New Week Headed Higher!
Research for Online Investors

by John Dalt

9/28/09

The market has opened off to the races this morning. Last week gave us the feel of teetering on the brink of a cliff. The surprise was bad news Friday morning on durable goods and new home sales. The market seemed to struggle and ignore it by only 5 points for the day.  The rally this morning gives the feel of 1100 on the S&P is just a few days away.

Asia markets sold off over the weekend, building on fears of a slowing world recovery and stronger currencies that would affect their ability to export widgets to western economies.  Angela Merkel was re-elected as Germany’s Prime Minister.  This signaled continuity to the U.S. as she has resisted Britain’s calls for more economic stimulus.  Ms. Merkel seems to realize the pay back is going to be hell. 

News this morning that congress is pressuring the Treasury Department for information on the closing of Chrysler and GM dealerships we wrote about on Sept. 21 in our article "Gangster Government."  Dealership franchise agreements were cancelled in the bankruptcy proceedings.  Were they cancelled based on political contributions?  There seems to be a direct link.  This sets a new low for retribution by political hacks.

I have to leave the office this afternoon for a few hours so thought today would be a good time to feature one of our articles from Investor Resources.  I encourage you to spend some time looking through these articles for a nugget of information that may help you become a better investor.

Four Legs of Wealth

You have worked hard to earn your money.  Now it is time to use discipline and a good plan to grow your portfolio of long-term investments.  A four legged stool is sturdy and will resist tipping over causing injury.  We should ask for the same characteristics in our investment discipline.

Investing in stocks is a lot like investing in real estate.  There are rules, if you ignore the rules you pay the price.

On real estate it is location, location, location.

In stocks it is:

1. Allocation Diversity.
2. Trailing Stop Losses.
3. Position Sizing.
4. Watch Expenses.

1. Allocation Diversity
Warren Buffet makes a salient point.  You cannot predict where the next boom or bust is going to occur.  Who would have expected the personal computer to change the way we live?  Who knew that tech was going to blow up in 2001?  Who expected oil to go to $147, and then crash to $30 within 8 months?  You get the point, looking back it is easy to see these made sense and should have been predictable.  But they are not, so we need to spread our investments over different sectors of the economy.  This keeps us from losing too much in a crash of an industry like oil or financials in the last few months.  We want to be exposed to as many different sectors as possible.  No one can predict winners and losers with certainty.  Some may make an impressive call, but not consistently.

2. Trailing Stop Losses
When we buy a stock, we expect it to increase in value and pay us handsomely.  We set a trailing stop loss on the stock the day we buy it.  The highest closing price after we buy a stock raises the trailing stop loss.  If the stock ever drops 20% from our purchase price, or subsequent higher closing price, we sell it.  We take our money and profits to invest in another great company.

3. Position Sizing
This goes hand in hand with allocation diversity.  What good would it do to be diversified but the positions were different sizes.  My luck, the biggest position would be in a sector that suffered and my smallest position would be in the very best sector.  It is important to size each of our positions approximately the same size in dollar amounts.  Once a year, generally in December, we "re-balance" our portfolio.  We sell some of the high flyers and add to the sectors that have decreased in value.  Thus we rebalance each of our positions to make each approximately the same size.  We may pay taxes on some of the stocks that we sell at a gain, but a small amount of taxes is better than holding and ending up with a loss.  We recommend that each position be 5% of the total portfolio.  This means you will be fully invested with 20 stocks.

4. Control Expenses
We recommend you use a discount broker, so you transaction cost is low.  You can enter your orders from your home, in the evening, and save a lot of money over "calling in your orders"  We like to buy quality companies that we can hold onto for the long haul.  We want long term holdings, watching our dividends grow.  We don't want to pay the government just because we saw some other company we liked better.  Long term capital gains are better than regular income, but no taxes at all are even better!  You should try to put your high yield investments in a tax sheltered account.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions. It may contain errors and you should not make investment decisions based solely on what you believe you have read here. Do your own research, it is your money. If you lose it, it is your responsibility, not ours or your grandmothers! The editor may or may not have a position in any securities discussed. The editor may have held a position in a security earlier, or in the future.

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