Archive for the ‘Investing’ Category

Just over a year ago I finally ventured into the world of stock investing.  Oh, to be sure, I’ve used mutual funds in my 401k for years.  However, I’d never taken the plunge when it comes to investing in individual stocks.

I’d been trying to decide how to invest my son’s college fund and was not impressed with investment returns of the state 529 programs.  Believing I had the knowledge to do better, I spent part of the prior couple of years looking for a new strategy that I could use.  In order to make sure that I was doing the best I could I decided to get my own skin in the game by leveraging the self-managed part of my 401k and apply the same strategy to both my 401k and my son’s college fund.

So, the quick summary of the first year’s pre-tax, pre-fee returns:

  • Self-managed 401k ROI excluding any fees – 29.6%
  • College Fund excluding fees/taxes – 32%

I’m extremely excited about those returns.  However, I need to caveat those with a couple of things prior to digging into the details.
First, I don’t currently have the inclination or time to perform analysis on individual stocks.  That said, I’m leveraging a quantitative value stock strategy in which a computer applies algorithms based on criteria to pick my stocks for me.   I did not design this system and in some ways accidentally stumbled over it.  (IE, I’m not that smart!).  More on this in a minute.

Second, the stock market has been significantly up in the past year.  In fact, one of the mutual funds in my 401k is tracking at about 35%.  The other two funds are doing well but less than my 29.6%.  In other words, most people made (or should have made) money investing in stocks over the past year.

So, what was I looking for in an investing strategy?

  • I could understand the basic premise of the strategy if not the implementation details.
  • Didn’t take a lot of time to implement
  • Was a value strategy, meaning that I would buy and hold for a defined period of time.
  • Helped eliminate the emotional buying and selling that can occur with regular stock trading.
  • A computer picked the stock (thus providing b,c and d above).
  • Protected my capital

I’ve been a student of the Benjamin Graham and Warren Buffett value investing idea since I first encountered their ideas years ago and was researching information on how to screen stock using Benjamin Graham’s formula.  While doing this research I stumbled across a website (turnkeyanalyst.com) with associated blog and found that they had run analysis on different value investing strategies. The analysis included backtesting on the Magic Formula, Graham Formula and a Quantitative Value strategy that the authors of the blog had been working on and were in the process of publishing a book covering the strategy.

In comparing the tested strategies, the two that appealed to me were the Quantitative Value and Benjamin Graham strategies, both having very similar compound annual growth rates (CAGR).  In the end I went with Quantitative Value which had yielded about 17% in their tests.

After settling on the model I next determined my portfolio size.  Due to the difference in size between the college fund and my 401k I decided to only use the first 10 stocks for the college portfolio to help keep costs down and 15 stocks for my 401k portfolio.

And so last year I bought the following stock and two weeks sold all but one that the strategy still includes in this year’s purchases :

Portfolio Stock ROI
Both AET 73.16%
401k APOL -34.25%
Both BKE 36.03%
Both DELL 12.20%
Both DLB -5.00%
401k FRX 28.45%
Both GES -9.53%
Both HUM 41.66%
401k NOC 39.06%
Both SPLS 7.25%
Both STX 22.98%
401k TKR 44.56%
401k TSO 38.48%
Both UNH 40.32%
Both WDC 51.23%

As you can see there are several different industries covered in my portfolio and there were a number of very good purchases and some that could have been better.  The bottom line is that the overall return was phenomenal.

Now, before you rush out and try something I’d like to make a few observations and then wrap this up.

  1. Before doing anything.  Research.  Learn and understand.  Don’t do anything without doing your own homework.
  2. I don’t necessarily recommend the path I took for everyone.  In fact, you might follow the advice of Warren Buffett and others who recommend that the average person use good indexed funds with low costs.
  3. Watch out for emotions and for any ideas that you can time the market.  Case in point.  I was supposed to sell my stock on 8/15/2013, however, due to being unprepared and busy I didn’t.  Several days later the stock market dropped and my portfolio lost about 2% in value.  I then waited another almost two weeks in hopes it would recover and it did not.  Lesson learned.  Sell when the strategy says to sell and buy when it says to buy.
  4. If you choose a buy and hold strategy don’t monitor it every day unless your strategy says to sell the stock after a certain percentage gain, holding time period etc.
  5. There will be ups and downs.  This past year I made 32% (before fees/taxes) , next year I may only make 10%.  We’re looking for long term growth and capital preservation.

Finally, I’m not a licensed investment professional and encourage you to seek out a professional to help you put a comprehensive financial plan in place.  Lastly, I currently have holdings in WDC.


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