15, you buy $2.5k worth.
for very risky speculatives like mnkd (inhalable insuline), i usually wait until the stock is down 50% from it’s highs before i even touch it. even then i only put in 1% of my portfolio as my initial position and setup a much wider trading range.
*** BUCK THE MARKET = understanding this term is important to understand my range trading techniques.
actually i don’t automatically buy/sell when a stock hits my desired price. i wait for it to buck the market. example when gld goes down and hits my buy level, i wait for gld to start going up against the market before i buy. example i only buy if gld is up 1% and the market is down 0.5%. if the market is up 0.7% and gld is up 1%, i don’t buy because that means gld is just moving with the market. *** this is very important because most of the time it protects you from buying too much when your stock goes down a lot **** that is why when my alb (lithium) stock went from $139 to $77 i didn't end up buying too much on the way down because it only bucked the market twice.
similarly, when gld goes up and hits my desired sell price, i don’t sell imediately. i wait for gld to go down against the market before i sell. example if gld continues to go up, i don’t sell, no matter what the market does. if it goes down but the market is also down about the same amount, i also don’t sell because that probably means gld is only down because of the market. i only sell if gld is down compared to the market. example, gld is down 0.5% while market is up 1% or gld is down 2% while market is only down 0.4%.
note that only small time individual investors can do this strategy because if you are buying/selling only a small amount of shares you can always buy/sell anytime close to the market price. i think it’s because your order just gets included or lumped into the many huge orders waiting to be executed. big money fund managers cannot do this. sometimes it takes them days to buy/sell a stock. that’s because every time you buy, someone needs to sell. if you are managing a $2 billion fund, that means a typical buy would be around $10 million, and if you are buying, that means it’s a good stock which means there are very few sellers. if you insist on buying even if there are not enough sellers, the price of the stock will go up to motivate the seller to sell so you end up buying at a much higher price. it’s very tough. that’s why you have to be very smart to be a mutual fund manager. you have to be ahead of the crowd. you have to be good at valuing stocks and spot under valued stocks before anyone else does. but of course the rewards are also great – if you are managing a $500 million hedge fund and your fee is 1% a year, that means you earn $5 million a year.
think of a big fund manager as a captain of a giant cargo ship while a small investor like me is driving a jet ski. my jet ski is more agile and faster than the cargo ship which can take forever just to make a 180 degree turn but the cargo ship can carry a lot more stuff.
another analogy is – a big fund manager is like a blue whale that needs to eat 8 thousand pounds of food a day while i’m like a tiny parasite fish nibbling on the whale.
XII. why good stocks go down
you might be wondering why a favored stock would go down. if it’s great, why would anyone sell it? if the smarter big money fund managers are selling, why would i buy it?
1. etf current
most stocks are part of a basket of other stocks (e.g. indexes, mutual funds, etf’s). when a basket is sold, all stocks that belong to the basket are also sold. example when the market gets spooked because greece is defaulting on their loan, many just blindly sell the S&P500 so even stocks that has nothing to do with greece also gets dragged down by the etf current.
2. margin requirements
another reason why good stocks go down is when big hedge fund managers using margins make a wrong trade, they have to sell other stocks including good stocks to raise money to meet the margin requirements. example, when commodities go down, that’s suppose to be good for companies that use these commodities. example, chemical manufacturers and paint manufacturers use a lot of natural gas. so the smart move is to buy them when natural gas goes down unexpectedly. but instead these stocks go down because big hedge fund managers who bet long on natural gas using margins will have to raise cash to meet the margin requirements so they will have to sell other stocks, including the paint makers.
a lot of hedge funds also bet against the dollar so when the dollar strengthens, they will have to raise capital to meet the margin requirements. so they sell great stocks which causes them to go down,. so you can buy them at a discount.
3. short term negatives
stocks with great long term stories also go down because of short term temporary negatives. that’s where you need to pounce and take advantage. fund managers need to perform or beat the market year in year out to keep their jobs. therefore they will have to sell even if the negative is only temporary. example, a great oil company with bright prospects and fast growth can get cut in half if price of oil goes down. even if oil is expected to recover in 3 years, the fund managers will have to sell. that’s where i buy because i can afford to wait. i don’t have clients breathing down my neck demanding performance. why don’t i just follow the fund managers? because nobody knows when oil will recover and when it does, the prices of the stocks are already too high. why don’t we just start buying when it starts going up? because there is such a thing as a head fake or a dead cat bounce when a stock looks like it’s going up but then it goes back down the next day. it’s too tough. it’s better to just buy and wait.
actually, the strategies i’m teaching here under performs or does not beat the market during a strong bull market. but in the long run, it has beaten the market big time. but i cannot use my strategy if i have clients because if the market is up 20% that year and my fund only went up 10% my clients will get angry and withdraw their investment. but if there is a big crash like in 2000 and 2007 bear markets, then i can buy the great stocks at a huge discount and make lots of money when they recover. also if the market gets stuck in a rut and becomes range bound, i continue to make money and beat the market.
4. sector rotation
another reason a good stock goes down is sector rotation. the economy is a cycle and at certain points in the cycle, certain sectors get favored by the big fund managers so the stocks of those sectors go up while the stocks of other sectors go down. this is where i take advantage and buy.
5. paid bashers (opposite of pump and dump)
i also have this crazy conspiracy theory that when big funds and oligarchs need to get in a stock or industry, they need to drive the price down first because of the large amount of shares they need to buy. so they bash the stock or industry and big funds sell the stocks to drive it down. note the fund managers don’t actually use their personal money so they really have nothing to lose. it might bring down their fund’s performance to a couple of percentage points but imagine the amount of money they personally make, especially if they short the stocks before it goes down. or better yet, a fund manager can team up with a few other fund managers to move a stock price and they make bets ahead of the move using their personal money. there are probably SEC rules that prevents this and if these actually happens i’m sure by now there would be stories or at least rumors about it. so far i'm the only one talking about this possibility. i'm not complaining becaues i’ve made lots of money with this theory because it gives me confidence to buy a good stock as it goes down.
XIII. baby sitting your investments
my favorite daily market recap is cramer’s mad money recap (thestreet.com). most of my knowledge about investing comes from cramer. he gives you valuable knowledge about how the market works, what's going on, why it's going on, the possibilities and risks, and the best stocks to choose from. but you still need to make the tough decisoins - choose which stocks to buy, how much to buy, and when to buy and sell. of course because he has hundreds of suggested stock picks you can't just buy all of them and and he tells you when to buy and when to sell on just a few of them per day..
to monitor the stocks daily, i shared my techniques and tools in a separate article - https://ian-crystal.blogspot.com/2013/11/stock-stalker-script.html
to get an estimate of your US properties, go to zillow.com. to get an estimate of your philippine properties, go to olx.com.ph and search for simlilar properties in the area to find out their selling price. it's good to do this once a year.
XIV. example for retirees
here's a time consuming but fun and safe strategy for retirees: 2% core, 1% trades
each core position is only 2% of your portfolio. then follow my strategy above but when you trade around your core position but the size of each trade is only 1%. however the number of stocks should not go over 50 or you will go crazy.
example, if your portfolio size is 100k, then each core position is only 2k. this means you should just own 25 stocks at a time (25 X 2k = 50k + 50k cash = 100k) because you still need to park 50% in cash.
then whenever the stock is down 5% from your last buy AND it bucks the market, buy 1% or 1k. when the 1% buy is up 5%, sell when it bucks the market (e.g. market is up 1% while the stock is down 1%).
if your portfolio is 200k, you can now own 50 stocks. but if your portfolio is 400k, then your positions are now 4k core and 2k trades because your number of positions should not go over 50.
it's not that time consuming monitoring 50 stocks because you only check the headlines if it bucks the market trend by a wide margin. it's also easy to quickly check which stocks bucked the market by sorting the "change %" column in your yahoo portfolio view.
just imagine 5% of 1k is $50 so minus trading fees (fidelity) = $40 profit. that's a lot of money especially if you are retired in a low cost place like the philippines. $40 = P2k. my P3 million ($60k) luxury condo rents for only P15k ($300) a month so $40 is pretty significant. you could easily average 5 trades a week if you have 50 stocks so that's 5 X $40 = $200 X 55 weeks = $11k. so that's around 10% income excluding the gains of your core positions. if you include capital gains that would be 15% / year (conservative). compare that to my condo investment which only makes around 10% (considering 5% / year increase in property value). you might ask, is 5% difference worth all the time and effort? why not just put everything in rental properties? if you do that then you are not diversified and if there is a real estate crash you can't take advantage of the dirt cheap prices and buy buy buy !!! besides 15 minutes a day average is not that much and it gives you a fun way to be informed on what really is going on in the world and not just be a brain dead ideologue. it makes driving in traffic less boring because you will be listening to financial pod casts. waiting for your girlfriend shopping in the mall won't be that boring because you can read the latest market news on your smart phone.
of course it's not consistent. sometimes you get only 2 trades but each is $100 and sometimes 2 weeks passes where there is no action but then the following week you get 10 trades. sometimes i even get $200 profit on single $1k trade if it keeps going up without bucking the market (only sell if it's past 5% profit and it is down while the market is up).
and here's the icing on the cake: if the market goes down, you eventually make more money. remember your stocks have very long term thesis. example if lw (potatoes) goes down because of high inventory or accounting scandal, as long as kids all over the world from all cultures continue to love french fries and as long as lw continues to dominate world market share, just keep buying using the rules that i mentioned (e.g. only buy when it bucks the market trend). even if lw goes down 50%, using my rules you probably only would end up with 4 incremental buys so there is no danger of too much dead money if it stays down for a very long time and remember while it stays down you could continue to range trade at that level so sometimes long before the price recovers, you already made a lot of money and when it does recover, you make even more money. this happened to me so many times (e.g. appl, fmc, lng, eog, etc ...). however of course if the thesis or catalyst for the stock is broken you sell everything even for a loss which happens rarely and because you are so diversified it won't be that big of a deal (this happened to me with gogo)
XV. creative accounting
i usually trade in my IRA account which is a legal tax shelter. in my non IRA account, i'm always 50% stocks and 50% bonds so in the 2008 crisis, i made a lot of money by rotating my bonds into assets that became dirt cheap because of the crisis. mostly properties and index funds to avoid a wash sale. i then converted my 50% stocks into bonds. so now i have a humongous carry over loss on my tax returns that i can always use to not pay taxes on future capital gains and decrease my taxable income by 3,000 each year. despite all my success in investing, if you look at my tax returns, it looks like i'm the biggest loser.
XVI. don't forget what is money
the best way to protect your money is to spend it on something you really love or makes you happy. don't forget money is for your quality of life. if i continue to work i can make $120k more a year, but i lose billions worth of quality of life. freedom to me is priceless. of course it's different for other people, especially if you have family because the rewards you get for working all your life to raise a family is also priceless - (https://ian-crystal.blogspot.com/2017/04/knowledge-bomb-on-self-esteem.html)
(for more of my knowledge bombs, click the "ian's knowledge bombs" banner at the top of this article and choose any article in the table of contents that piques your interest)
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