INVESTING DIY – 3 – Selecting the right investments

I knew since the beginning of this cycle that this would be the hardest chapter, only I didn’t imagine it will be so hard. Why?! Because while there are only limited number of investment strategies, there are as many personal situations and characters as people on this world. This confusion, though, lasted only until I remembered something important: I am NOT a real financial advisor, writing for an audience of millions. Phewww – so all I need to do is to talk about the general guidelines that govern my decisions, rules of thumb etc. I will lay down some of them but probably now and then, as my experience grows, I will add more.

Basic Rules

  1. Invest LONG TERM. You are NOT a day-trader (trust me!). Trading often means commissions that can chew up your profit and – probably – translates into trying to time the markets. Not a bad career, interesting, exciting, but this activity is outside of my scope and I hope your too.
  2. Information is MONEY. Information and information processing. Not only financial reports but being up-to-date on the news and maybe trying to understand the world we live up to the point where we know where we are going to. I.e. If one knows that the world population is increasing by 74 million yearly at the same time that we continuously lose agricultural land due to misuse and abuse, the logical conclusion is that in the next 10-20 years agricultural-related companies will do well. Subscribe to economical magazines, financial newsletters, read the economical page of major publications… keep informed
  3. Discipline and Common sense is MONEY. Invest periodically, chose solid investments and stick to them for as long as they make sense. Just because many are selling that is not good-enough a reason to be selling – maybe you should be buying and taking advantage of the herd (but, yes, sometimes the herd can trample you so use that common sense)
  4. Greed is GOOD… but so is realism. A line in an article drew my attention – many intelligent investors know and prepare well for buying but very few are disciplined when selling: “Shouldn’t I stay with this investment some more?! It’s doing well, maybe it’s going to be making more money”… but then again, maybe not. If you estimate that there is no more growth in that sector and that is not compensated by other means, like dividends, sell it at a fair price. If the sector is doing less than good, take the beating and accept the losses. Better -7% than -35%. And remember, we’re not in this to double our money in one year but to grow them into a financial stable future.
  5. DISTRIBUTE the risk. The purpose is that overall you are making money and profits are beating the inflation. Especially in the beginning, I know what psychological impact would make losing money by betting all your cards on a single horse. So diversify by betting on the good geographical and economical areas.
  6. REINVEST. While I know that it would be very tempting to take those 2000$ profit to have that wonderful vacation, those could mean 8000$ in 20 years. If you put it that way, it might not be such a good deal. Dividend reinvestment (if you chose companies who pay dividends while insuring some growth) is a sure way to grow solidly. A conservative return of 7% will DOUBLE your money in 7 years. Not good enough?! Get a gun – 300$ – and rob a bank and you can make as much as 10,000% profit in 1h… which then you can hand it to a lawyer or a judge for a more lenient sentence
  7. Don’t forget about TAXES. If you invest outside RRSP/401K, made sure you know what you’re doing and evaluate the impact of taxes on your return. Some investments might seem meager but allow for tax deductions while others might seem booming but less so after tax. Subscribe to tax-reduction tips newsletters and use whatever means you have to reduce the taxes. Don’t give me that BS that you’re not believing in RRSP/401K/TSFA etc. – they are not GOD to believe in; simply some accounts with some perks that we can use for our own good.
  8. Invest in what you understand. Just because something makes good profits and everyone says it’s a good deal, don’t jump in the boat before you researched and made your own mind. Look for products and companies that you like and find useful. Warren Buffet said that if the business is good and solid (i.e. product is good) the price of stock will follow.

Let’s leave the theory and systemization to the ones who can do this. How did I go about investing?! Sergiu Preston helped me a lot – our conversations cleared my mind, confirmed some knowledge I wasn’t sure about and opened new idea threads.

  • Gold was a good investment although most articles were announcing that it peaked and there is no more place for growth. But then I read an article where somebody was pointing that in 1982, gold has reached 850$/ounce. Adjusted for inflation, that meant 2300$ in nowadays dollars so 1200$/ounce left ample place for growth. As the governments are printing more and more money (few years ago 440 million dollars deficit for US was a tragedy, now 1.4 TRILLION is a fact of life), it simply makes sense that all the investors would seek the shelter of gold. Fearful that the gold itself might be though too expensive and worried about liquidating should there be an issue, I turned my attention on the companies mining for gold and low-cost, no-load index mutual funds.
  • Dividends make sense in this tough economical times. Companies who seek growth when everyone is watching their pockets are making a huge gamble and by investing in them, you take one yourself. Better companies with moderate growth that put cash in your portfolio on a regular basis. I was shocked to find out that investments with 7-8-11% yield (dividends paid divided by price of share) don’t have to be risky business. Dividends are NOT guaranteed yet there are companies with a very long track of paying them – thus some certainty that, unless something earth-shattering happens – they will not cease to pay those dividends.
  • Energy – despite all the conservation promoted by the governments of the world – is required for growth and the demand drives the price of energy up. I found out that there are very good Canadian Trust Funds (google the term) which are about to transform into corporations and that the uncertainty made investors shy away from them, despite paying very good dividends 6.5-9%. With the capitalization they have (tens of BILLIONS of dollars) it’s unlikely they will vanish and bargains are to be taken advantage of. One of them, which drew my attention already converted to a corporation, it’s unit price grey by more than 4% and they still pay 6.3% dividends and there doesn’t seem to be a stop or diminishing them.
  • Emerging markets – we, the Westerners, we screw it up. By spending and spending and never saving we eroded our buying power. But hey, there are hungry new consumers on the horizon to save us and afford the luxuries we take for granted. China and other countries in Asia, Brazil and other South American countries are places where economy grows while ours is shrinking. Again, an index mutual fund – 0.73% MER and no load – was the solution to tap into that wealth-to-come. And this is a good example of personal attitude to take – soon after purchasing the mutual fund, it dropped by 7.5%. I studied the situation, I realized that it’s just a herd-attitude and stuck to them. In just 3 months they are back in black, more than 3% and I expect this trend to continue. The Chinese consumers are barely awakening and they will want everything we have: cars, electronics, apartments, nice clothes. The Chinese government started appreciating their currency, the yuan. With this, the average Xuang will see his buying power appreciating and will start buying more – thus better their economy will do. It’s just at the beginning but its a good thing to be in a sector when it starts rising than when it has peaked.

CONCLUSIONS: No matter what you do is still a guessing game. Information can help you minimize the guessing and thus the risk to a bearable level. By being informed and using your common sense, caring for your investments, not being overrun by emotions and keeping your greed in check, you WILL make profits. It’s all been written over and over again yet I write this to expose the human element: the initial fear and the joy when I realized that it’s not such a big deal to select decent investments. Bypassing the middle-man – the investment agent, who is on commision – you are already ahead of the game.

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