It has been a down week in the stock market and it makes me question why I ever got the itch to pick individual stocks. For twenty years, I cruised along comfortably with my mutual funds, and they performed well above the market averages. I felt pretty smug about my performance, even through the market’s ups and downs. Then, I got the bright idea to open a brokerage account.
Three Bad Investment Strategies
Investment Services – My brother and I attended an investing seminar that made choosing stocks look like a sure thing. They had some slick software that showed everything on one screen. There were stochastics, MACD, moving averages and all of the fundamentals. They even had red and green arrows, showing the direction things were headed. I figured even a moron could do this, so we signed up. After a year of using the service, I ended up breaking even in an up market. I realized that I would have done better picking stocks with a dart board than paying $500 for the service. So, I devised a new strategy.
Newsletters - I purchased the stock newsletter with the best 10 year performance and I followed their recommendations. The bad news is the newsletter recommended uranium mining stocks. These volatile stocks were on fire before they crashed and burned. Who knew a tsunami was going to slam into a nuclear plant in Japan and cause the worst nuclear disaster in history? I still own three of those stocks, but they aren’t worth much. Like any novice stock picker, I am waiting for the big comeback.
Bottom Fishing – I was doing pretty well catching stocks on the rebound after the financial collapse of 2008. The bailout was in place, the market was headed up and it seemed as though I couldn’t lose. Unfortunately, I bought some shares of GM and Fanny Mae that quickly went bankrupt. I had to cash those shares out for pennies on the dollar and take a big loss. Luckily, it was balanced out by some of the other stocks, like Ford, that did pretty well in the recovery. But, it left a pretty bad taste in my mouth.
A Case of Buyers Remorse
So, I am looking through my portfolio and I’m wondering, who in their right mind would have purchased these stocks? They have no earnings, poor fundamentals and are from industries that are devastated. I own a home-builder that’s down 30%, a chip manufacturer who hasn’t made a profit in years and a bank that ousted their CEO last week. This wasn’t what I had in mind when I set out to beat the market. I envisioned double-digit gains, stock-splits and fat dividends. Instead, I own the Dogs of the Dow.
My New Trading Strategy
After all of the failed strategies and disastrous stock picks, I decided to get back to basics. I realized the most successful professional stock pickers over the past century used the same criteria. They are mostly Value investors. In other words, they look for stocks with good earnings that are trading below their fair market value. It sounds simple enough, but it’s not so easy to determine fair market value. I start with stocks that have a P/E Ratio of less than 10. Then, I try to determine if earnings are shrinking or growing. If you find a company that is growing earnings with a low P/E, you have a bit of cushion for the inevitable bumps in the road.
So far, things are going much better in my portfolio. Most of the stocks I have bought recently are doing much better than the stocks I bought in the past. As long as the markets don’t take a tumble because of the elections or the looming Fiscal Cliff, I should be in pretty good shape. Now, if I could just bring myself to cut loose with those old stocks that are under-water.
The Bottom Line
The bottom line is that picking individual stocks can become an expensive hobby. Even the stocks of solid companies can take an unexpected nose-dive on the mildest of bad news. Unless you devote lots of time and understand the fundamentals, you may be better off leaving it to the professionals.
“As a bull market continues, almost anything you buy goes up. It makes you feel that investing in stocks is a very easy and safe and that you’re a financial genius.”
Ron Chernow – American Biographer