This quick, educational, bullet point tutorial on investing is a modification of the DeepGreen™ tutorial. It is meant for general consumption by "do it yourself" investors without access to DeepGreen™. The lessons are plain and simple. You will learn about Career Investing. You will learn about practical risk management. You will learn about practical stock picking. You will learn to invest independent of Investment Science Corp or DeepGreen™. Good luck!
The business of investing is analogous to buying an apartment building and charging rent. In the apartment rental business, profits equal rents minus expenses. Instead of buying apartment buildings, securities investors buy fixed income securities and collect interest. The highest quality fixed income securities are government bonds due in five years or less. It's a great business, the interest payments come regularly, the expenses are minimal, and federal bonds have never defaulted.
Our profits can be increased by investing some of our capital in common stocks; but, only by adding risk. It's still a great business because common stocks can be extremely lucrative in good times, and we control our risk absolutely by the percent of our capital exposed in common stocks. In our business we expose 10%, 30%, and rarely 50% of our capital in common stocks. This leaves us with a 90%, 70%, and rarely 50% capital reserve in federal fixed income securities due in five years or less. It's a good business, and we can control the amount of risk.
The time to start an investment career is: Now! Time favors the investor. Savings build arithmetically over time. Investing returns build geometrically over time. Let Time Work For You.
You need three things for a great Investing Career.
Great investment managers are hard to find: 85% of all mutual funds under perform the indices. Great investment managers get taken quickly: Jim Simmons, Warren Buffett. For "Do It Yourself" stock picking strategies, we never use a broker affiliated analysis service. Valueline is an excellent stock ranking service. Standard & Poors is also a very good stock ranking service.
For a great budget strategy, live by the “5% or less” rule. If your net budget distributions are less than 5% of your investment capital on a per annum basis, numerous studies have shown that you will never run out of money. In every twenty year period your investing capital will grow. But, that is only if your net budget distributions are less than 5% of investing capital each year.
For a great "Do It Yourself" Risk Management Strategy, manage risk for a four year severe bear market. You must plan to invest in bonds as well as common stocks. We recommend implementing a variable four year portfolio rebalancing strategy between bonds and stocks. Try to keep 90%, 70%, and rarely 50% capital reserves in federal fixed income securities due in five years or less. At 90% fixed income reserves, an investor can recover from a severe 1929 level bear market in 1 average year. At 50% fixed income reserves, an investor can recover from a severe 1929 level bear market in 2 to 3 average years. Implement your risk management strategy before you suffer losses.
There are only two emotions on Wall Street: Fear and Greed.
Investing is both lucrative & dangerous. Bull & Bear markets are commonplace. Bull markets will double your money in a few years. Bear markets will steal 80% of your money in a few years. Plan for profits and plan for losses. You will have profits. You will have losses – count on it. The time to Manage your losses is before they occur.
Bull markets enrich. There are many bull market stories. In the bull market from 1920 thru 1929, the SP500 rose over 500%. In the bull market from 1933 thru 1942, the SP500 rose over 1000%. In the bull market from 1995 thru 1999, the SP500 rose over 220%. In the bull market from 1995 thru 1999, MSFT rose over 1200%. In the bull market from 1995 thru 1999, DELL rose over 7500%. The average bull market lasted 5 years in the last century.
Bear markets impoverish. There are many bear market stories. In the bear market from 1929 thru 1932, the SP500 fell over 80%. In the bear market of 1987, the SP500 fell over 30% in three months and it fell over 25% in one day. From October thru November 1987 Intel fell 48%. From February thru September 2000, IBM fell over 49%. In the bear market from 2000 to 2002, the SP500 fell over 40%, the NASDQ fell nearly 70%, and SUN Microsystems fell over 90%. Your bear market plans should include losses of over 80% on all common stocks. The average bear market lasted 18 months in the last century. The longest bear market lasted 32 months in the last century.
Business Cycles are a reality of investing life. Short term Business cycle is four years. Worst bear lasted 2.7 years (1929-1933). Bear is over (short term cycle) after first 50% bounce. Long term business cycle is 20 years. Worst bear market lasted 13 years (1929-1942). Bear is over (long term cycle) after return to past highs.
There are only two basic investment products: Fixed Income securities; and Common stock equity securities.
For Common Stock Equity Securities volume is an important issue. We invest only in the 400 highest volume traded common stock securities. Must move minimum $50 million per day in trades. Must be well known company. Must be heavily followed by analyst community. Common stocks are our inventory.
For Fixed Income Securities, short term is four years or less. Short term fixed income is resistant to swings with interest rates. Short term fixed income is safer. Long term is 20 years or more. Long term is subject to wild swings with interest rates. Long term fixed income is unsafe. We purchase only Government Obligations: United States Federal TBills or Tbonds; or State General Obligation bonds (AAA States only). We purchase only 5 year term or less. We call these cash equivalents.
Income Tax is a reality of investing life. Long Term capital gains are 15%. Short Term capital gains are 35%. States can charge income tax.
Income Tax has different brackets. Long Term capital gains are 15%. Must hold investment for 12 months or longer. Short Term capital gains are 35%. State income taxes can be hefty. California income tax is 9%. Tax Minimization Strategies are a necessary evil for career investors. Brits & Canadians can pay NO taxes if they offshore domicile in zero tax basis country such as Cayman Islands, Belize… US Citizens Always Owe Uncle Sam. Liable on world wide income regardless of domicile. US Citizens can minimize income taxes. Long Term capital gains are only 15% and can be achieved by holding securities 12 months or longer. Zero tax basis states: Nevada, Washington, Florida, Texas…
The career investor manages risk versus return by choosing appropriate levels of capital commitment to fixed income securities versus common stock equity securities. The larger the capital commitment to fixed income securities, the lower the risk. The larger the capital commitment to common stock equity securities, the greater the return. Assuming that a standard five stock portfolio were selected each year, a capital commitment of 30% to these five stocks would have produced the lower risk monthly returns shown in this example. Assuming the same standard five stock portfolio were selected each year, a capital commitment of 70% to these five stocks would have produced the higher risk monthly returns shown in this example.
Index averaging is a popular strategy for managing risk, and it is a strategy which we strongly caution against! While index averaging would have produced average annual returns of 11% in the last century, during the bear market of 1929 thru 1932, index averaging produced losses of over 80%. No amount of diversification, including index averaging, will protect the investor against catastrophic events or major bear market crashes. Use diversification to protect against statistical risk. Use cash reserves to protect against catastrophic risk.
Great stock picking depends upon fair independent financial analysis. We never use broker affiliated analysis services. We recommend using only top ranked INDEPENDENT analysis services. Valueline is an excellent stock ranking service. Standard and Poors is an excellent stock ranking service. Investors Business Daily is an excellent stock ranking service. Always use an analysis service whose approach you believe in.
Use a consistant approach to stock ranking and selection. Frequent unnecessary changes and/or inconsistant stock selection criteria will greatly depress returns. Purchase only stocks which you are prepared to hold for 12 months or longer. Frequent trading is extremely costly, not only in terms of commissions, but more importantly, in terms of spreads (the difference between the bid and ask price of a stock). Frequent trading depresses returns in two ways: much greater trading costs; much higher income taxes. Our investing motto is: Trade less, take home more.
There are many sources of information about investing on the Web. However many of these are really marketing or sales related. Out of this morass of generally available investing "tips", there is one source of introductory investing training material which we think might be of interest.
For more information, email Korns Associates at:firstname.lastname@example.org