Investing 102

[XLexusTech]

Originally Posted by GregWeld

So today was a real mixed bag -- and while the market was a total "ho hum" -- when I looked at my Schwab account it was way mo better than ho hum! So what gives?

I call it the law of large numbers - and I've written about it before... but here's where it starts to affect YOUR accounts... BALANCE. And I don't mean your account balance - but the balance of the shares you have in your accounts -- and also the diversity.

Since I have outsized positions in this account by NUMBER OF SHARES in certain names -- they can really affect your day - either GOOD or BAD... and that's why I mention the balance of number of shares....

I have (again - just using my own real life as an example here) 20,000 shares of Altria (MO).... so when it moves a whopping .23 a share (like today) the LAW OF LARGE NUMBERS takes hold.... 20,000 X .23 = $4,600 BUCKS! A nice days work if you could get it! BUT -- Dang that big butt in the room -- it works on the way DOWN as well....

This balancing act is far harder to achieve for "newbs" or smaller accounts - let's say "smaller is anything under 100K". It's just almost impossible to own 500 shares of everything in your account because of the share price differences.... So you end up with 500 shares of something at $20 a share -- and only 125 of something at $125 a share.... Obviously the 500 shares have a larger affect on your account when they're up or down because of that pesky "law of large numbers". So this brings me to the more important way to look at money. Money is about PERCENTAGES.... and when you open your account and see it's down $500 for the day and you swallow hard --- but if you have 50 Grand in the account -- that's not a very large PERCENTAGE... ditto, of course if it's going up.

A better gauge is how your account is doing OVERALL.... and how it's doing RELATIVE to "the market". There is no way on god's green earth that you can own 15 or 20 stocks and have GREEN in every one of them all the time. And they're never up evenly. So better to look at how your account is doing OVERALL AS A PERCENTAGE rather than a number (10% vs $1000 dollars) and make that percentage be your goal - then the numbers will take care of themselves.

To get back to balance --- when you have a good day or a bad one --- look not just at the dollar amount -- but which stock affected your account the most -- and is it down/up big? Or is it the law of large numbers that made it look "outsized". The biggest number of shares in your account might have only been down a dime... but the multiplier is what makes it look bad/good rather than the percentage of move.

Not much you can do to change that - cause you'll never achieve a perfect balance. It's just another point of THOUGHT when you're looking at your account and brings a little better perspective when you sort out the details.

My goal is to beat VFINX every year.... it may seem like a silly goal but I have to start somewhere..

[GregWeld]

Originally Posted by XLexusTech

My goal is to beat VFINX every year.... it may seem like a silly goal but I have to start somewhere..

That's a good gauge....


So far that account (Schwab) has a 10.48% "gain" vs the VFINX's 12.04%


VFINX is heavily weighted in "tech" with some 20% of their holdings in that space and no doubt Apple being their top holding has certainly boosted that performance.

Since it's always fun to "explore" what someone else is doing here's a link to Morningstar showing their YTD returns on the companies they invest in. Note that Apple (AAPL) has a 54% YTD return -- and AT&T (T) is second best with 27%

http://quicktake.morningstar.com/syn...7&symbol=VFINX

[GregWeld]

I had an EPIC FAIL and forgot to include the link to Morningstar as stated in the previous post... so edited it and added -- but here it is again.


http://quicktake.morningstar.com/syn...7&symbol=VFINX

[GregWeld]

One of the oldest sayings on Wall Street --- is "when interest rates rise the stock market dies"...

Now of course... nothing is ever a zero sum game... and old sayings have longevity are are "generally" very accurate.

Interest rates have risen NOTICEABLY on the 10 and 30 year T bill.... and also on mortgages. While both are still really low historically --- the take-away is --- to pay attention to this "trend" if it is one.

Interest rates rising are a good thing! And a bad thing! How can they be both?

Interest rises as there is more demand for BORROWING.... more people borrow when they feel like they can pay the loan back... so rising interest rates signal that the economy is/might be getting better.... AND THAT IS A GOOD THING....

BUT... that dang big butt!

As the yields on interest bearing stuff (like T bills) rise - people sell stocks and move to "safe" interest bearing accounts.... so the stock market usually begins to suffer as money flows OUT....

BUT... dang that big butt!

The stock market could also benefit - because if the economy is better - then the companies should have better sales and better bottom lines!

Okay --- I know --- it's all crazy and if someone could figure it out and it was easy then everyone would be rich right?

My take is -- the companies that pay the lowest yields will get pressure (selling) first... so many of the steady eddys that we love -- that pay lower dividends as a percentage -- would be the ones that people would sell first. But as the price comes down on the shares -- the yield goes up! (IF you pay the new lower prices).

I guess the only real point of this for Investing 102 -- is to stay somewhat heads up to the interest rate market. It signals lots of stuff... a rising economy -- better business -- and frankly -- we actually need to see that! We're not there yet - but you need to stay vigilant to what the market is telling you and the "market" is always ahead ---- by months --- but it doesn't always get it right.

[Sieg]

Thanks for the last post Greg, very enjoyable and wisdomatic read.

[GregWeld]

Originally Posted by Sieg

Thanks for the last post Greg, very enjoyable and wisdomatic read.

Welcome...

Sometimes I can ramble -- but there is a point in there somewhere!

Interest rates are CRITICAL... ignore their importance at your own peril. I guess that was the point. Doesn't mean to ACT -- it means to pay attention!

[Sieg]

Totally understood, again very good read. The older I get all those cliche's I chuckled at as humor as a kid now hit very close to home.

[GregWeld]

Here's something else I've said more than once in this thread.... IMHO I only think a guy can follow just so many names... too many and you just get confused -- too few and you're not diversified. My 'goal' for someone asking is that when they get to 100K invested - they should have about 20 names...
When you get to a million -- there's really not much need to have 100 names - - when 20 good ones will serve you just fine...


So here's a guy that follows my thinking perfectly!


As of 06/30/2012, Kynikos Associates LP owns 22 long stocks with a total value of $257 million. He is said to manage more than $6 billion. Jim Chanos has been called the Warren Buffett of short selling.

[GregWeld]

Along the lines of the "what ifs" such as the POSSIBLE rising interest rate scenario... I think the FAR BIGGER DEAL that will affect the stock market is the election in November.

While the PRESIDENTIAL race is very important for "investors" (and the general public) the CONGRESSIONAL races are far MORE IMPORTANT.... A democratic SENATE and HOUSE of REPRESENTATIVES will and I should underline WILL..... raise the tax rates on anything and everything they see as their personal piggy bank (your wallet). THAT will affect what people invest in etc.

Dividends - that now enjoy a 15% tax rate are highly competitive with other investments because of that rate. Raise that rate to ordinary tax rates and that competitive edge just gets blown away. People like me - with LARGE incomes from dividends WILL find other homes for their money. Muni bond rates are LOW right now precisely because of the advantage dividends enjoy. A 3% TAX FREE rate of return is not so hot when a guy can buy a 5.5% (or higher) dividend and pay ONLY a 15% tax.

THE TAKEAWAY FOR INVESTING 102:

What AMERICANS forget is that the PRESIDENT DOES NOT MAKE LAW -- CONGRESS and the HOUSE DO! So in my book -- those selections are far more important when it comes to who I vote for as my Senators and Representatives (Dem or Rep) because it's those jackazzs (BOTH PARTIES IMHO) that rule the roost... NOT the President. While he's the leader and the big voice -- he doesn't make the rules -- those 535 OTHER GUYS do!

Right now -- the main reason we have INACTION on almost anything - is because of the REPUBLICAN House -- vs -- the DEMOCRATIC Senate. The house is voting one way and the senate the opposite - therefore NOTHING gets done.

I AM NOT DISCUSSING POLITICS HERE.... this is not "I'm voting for Obama or I'm voting for Romney" discussion. Let's not go there because it is a bottomless pit of one guy against the other....

I AM SAYING -- PAY ATTENTION to what changes and who you vote for in these (IMHO) far more important races because the outcome WILL - (underline WILL) affect you!

If you want real change (one way or the other - I'm not saying which way YOU should vote here) then it's the change in the make up of these two legislative bodies that will make the big difference.

[bdahlg68]

I decided earlier to add some risk to my portfolio and picked up a small position in CYOU before the dividend. So far so good. I picked the shares up for $24.73 and they paid a $3.76 special dividend. Up about 11% after the dividend is paid. Still a risky affair as this is a China stock (always the fear of fakes) and the Chinese economy has been cooling. Therefore this is a small position more for fun and to see where they go with dividends.

I'm also now green on SAN! Took a lot of patience, and a good average down when the stock was around $5. I've now trimmed back that position so it is inline with the total value of many other stocks in my portfolio. I got a little heavier than I'd like to have been in SAN, but it worked out. But, this is not always the case.

Pretty happy overall with unrealized gains YTD - nearly 14%. Hoping for continued success rest of year and beyond.