It has been over a year now since I had pulled the trigger and assumed control of my investment portfolio. I simply got tired of watching my portfolio go up and down with no real say in the matter. My investments seemed to be growing, but as I took the time to review them, I realized I hadn’t been getting much more out of them than the overall market index. Why in the world am I paying someone to get little more than indexed returns, I can do it myself.
It took me almost a year of reading everything I could find (that made sense to my non-finance oriented brain) on the subject before I felt confident enough to manage my own investments. It all started with Dave Ramsey and his get out of debt lessons. While our family finances were not overextended in any way, it did need a little tweaking to get to a point where we were debt free and much more comfortable.
Climbing up the levels of Dave’s multi step financial freedom ladder, I stepped on the investment rung and simply couldn’t climb high enough to get over it. Investing my money into 4 categories of growth index funds seemed to be just more of the same. Although I applaud Dave’s debt free strategies, his wealth building theories just aren’t for me. I wanted to be more actively involved.
It didn’t make sense to me how he asked his listeners to be so involved with the debt portion of the process, yet he threw in the towel regarding investments and asked everyone to index in growth funds. It was later that I discovered a big portion of his investment strategy involved taking a commission from his recommended “advisors.”
Say what you want regarding this philosophy, but this is not the focus of this writing. I have been investing on my own for some time now and have been keeping my head above water, actually beating the market. I don’t know if this is a result of beginners luck or the countless hours I have put into my self learning, I would like to think the latter, but it is what it is.
My core philosophy is that of being a value investor that is seeking alpha, mostly in the form of fundamentally sound individual securities that are undervalued and pullback buying. Never say never, but you will never see Tesla in my portfolio.
I have studied multiple methods of investing, and I just can’t help but feel a majority of these are closer to gambling than investing. Penny stocks, day trading, hedge funds are way out of my comfort, risk, and quite frankly skill level.
I have previously written regarding active investing vs. indexing. I want to be more involved with my investments, but with work and family responsibilities, as well as taking care of the homestead, I simply do not have much time to keep track of everything I need to be an informed and responsible investor.
I think there are pros and cons with the active vs passive investing concepts, so why not take advantage of them both. I have decided to index with 2/3 of my portfolio and actively manage the other 1/3.
I will index with mostly mutual funds and maybe a few ETF’s if they are relevant at the time. I plan on taking a majority of this index fund and placing it in the vanguard total stock market fund (VTSAX). This fund offers many advantages over other index funds.
The performance can’t be denied, it has done very well over the last 3, 5, and 10 year time periods. In fact there aren’t many funds, index or otherwise, that can beat it especially considering it has a 0.05% fee. The total cost over a ten year period for every $10,000 is a whopping $64. Investing $10,000 ten years ago would show an almost 80% gain today ($8,000), and don’t forget this includes recovery from the 2008 disaster. All of this for a unbelievable $64 in fees.
I will likely invest no less than 50% of the index allotment in the VTSAX fund. During times of unusual investment opportunities, I may take a small portion (15% or less) and invest it in specific index sectors. An example of this would be today’s financial or biotech market, in the future, who knows, maybe REIT’s will make a comeback after the interest rate scare cools off.
I am not a fan of timing the market, but I do believe strongly in positioning yourself to buy when the opportunity arises and the stock is cheap, from a value perspective that is. I planned on holding onto cash that is allotted for my index funds until the opportunity presented itself and then buy during a pullback or market correction, and it did. Trump won, and I got back into the market.
When the time comes and I have built up another allotment of cash to buy in, I will wait again until the market presents with an opportunity. Rather than dollar cost averaging with cash from a time perspective (quarterly, monthly, bi-monthly, etc) I will average through dips in the market. This assumes we don’t go into some bull market anytime soon, if we do, it’s dollar cost averaging for me. I plan on holding on and weathering any market storm with one exception. If the fund hits the 100 day SMA, I may consider selling, for the simple reason of market reaction, and the opportunity it may create for a buy later on.
Take a look at this chart from the Dow Jones Industrial Average. This is a lifetime chart spanning over 100 years. I chose this chart for the simple reason that it provides a good example of market volatility over the last 100 years.
There have been numerous studies, some of which I reviewed in previous posts, that show actively managed funds are rarely an improvement over indexing. I believe this holds especially true over the long haul. I also believe that there is an advantage to buying individual stocks, as they may be a little riskier, but the reward is often worth the risk. If you are picking fundamentally sound companies, at a reasonable price, you significantly reduce your risk as well.
I was born in 1970, so realistically my investing time frame would have started in the early 1990’s. I realize that this chart is difficult to see, but this would have put me about 1/3 of the way up the last significant bull market. Buy and hold would have been a great opportunity for me at the time, and it actually was, because I didn’t know any better. I rode the last 2/3 of that market and did as well as could be expected.
It was around the turn of the century (wow that makes me feel old) that the sideways market (albeit a very volatile sideways market) started to take shape. I can’t say for sure but I don’t think this buy and hold philosophy worked very well for me during this market, in fact I believe I may have missed multiple opportunities for significant growth. let me explain why:
Viewing this 5 year chart from Wal-Mart you may notice a nice price increase from pre-October ’12 (~$52) until now ($72.75), an increase of a little over $20 a share. This is roughly a 28% increase over this period, not bad at all. Throw in dividends and you are likely over 30%. What you see here is a nice investment, what I see is opportunity missed.
A story of buying on the dip, PE’s and Simple Moving Averages
Before I get started, I suggest you go to your favorite stock research page and bring up a 5 year WalMart daily chart. Make sure you can add a 20 and 50 day simple moving average. Having a way to identify PE ratio trends during this time is helpful, but not critical. Follow along as I describe this journey, hopefully it will make sense.
Lets assume that I had been a holder of this stock in October of 2012. Knowing what I know now, I think this would likely be the case with this blue chip, fairly valued company. The stock had a PE ratio of around 11 at the time and seems like a good value buy. As the stock price went up, the value declined, it started to become a little too expensive from a value perspective.
At its peak around January of 2015, the price was roughly $85 a share and the PE ratio was approaching 19. This in itself would not have been enough to make me want to take profit, but it did raise a few red flags. This had been the start of a significant drop in price for WalMart. I can’t say for sure if I would have taken profit or not at that time (likely not), but what I can tell you is with those evaluations and crossing under the 50 day simple moving average (SMA) in April of the same year I would have definitely taken profits and been happy to do so.
In early April 2015 WalMart crossed under the 50 day SMA when the stock price was roughly $80 a share. It eventually stopped falling around November 2015 and started to climb again. There is no way to tell at the time that this was the beginning of another run, so I wait for another SMA to give me some direction. Just after Christmas 2015 WalMArt crossed above the 20 day SMA and had a PE of about 13. It is at this point that I would consider buying again on the dip at a price of $63.50.
Today this stock sits at about $72.75 a share. Lets take a look at a comparison of profit taking with buy and hold vs value evaluation.
Buy and hold profit: Purchase ($52) Current value ($72.75).
Profit of $20.75 a share (28.5%)
Value evaluating: Purchase ($52) Sell ($80), buy again ($63.50) Current Value ($72.75)
Profit of ($28 + $9.25) = $37.25 a share (51.4%)
Doubling down: Lets just say that I did not sell this stock when it crossed the 50 day SMA for whatever reason. Another technique that I have benefited from is doubling down. After a decline in price, buying more shares when you are confident the correction is reversing can often be a nice way to increase profits. There may or may not be a little more risk involved, depending on the stock, but it can average out the loss, and make a lot more money in the long run.
A word of caution here, if you decide to double down, you must be absolutely confident in the fundamentals of this company and know why the price dropped. If the reason was benign, go ahead and double down, if there are potential significant issues, get out.
As you can see by this example, consistently evaluating your portfolio and looking for opportunities can significantly increase your profit. I fully appreciate that this scenario is a hypothetical one, and there is really no way to know if this example would have played out this way had I owned the stock during this period, but it does present me with interesting options and perspective for the future.
There are some that would say hindsight is 20/20 and this is market timing. I disagree. I have been able to accomplish similar gains during my short experience so I know it is possible. There may be, technically, some form of market timing here, but I am not guessing at buying and selling, I am using the data to provide information to make an informed decision. I am continuing to evaluate a company after I have decided to purchase it looking for opportunities to grow. I am buying fairly valued companies, that make money (NOT Tesla) and offer promising gains, not stories (Tesla).
I don’t think this scenario holds true for most companies. It all starts with a great company at a fair price. Too much debt, little growth potential, sub par evaluations, little earnings growth, diminishing return on equity, and you’re out. In order to be successful in this market, I strongly believe each company must be evaluated with a strong objective lens and one must be patient for the good ones to dip in price for reason based on fear and not value. Monitoring the market in relation to a portfolio will allow the savvy investor to reap the benefits later. Good evaluations, studying and patience are what I feel it takes to be successful in this endeavor.
By this point you make think I consider my portfolio as my greatest asset, I would say my greatest asset is my watch-list, it is loaded with good companies waiting for me to buy them when the time is right.