Good morning! Today Troy continues about the investing for beginners series. You can check the previous posts about What are stocks and how to value them, How does Currency Trading Work, How are Currencies Traded, Investing in Commodities, What Fundamentals Affect Commodity Prices, What are ETF’s, What are Options, How are Options’ Prices Structured, Investing for Beginners Part 2 – Different Investment Strategies, When does Buy and Hold not Work, An Unconventional Approach to Buy and Hold
In the last post I discussed the need to create a side business if you decide to buy and hold. However, creating a side business is not enough. We’re still missing a couple of ingredients.
Identify the Trends
Having a steady source of cash to snap up stocks on the cheap (when they are cheap, of course) means nothing if what you invest in is wrong (duh). You cannot do what your parents or grandparents did and just blindly invest in the stock market. The fact is, they got lucky. They were probably the luckiest generation of people (Americans in the 20th century, America’s Century), much like the 2nd century Romans (Rome’s Golden Age) or the 8th century Chinese (China’s Golden Age). For many of our parents’ generation, they retired because of sheer dumb luck. They blindly listened to their financial advisors (what else are you supposed to do if you’re too tired after a long day of work?) and invested in America, the Land of Opportunity. Fact is, the market didn’t achieve 7.5% returns annually because “this is America”. It’s because of the unique circumstances that we were in during the 20th century (America’s golden age). The market just so happened to achieve 7.5% returns annualized.
But our generation is different (which we can see from all the practically bankrupt pension funds). We need to invest smarter. We cannot depend on sheer dumb luck. And in order to do that, we need to identify the long term trends. And you know what the beauty of this is? Identifying long term trends is actually pretty easy!
It didn’t take a genius in the 1980s to realize that computers were becoming a big thing. As long as you were relatively smart (no Einsteins here) and you read the news (no NYTimes.com back in the day, unfortunately), you probably knew that computers were taking over the world! In the words of famous investor and hedge fund manager Jim Rogers, “you don’t have to predict the future. You just have to see the money lying on the street, walk over, and pick it up.” In other words, what he’s saying is that you don’t have to predict future trends. All you have to do is recognize trends when they occur.
All these trends will be caused by big fundamental factors. A couple of trends we’re experiencing right now include:
- The long term devaluation of the U.S. Dollar. Thanks to Bernake printing a ton of money (quantitative easing), the US Dollar is in a long term (multi-decade) downhill slope.
- The long term bull market for commodities. Massive demand from China and emerging economies will mean a huge increase in demand for raw materials.
Have an Exit Strategy
Of all the investment books that I’ve bought (and believe me, that’s a lot), there’s only one book that I’ve found to really be useful: When to Sell Stocks (and no, I’m in no way affiliated with this author). Why is this book so friggin awesome? Because every single investment book out there only tells you when to buy and how to buy stocks. Not a single book (besides this one) tells you how to sell and turn your paper profits into real profits!
Selling isn’t as easy as hitting the “Sell” button on your keyboard (if that actually existed). You need an exit strategy:
- What price will I sell at?
- Will I liquidate my entire portfolio all at once, or will I liquidate a portion at a time?
- Will I liquidate on the way up during a bubble, or will I liquidate my entire portfolio in a post-bubble rally?
These are all very important questions that you must answer before you decide to buy and hold for 40 years. Most buy and holders just say “I’ll figure it out in 40 years.” That’s totally wrong – you need to plan ahead.
Unfortunately, I cannot tell you what your exit strategy is going to be. That is totally dependent on your unique circumstances.