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Hello,

This is the most appropriate forum I can find for this post. Everything below is related to long term and retirement investing. I am simply going to post some of my thought process with my personal concerns an a comparison to a friends investing strategy that seems to be doing better than mine in the hopes I'll get some interesting feedback.

I've been investing for several years now trying to learn as I go, but following the fool picks for the last 2 years or so. I currently have 19 picks. 18 are fool picks, and I picked up FXI today because I wanted more Asia exposure without risking a pick on an individual stock. I had a bad experience with TOMO, but my CRTP is doing great, so I figured an index to go with them seemed reasonable. It seems to me that when I get to my next pick I'll be at 20 and that may be too many. Without a good reason to sell, is it best to continue to adding more picks or add more money to my existing picks that are doing well? Probably a balance of both. The fool may be doing well overall, but I seem to make the wrong choices and am up only ~5%.

A friend of mine who has mostly fool picks (and 1 share of GOOG) is up 20%. I got my GOOG at $250 and sold at $350, oops. We have many of the same picks. I am in a regular trading account. My friend is in an IRA. His theory is to make a gain, sell, and repick, and continue repeating that process since he does not have to pay taxes on the gains. He is Scottrade and pays $7 for each trade. So following his example he'd be selling CTRP right about now, or at least what he invested in it and "letting the profit ride", and picking a new pick with the original investment money. We both invest the same amount for our purchases relative to our other picks (I do at least $1000 a pick, he prefers $700/pick)

I'm just a little frustrated since he seems to be doing so much better with a slight tweak to the amount of time we hold our picks. I'm of the hold forever until I have a reason to sell, he sells when he's made a decent amount and re-picks. He can sell a little easier since he does not pay taxes, but still even if he was he'd be doing better than me.

A (potentially stupid thing to do) is using my margin ability which I have but have not used in years to buy something I think should do well, like 10K worth, watch it closely, hope to make some $, and sell if it seems like I made a mistake and eat a reasonably small loss ($500 / 5%). For example I was considering doing this with DLB and oops... big gainer today but that may have started me off on a dangerous investment strategy path.

Thoughts?
-Raymond
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Welcome wnypoker. Glad you could join us.

Unfortunately this is not a stock picker board. So it is difficult for us to advise you. Mostly we discuss mutual fund investments and strategies for retirement investing.

There are other boards around that might be able to supply better advice. For stock studies, check out Foolish Collective. Mechanical Investing is a good one for evaluating stocks. Others like Pencils Palace and Liquid Lounge follow some stocks. But I am not aware of any that discuss specific trading strategies. Boards for individual stocks usually can keep you aware of news developments and expectations.

Everyone who invests has had the experiences you mention: selling too soon when a stock continues to rise after a nice gain; selling too late when a nice gainer goes away rather than continues to go up. Still there are those who buy high, double up after a gain, and do very well. I did it once on Apple stock, and have since tried unsuccessfully to do it again.

Fundamental to stock market investing is selling when you have a loss--essentially admitting that you made a mistake and the market did not behave as expected. And selling when you have a nice gain, taking profits and moving on to something else--most of the time, but not always.
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Yes, you need a discipline. I suggest that you read about CANSLIM - O'Neil's "How to Make Money in Stocks". I do not practice CANSLIM, but the book is very informative. The problem I have with CANSLIM is that it is extremely time-consuming. Another good book to read is Achelis "Technical Analysis from A to Z". Also read Mandelbrot's "The Misbehavior of the Markets". This will not help you trade, but it thoroughly demolishes the academic studies which assumed a normal distribution to the fluctuation of stock prices, and the random walk stuff.

You need a good technical analysis tool. I use Fasttrack, but there are others. You can see a good example of a Fasttrack screen for market timing on my site:

http://www.actwin.com/kalostrader/VisualMethods.htm.

Fasttrack is also excellent for picking good mutual funds.

The Mechanical Investing board is a good place to look. Read a bunch of back posts about market timing and selection of stocks. My objection to their way of doing things is that they hold for a fixed length of time - 30 days or more. While you can certainly make money that way, the introduction of a fixed holding period, along with fixed days to trade, injects an artificial constraint and makes the backtest less reliable.

I use a mechanican trading system based on FastBreak, which works on the Fasttrack database. It is described at

http://www.actwin.com/kalostrader/RSExplained.html

That's me in the blue bandana <GG>.

Never buy a stock unless you know why you are buying it and the conditions under which you would sell it.

Do not be afraid to use margin if you pay attention daily and are willing to cut your losses promptly. I would not use more than 50 cents of borrowed money for each dollar of your money, however. You have to be unemotional about selling a loser. The people who really lose money in the market are those who "just know" that the stock cannot go any lower, and will turn around any day now. In 2000, sometime after the big sell signal in March (when I went to cash), I walked into my brokerage to make a deposit. There was a guy there with a certified check for $30,000 to deposit to avoid a margin call. Well, I don't know what happened, but from the general condition of the market in subsequent weeks, he probably had another margin call.
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My advice is to ignore joelxwil's advice.
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Stock picking is very hard to do over the long term and should be measured against a comparable index(not your friend), which often will not be the S&P 500 index. Most actively managed mutual funds don't beat their comparable index over the long term.

One of the keys to stock picking on your own is keeping good records so you can know how you are doing. A few years ago there was the "Beardstown Ladies" group that sold lots of books about how easy stock picking is and about how well they did. Unfortunately they didn't keep good records and they significantly trailed the indexes.

http://en.wikipedia.org/wiki/Beardstown_Ladies

The Motley Fool has been much better at record keeping but their portfolios that didn't do so well disappear from the web site so their stock picking abilities may not be what they appear to be.

If you don't feel up to meticulous record keeping, one easy way to track of how your are doing is to split your money into two accounts and compare how they do relative to each other. For example you could put half your money into a low cost index fund and put the other half into a brokerage account. In the future if you add money in the you would also split that. You would also have to pay any taxes and expenses from the accounted that caused them. Three years from now you could easily see if you are beating the index. A ten to one ratios also is easy to track.

Finding 20 great picks is hard to do even if you are good at it. Some people decide to split their money between index funds and individual stocks. For example you might put 75% of you money into index funds, and the other 25% into your five very best picks. Thinking that your 20th best pick will beat the indexes is probably wishful thinking. Holding a limited number of stocks will also force you to sell stocks; in some ways it is harder to decide when to sell than it is to buy.

Greg
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Well, why don't YOU have an IRA?

Anyway, since your friend seems to have the knack to time the market well, why not just ride along on his trades? Could be he was just BS'n you, you know. That's one way to find out. Could even post them here! HEHEH.

Stock pick services like TMF and Gorilla (I current have a trial) are frustrating to me because they give lots of picks, but once you're fully invested you have to sell something in order to buy the latest pick. I tend to prefer to hold a stock unless it really tanks.
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Stock picking is a losers game.

buzman
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The level of militant stupidity on this board is always truly amazing. Mad Capitalist is a good example, but there are others.

That is why it is best, if you want good advice, to go to boards where people actually know things. Or are willing to learn. The FT-Talk board, for example, has numerous people who actually know stuff, and others who are eagerly learning. http://www.ft-talk.com/forums/. Then there are places here, like Mishedelo's board, Rat's board, and the MI boards where people actually try to solve problems.

Some of the posters here are simply pathological.

That said, PKunden makes an excellent point. I do not subscribe to Gorilla, but I know the problem, and it is a problem with CANSLIM also. You find a collection of good stocks and get fully invested. Then you find something else that looks equally great, and there is no clear algorithm for knowing whether or not to switch, or what to sell. Or, you sell a couple of stocks because they go through their stops, and there are 15 that look equally good, but you cannot reasonably buy them all.

The advantage of a FastBreak system is that you always hold N stocks, unless you get a market timing sell signal. This may or may not be optimal - who can tell - but it makes the decision and you do not have to spend a lot of time pondering. The same is true for the stuff on the MI board. It sure avoids a lot of agonizing.
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The level of militant stupidity on this board is always truly amazing.

Actually, the truly amzaing thing is how one person seemingly can be stupid all the time.
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The level of militant stupidity on this board is always truly amazing.

It pales in comparison to the level of your incredible arrogance.
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<<<The level of militant stupidity on this board is always truly amazing.>>>

Then why don't you go away and leave us to our ignorance?
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I am quite happy to leave you to your ignorance. However, if somebody asks for advice I think I owe him a rational answer, which I have given.

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I am quite happy to leave you to your ignorance. However, if somebody asks for advice I think I owe him a rational answer, which I have given.

It's no secret that I disagree with your arguments. For example, you disparage anyone who uses buy-and-hold investing as idiots. However, Warren Buffett, Peter Lynch, Bill Miller, and many other great investors use buy-and-hold investing.

How do you expect us to take you seriously when you disparage many of the greatest investors who have ever lived?
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Then there are places here, like Mishedelo's board, Rat's board, and the MI boards where people actually try to solve problems.

Part of the reason that suggestions about doing your own stock picking are so poorly received on this board is that it is geared towards "retirement investing". To bet you retirement on your stock picking skills is very risky and lots of people have gotten into trouble doing this.

I don't follow him but even Jim Cramer on Mad Money makes it clear that the stock picking that he advocates is strictly for your "mad money", not your core retirement savings.

"Cramer defines "mad money" as the money an individual has left over to invest with, after paying bills and setting aside funds for retirement (Cramer does not recommend speculating with retirement assets)."

http://en.wikipedia.org/wiki/Mad_Money

Greg
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Cramer says not to speculate with retirement assets, but in his segments on speculation he clearly differentiates it from buying stocks as investments. Speculation entails more risk.

However the difference between speculation and investing is hard to define. Generally, it is said that speculators take unusually high risks in the hope of unusually high rewards. Of course that is an extremely subjective definition, since it is difficult to quantify risk. Part of the risk is in the stock, and part of the risk is in your method for knowing when to sell.

I am not opposed to buy and hold in the sense that I would hold a stock forever so long as the chart looks good. Deciding that you will hold it forever when you buy it is simply folly. Things can change. Note, for example, that BRKa has underperformed SPY for the last 3 years, and in fact is more or less a flat line from the first quarter 2004 until about 4 weeks ago. IWM is up 36% over the same period, while BRKa is up 19%. So if you really want to buy and hold something, try IWM. I cannot beat that index either, although maybe if I only included only small caps in my list of candidates I might. I do not think that would be particularly prudent, however.

I have a small taxable account in which I am buying and holding (except if extremely provoked) a collection of mutual funds as the base part. Then I am using the ProFunds for an augmented hedge. So far so good, but it has only been about 6 weeks. The money is an inheritance, and just arrived recently. I will publish the results after about a year. This is a very low risk strategy, and also reasonably tax efficient.
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Have you tried Motley Fool CAPs (link on the right of your screen). There you will find over 12000 portfolios ranked by their abilility to beat the S&P 500 Index.
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How would you propose using that? I see that ASEI, which I buy Monday, is high on the list. That is comforting.

But would you just buy the top ranked stocks? Then when would you sell?

Or just use the list for ideas and then investigate further.
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I use the list for ideas and then further investigation.

But you can easily see what stocks people are adding now. And you can easily follow the selections of the best players.

The stock ratings and performance expectations can also be useful inputs in your decision makers.
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Sounds like a good idea.
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However the difference between speculation and investing is hard to define. Generally, it is said that speculators take unusually high risks in the hope of unusually high rewards. Of course that is an extremely subjective definition, since it is difficult to quantify risk. Part of the risk is in the stock, and part of the risk is in your method for knowing when to sell.

I use the following definitions:
“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting this requirement are speculative.”
- Benjamin Graham (Security Analysis, 1934 edition, p. 54)

Justice Stewart had difficulty devising a test for obscenity, but asserted "I know it when I see it." In a similar way, I think it is possible to know the difference between investing and speculating.

I am not opposed to buy and hold in the sense that I would hold a stock forever so long as the chart looks good. Deciding that you will hold it forever when you buy it is simply folly.

Few people who believe in the buy-and-hold philosophy believe that you should buy a stock and hold it forever no matter what, so when you generalize as you do and criticize people who buy and hold and call them idiots, you are being unfair.

Investing in index funds, however, is a different matter. *Most* people who buy and hold an index fund no matter what will outperform those who actively manage their money in the long run. This *doesn't* mean that *all* people who actively manage their money will underperform, but making a blanket recommendation that people manage their own money is, IMHO, rather foolish.

Things can change. Note, for example, that BRKa has underperformed SPY for the last 3 years, and in fact is more or less a flat line from the first quarter 2004 until about 4 weeks ago.

So what? You can have excellent investment results without having gains in every short-term period of your life.

Warren Buffett wrote:
“In our opinion, the real risk that an investor must assess is whether his aggregate after-tax receipts from an investment (including those he receives on sale) will, over his prospective holding period, give him at least as much purchasing power as he had to begin with, plus a modest rate of interest on that initial stake.”
1993 Letter to Berkshire Hathaway shareholders
http://www.berkshirehathaway.com/letters/1993.html

The important phrase here is "prospective holding period." You repeatedly talk about the "drawdown" of the S&P 500 starting in 2000, but the reality is that it isn't much of an issue if you have a very long holding period. As I've shown before, you can very satisfactory results from a "dumb money" buy-and-hold philosophy.

OT: The Know-Nothing Investor
http://boards.fool.com/Message.asp?mid=21777442
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Fine. All I know is that if I lost 40% of my net worth in a way that was completely and utterly avoidable, I would consider myself a total failure. And if I had a 2 year period during which the market went up buy I made nothing, I would certainly revise my plan - probably after the first 6 months.

But then neither of those things have ever happened to me.
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But then neither of those things have ever happened to me.

How long have you been investing? Just curious.

By the way, it has never happened to me either. I have had great returns since 2000. But I still don't believe in calling people idiots for following the investment philosophies of great investors.
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Stock picking is a losers game.


In your case, I am sure that is true.
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You´ve gotten a lot of advice already. I vote for the mix of index fund and some stock picking. This in fact, is what the Fool recommended, back in the early days (1990s) in one of the earlier books. Of course, TMF has offered all sorts of angles, so you can pick and choose here too. The depressing fact (?) is that any given stock picker (e.g. mutual fund) is more likely to lag its index than beat it. Your portfolio is likely to do the same, I guess.
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“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting this requirement are speculative.”

Then by that definition, I don't see how any individual stock can be anything but speculative; and by a lesser degree, any index or fund.

Few things provide a promise of safety of principal (FDIC, treasuries, etc.).
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As for top CAPs portfolios from regular posters, check out Kahunacfa's portfolio--

http://caps.fool.com/ViewPlayer.aspx?t=01004279975285466200

He seems to be one of the top performers around.

His explanation is here--

http://boards.fool.com/Message.asp?mid=24815375
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“An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting this requirement are speculative.”

Then by that definition, I don't see how any individual stock can be anything but speculative; and by a lesser degree, any index or fund.

Few things provide a promise of safety of principal (FDIC, treasuries, etc.).


I think you are taking it too literally. Graham wasn't talking about absolute safety or guarantees of safety of principal. It helps to read the book to get further context.
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Wynpoker,

At the risk of stating the obvious, "It's all relative."

If you have the aptitude and time, picking stocks (buying and selling), especially when using the resources of a good investment service like TMF, then that's the way to go. I'd bet on Charly Tavers (my TMF favorite over at Rule Breakers) over any index fund you pick for any time period over two years.

If you are working 50 hours a week and trying to raise a family, then go automatic deposit into 401k or IRA index funds and enjoy your life. And there's the whole continuum between the two depending on how much time and enjoyment you get out of investing.
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At the risk of stating the obvious, "It's all relative."

If you have the aptitude and time, picking stocks (buying and selling), especially when using the resources of a good investment service like TMF, then that's the way to go. I'd bet on Charly Tavers (my TMF favorite over at Rule Breakers) over any index fund you pick for any time period over two years.

If you are working 50 hours a week and trying to raise a family, then go automatic deposit into 401k or IRA index funds and enjoy your life. And there's the whole continuum between the two depending on how much time and enjoyment you get out of investing.


Now THAT is sound advice!

I started testing the waters in terms of buying and selling stocks a number of years ago -- sometimes with success and sometimes without. I learned a lot that I then started to apply to what I do, but people's style and needs vary!

Nowadays, ALL of my investing and/or trading (I do both) takes place within my IRA, because I pay no capital gains taxes that way (no need to keep records for taxes that way, either).

I maintain my IRA account myself, without any real advice except what I look for on my own.

My wife laughs sometimes when, often in midweek, I'll tell her "Well, I found a hot one and made a few hundred for us this morning!" She knows I was up early, researching, spotting a few "comers" for the day, carefully put in maybe $2,000 or so at 8:00 (when I can start trading) and then later bailed out -- or set in a stop limit -- and made a few hundred dollars on that little chunk of cash.

And, because our income vs deductions are low enough, we've paid no state or federal income taxes for two years now, even though I routinely draw out maybe $10,000 to $12,000 per year for "extra" costs above our Social Security income!

Never play with too much of your money, never put all your eggs in one basket (or even a few baskets), LEARN about how the "game" is played before putting real money into it, and be ready to sell if need be.

Vermonter
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Raymond:

I'm with your friend, but that's just me.

I do ALL of my investing or trading within my IRA, as I say elsewhere in this thread, because I never have to worry about any capital gains taxes that way.

Again, since we live mostly on our Social Security income, we also hardly ever pay income taxes, either. (We've paid ZERO to state or federal in the last two years, even though I routinely withdraw several thousand dollars a year from my IRA for "extra" things that come along -- like paying the whole oil bill in advance for the year!)

I think you have to pick the style and techniques that work for YOU -- and never mind your friend.

When I started out, I "played" at investing or trading by "buying" (pretending) stocks in a make-believe Yahoo account, and then seeing how my purchases did. Cost me nothing, was kind of fun, and I learned something about how the game was played.

If you decide to try your hand at "trading" (buying something, riding it upward, and selling it to make a quick profit that same day), be aware that even the "hot" ones can turn on you FAST! I keep a relatively small amount of my IRA account in cash specifically so I can do some day trading (or longer term buying, for that matter) if I choose to do so.

NEVER, EVER go "whole hog" with your money into ANY stock! People lose their shirts that way!

Also, beware of "churning" an account. IOW, I ran afoul by buying a stock at 8:10 a.m., riding it upward as it increased in price, selling it in an hour, REbuying it later, again riding it, and reselling it again -- all that same day! I later found out that, though my account was showing me that I had enough for both purchases, due to "settlement" delays (in days) I did not really HAVE all that money in the kitty so I was breaking the rules when I bought the second time!

I also suggest you learn about the use of STOP LIMITS. They can be very helpful. (Forgive me if this is boring and you already know all this.)

Say you buy a "hot" stock and it increases nicely for a morning -- or for several days -- to where, if you sold, you'd make a nice profit. However, you think it'll keep growing for days, weeks or months, so set in a stop limit for a reasonable profit, far enough below the current price so that minor fluctuations won't sell you out prematurely.

Then, if the stock continues upward, go into your account and tweak the stop limit UPWARD some more! This can be very helpful, especially if you need to go away on, say, vacation for a week or two!

Good luck.

Vermonter
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