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Author: lngtrmcptlgns Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8821  
Subject: please critique my simple-minded... Date: 1/20/2011 11:05 PM
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long term investing strategy (before I do something dumb).

I am a beginning investor (who has read and heard enough to formulate a semi-informed strategy).

I have been putting 5% of my wages into my 401K (getting my full company match) for about 10 years, paying off debt (my wife and I just recently paid off our small house and became 100% debt free) and now we want to start putting the max annual amount ($5,000 apiece) into Roth IRAs.

I am a massive believer in Warren Buffett and value investing for the long term. Buy and hold, minimize fees and taxes and all that.

Here is my simple strategy: each year fill one Roth IRA with BRK-B stock and the other with a single proven S&P 500 high dividend-paying stock.

Alternate each year so that over time each Roth gets equal doses of BRK-B and high dividend stock.

I think my strategy minimizes fees ($8 through my Fidelity account) pretty effectively in two ways:

(1) I fill each $5,000 Roth with a single stock purchase each year (so only one $8 fee)

(2) the dividends are automatically re-invested in the stock from which they were paid with no trading fee involved (I get more shares with no fees)

I know that the conventional wisdom is to not put too much of your portfolio into single stocks but Berkshire Hathaway offers a lot of diversity in a single stock. Plus, my 401K investments (Fidelity index funds) give my portfolio a pretty good measure of diversity.

The high-dividend stock pick would be different from year to year and that would create diversity over time.

As needed in retirement, the dividends from the high-dividend stocks would create a tax-free income stream (along with a taxable stream of forced withdrawals from my 401K) while we held the BRK-B stock as long as we could.

I know that ideally one puts tax-inefficient investments into Roth IRAs and I'm not sure how BRK-B (pure capital gains) and high-dividend paying stocks fit into the tax-inefficient investment scale.

So, whaddya think? Please fire away and don't be gentle (I would rather feel stupid now than 25-30 years later!)
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Author: dfish Big red star, 1000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6608 of 8821
Subject: Re: please critique my simple-minded... Date: 1/20/2011 11:14 PM
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I have just one question for you...and you don't even need to post the answer. (The answer is for you to contemplate!)

What is Warren Buffett's age?

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Author: Hohum777 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6610 of 8821
Subject: Re: please critique my simple-minded... Date: 1/21/2011 3:31 AM
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(1) I fill each $5,000 Roth with a single stock purchase each year (so only one $8 fee)

(2) the dividends are automatically re-invested in the stock from which they were paid with no trading fee involved (I get more shares with no fees

I know that the conventional wisdom is to not put too much of your portfolio into single stocks but Berkshire Hathaway offers a lot of diversity in a single stock. Plus, my 401K investments (Fidelity index funds) give my portfolio a pretty good measure of diversity.


Seems penny wise, pound foolish.

1. What happens if one or both stocks were purchased at recent or 52-week highs?

2. What happens if one or both stocks plunge 30% - 50% within a 6-month period?
2a. Couldn't happen to Berkshire? Wrong.
http://finance.yahoo.com/q/bc?s=BRK-B&t=5y&l=on&...

I sincerely doubt even Warren Buffett buys an individual stock position as a single transaction, and
decides he's done. I know positions like Coke, Proctor & Gamble, Johnson & Johnson, etc were
multiple purchase transactions. Just the transactional execution of say, buying 1M shares of stock X,
would likely not occur as a single transaction.

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Author: washcomp Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6611 of 8821
Subject: Re: please critique my simple-minded... Date: 1/21/2011 8:56 AM
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$hit happens to even those stocks perceived as solid at the time you buy them. Look at GE during the 2008-2009 period. Look at BP who poked a hole in the sea bottom. As has been pointed out, while BH will not necessarily be impacted by the evaporation of WB, the stock price likely will. Optimizing which specific company to pick is an art form, but preading your risk is not quite so hard. A trivial example is that I believe that it is prudent to own a mining company. I could buy a copper miner like FCX, but there future is mostly based on a single commodity, mined in a single country. The same is true of owning a coal or gold miner. OTOH, if I hold BHP (or as I do, BBL), RIO and VALE, I get a diversified pread across the territory. If something happens (like, say an unlikely flood in Queensland Australia), it may impact one or two of them, but the other is likely to benefit. It creates long lists of stock in a portfoio, but so what? This is a game of using your best ideas, but spreading the risk. BRK.B is a fine stock and I own some of it, but if I have the urg to get into consumer foods, for example, I'll buy Coke and Kraft (and maybe add Nestles, Smukers, Campbell and Heinz for good measure), rather than more BH.

Just how I tend to run the game.

Jeff

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Author: missash Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6613 of 8821
Subject: Re: please critique my simple-minded... Date: 1/21/2011 10:49 AM
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You've done some critical and important thinking, obviously..I agree with a prior poster who advised greater diversity. I happen to think the energy sector is one with good long term potential. Jim Rogers, never dull, in a recent interview, predicted that oil would rise to $200/barrel. PEO is a closed end energy fund with a widely diversified portfolio of oil and gas stocks; it usually is available at a discount to NAV and its expense ratio is moderate. So gives one diversity in an attractive sector all in one package.......just my 2 cents

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6615 of 8821
Subject: Re: please critique my simple-minded... Date: 1/21/2011 1:08 PM
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1. What happens if one or both stocks were purchased at recent or 52-week highs?

2. What happens if one or both stocks plunge 30% - 50% within a 6-month period?


If they are stocks to be bought and held or positions added to over 25-30 years, does it matter?

JLC

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Author: Hohum777 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6617 of 8821
Subject: Re: please critique my simple-minded... Date: 1/21/2011 1:51 PM
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If they are stocks to be bought and held or positions added to over 25-30 years, does it matter?

JLC


From a really LT perspective, you are correct.

The questions were posed more in terms of a DCA perspective.
Let's use BRK-B as an example. Currently trading around $80/sh. A single transaction would be
60 shares @ $80/sh = $4800
Suppose one purchased 20 shares @ $80, @ $75, @ $70, or
(20*80 + 20*75 + 20*70) = $4500
I think the OP suggested $8/trade, but let's use $10/trade, or $20 for the additional transactions.
That's $280 additional capital available for investing in one account.
Would the inefficiency occur every
year? Probably not. But it is still 5.8%

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Author: codger41 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6618 of 8821
Subject: Re: please critique my simple-minded... Date: 1/21/2011 1:52 PM
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You are smart to consider transaction costs when dealing with 2 $5000
Roth investments per year. You want to be careful with this money....it is real after tax money in hand with no employer match. Believe me it hurts to lose it.

The input you receive re how to invest the yearly Roth contributions will vary according to the advisor's interests. Because you plan to make annual contributions you might want to consider putting money into a CD ladder. Yes, current interest rates are low (online banks are only paying about 2.5% on a 5 year CD), but rates are expected to rise. If you buy a 5 year CD every year each CD will be at ever higher rates, and when your 2011 CD rolls over in 2016 you simply renew at 2016 rates. This is dollar cost averaging at its simplest.

If you want a little more action, buy into a dividend etf with 1/2 of the money each year. Just one transaction cost, lots of diversity. My favorite is SDY, the S&P 1500 dividend will follows the Dividend Aristocrats.

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6619 of 8821
Subject: Re: please critique my simple-minded... Date: 1/21/2011 2:45 PM
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If they are stocks to be bought and held or positions added to over 25-30 years, does it matter?

Yes, because we do not always know exactly when we may have to sell; life can be unpredictable. Buying low means higher dividends yield plus greater safety when the animal spirits are misbehaving. We have lived through a decade of bupkis primarily because the prices in 01 remained too high. If we reach way back into the yesteryear of Fool.com we find that the major flaw of the Rule Makers portfolio was price at purchase.

jack

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Author: brucedoe Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6620 of 8821
Subject: Re: please critique my simple-minded... Date: 1/22/2011 1:46 PM
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washcomp

I could buy a copper miner like FCX, but there future is mostly based on a single commodity, mined in a single country.

Actually the FCX mine is not only a huge copper deposit but is the world's largest gold mine to boot. But I agree that Indonesia is the country, and I don't consider it stable although I might be wrong. Also things like cave ins can occur. They had one in the open pit some years ago, and it took them something like a year to recover. During that period, the stock of FCX was murdered.

brucedoe

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Author: lngtrmcptlgns Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6621 of 8821
Subject: Re: please critique my simple-minded... Date: 1/22/2011 2:17 PM
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1. What happens if one or both stocks were purchased at recent or 52-week highs?

2. What happens if one or both stocks plunge 30% - 50% within a 6-month period?
2a. Couldn't happen to Berkshire? Wrong.
http://finance.yahoo.com/q/bc?s=BRK-B&t=5y&l=on&......

All of that seems to me to be purely random stock price movements that I have absolutely no control over. I can control fees.

Yes I would hesitate to buy any stock that was at a 52 week high.

But I am continually buying in over many years. And holding.

I sincerely doubt even Warren Buffett buys an individual stock position as a single transaction, and
decides he's done. I know positions like Coke, Proctor & Gamble, Johnson & Johnson, etc were
multiple purchase transactions. Just the transactional execution of say, buying 1M shares of stock X,
would likely not occur as a single transaction.

I'm not buying in once and deciding I'm done either. I am simply spreading my buys over a very long period on a once-a-year basis.

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Author: lngtrmcptlgns Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6622 of 8821
Subject: Re: please critique my simple-minded... Date: 1/22/2011 2:41 PM
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The questions were posed more in terms of a DCA perspective.
Let's use BRK-B as an example. Currently trading around $80/sh. A single transaction would be
60 shares @ $80/sh = $4800
Suppose one purchased 20 shares @ $80, @ $75, @ $70, or
(20*80 + 20*75 + 20*70) = $4500
I think the OP suggested $8/trade, but let's use $10/trade, or $20 for the additional transactions.
That's $280 additional capital available for investing in one account.
Would the inefficiency occur every
year? Probably not. But it is still 5.8%



Your hypothetical assumes that the price will drop.

How can anyone assume that?

I believe in buying into a stock when it is undervalued (at the right price and with a "margin of safety", as Ben Graham would say) as much as the next guy.

But with a well-known, heavily followed stock like BRK-B, what are the odds that it is ever going to be seriously undervalued?

My guess is that when Mr Buffett passes, the price will drop significantly and we might see it undervalued for a time.

The only other time it will become undervalued is if the stock market as a whole takes a dive, at which point everything is undervalued and relatively speaking BRK won't be undervalued any more than any other stock.

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Author: desertdaveataol Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6623 of 8821
Subject: Re: please critique my simple-minded... Date: 1/22/2011 3:28 PM
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My guess is that when Mr Buffett passes, the price will drop significantly and we might see it undervalued for a time.

You seem married to BRK-B. You seem to insist on putting too many eggs in one basket for my comfort.

Desert (dividend paying utility stocks-R-us) Dave

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Author: Goofyhoofy Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6624 of 8821
Subject: Re: please critique my simple-minded... Date: 1/22/2011 4:39 PM
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But with a well-known, heavily followed stock like BRK-B, what are the odds that it is ever going to be seriously undervalued?

Berkshire has been "seriously" undervalued twice in the past decade. It has been "undervalued" for a decent part of the decade: between 2004-2006.5 it didn't move at all, even though the company profits kept rising.

http://bigcharts.marketwatch.com/quickchart/quickchart.asp?s...

Like any other stock, it has times of over-performance and under-performance. The questions on the Berkshire board are legion: "Do you think BRK is undervalued today?" Had you bought it in early 2009 you would have an almost 80% gain already. Had you bought it in late 2007 you would be sitting on a loss.
 


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Author: Hohum777 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6625 of 8821
Subject: Re: please critique my simple-minded... Date: 1/22/2011 9:06 PM
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Your hypothetical assumes that the price will drop.

How can anyone assume that?


Actually, it would be quite naive to not make that assumption- prices of all stocks will have fluctuations.
Many will have even greater price variation than BRK. As Washcomp suggested, $hit happens.

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Author: washcomp Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6626 of 8821
Subject: Re: please critique my simple-minded... Date: 1/22/2011 9:59 PM
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Anyone who invests based on the most optomistic projection is likely to be disappointed.

It is better to invest from the standpoint that you consider the worst thing that can happen if you make an election rather than the best. You may not increase your assets as quickly as some, but you are likely to be able to hold on to them better.

But of course I could be wrong :-),
Jeff

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Author: GreenCollegeGrad Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 6689 of 8821
Subject: Re: please critique my simple-minded... Date: 3/11/2011 4:44 AM
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Quoted for truth

If you invest expecting only the best then you are in for a ruuuuude suprise.

Diversify, diversify, diversify. Buy 5 stocks instead of 1. Even though u spend 40 dollars instead of 8, I can almost promise that 32 dollars will more than cover the money you will save if the one stock tanks

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