Thursday, February 23, 2017

Grow Your Own Investment Fund

This essay is part of a series written on investing intended to be helpful but not too technical. A beginners course for fledging investors, if you will.  You do need your money to grow faster than slow 2-year CDs paying 1% or less. Mutual funds are easy, an index-tracking mutual fund, for example the SPDR Dow Jones Industrial Average ETF Trust fund (NYSEARCA:DIA), may be the best choice for those that don’t want to do the homework. Read on if you want learn how money can actually be grown. How to trade shares of stock.

New York City 036590
The most important reason to invest is always going to be return on equity. You get something in return for letting other people use your money. You'll even get paid dividends, like savings account interest, in some cases. But another big reason should influence your decision to buy a particular stock. When I invest in some part of the economy, also called a sector, I do so for very specific reasons. I understand the Consumer Product, Technology, Logistics, Telecommunications, and Retail sectors but sometimes I will buy stocks outside of those.

I expect growth. Like in my organic vegetable garden.  If a company does not know how to grow, where is it really going? Why would I suddenly expect my money to grow there? Why should it be growing in my garden? Careful research within a sector is essential for understanding any investment. You might not be looking at the top performer.

I prefer the hunt for real growth stocks, stocks whose prices go up and up, to most other puzzles. I also run, walk, swim or bike but I literally go out and hunt for really successful companies. I initially invest essentially small amounts, by any measure, but all year long, every month. An amount going to my brokerage account has been a part of my monthly budget for decades.  

Regular investing doesn't make it any easier, you just need to save some money for retirement. Every month. I might forgo a big purchase at times, but I never skip my investment contribution. There is no choice or argument with the matter. Nobody is getting any younger.

Having a 401k account at work is an easy way to save, especially if the place where you work matches some of the money you contribute. When I worked at Ma Bell if I had 6% going to my 401k, Ma Bell matched the contribution. My big issue with 401k accounts is that people don't take care of them. They just buy some funds, often ones the company seems to recommend the most, and let their money sit there. It's like planting a garden and then walking away and expecting to come back later to just harvest food.

Open a discount brokerage account, it takes $500 to $2,000, depending on the broker. It is still your money. Think of it as a savings account that could earn you a lot more than 1% interest. It is true you could lose money, but if you are only getting 1% interest you are already losing money with that sleepy savings account. Prices are still going up, that's inflation.  Some stocks consistently pay great dividends. Invest in those if you want to play it safe and still get better returns than a CD.

You have to take care of stock investments, know what you hold, know what you should sell or buy, in advance. I know it sounds like the lyrics to a Kenny Rogers song, you will probably not be trading very often. When you do trade you want to make an informed trade. Then you make sure you look back at your investments at least once a week, more if you are planning to buy. You always do research before you prepare to buy or sell a stock. Always. 

If you think you have located a worthwhile company to invest in, to buy stock in, look in the other direction. Look at the other businesses that are similar to that company. It is an easy trick to do.

To avoid this type of investor myopia use a simple feature found in most investment-related web sites. In Google it is called "Related Companies." Just "Search Finance" an equity at When you  search for  "T" for example, you land at AT&T’s page. Scroll down and you see a list of Related Companies, along with basic performance statistics including: Price, Change, Change % and so on. You can even add or remove columns here.

You should start digging into competition here. Look at the performance of other firms with a similar market capitalization, in this example Verizon (NYSE:VZ) or Comcast (NASDAQ: CMCSA). Also look at tough competitors you know about, like Sprint (NYSE:S). Check the statistics, dig down deep.

5% Minimum Return Hint: You can simply use telephone or utility stocks like savings accounts, they’ll give you a steady ~5% return on your cash while you research and save up to buy growth stocks or growth+dividend shares. The prices of telco shares may vary, usually not by too much, but the dividend amount is often very consistent. 


When you perform this same exercise with Wal-Mart (NYSE:WMT), a few smaller competitors are displayed in "Related Companies." These include Dollar General (NYSE:DG) or Costco Wholsale (NASDAQ:COST). When you search those firms you’ll find even other important sector players, including Dollar Tree (NASDAQ:DLTR) or even Big Lots (NYSE:BIG). Each has a past performance history you can easily research.

Hint: BUY LOCAL PRODUCE: Many investors buy stocks in businesses where their money is going. You make a payment to the electric or cable company each month, why not have them send you a dividend check every three months? Or the cell phone company? Or even the place where you shop frequently? It might make sense.

If I change the chart for Big Lots (NYSE:BIG) to 1 year, and hover over the 1y, I can see it has gone up 36% in just the past year. However, over 5 years this fascinating retailer has only increased about 19%. It may be on a roll right now or it just had a good year. I would need to look closer.

If I change the chart for Dollar General (NYSE:DG) to 5 years,  and hover over the 5y, this stock has gone up 81%! 81% returns over 5 years is good. 

If you change the chart for Dollar Tree (NASDAQ:DLTR)  to 10 years,  and hover over the 10y, this stock has gone up 590%! 590% returns over 10 years is incredible. Nearly 60% returns a year for the past 10 years is mind-boggling to most investors. Now, remember, Dollar Tree may have done all the rapid growing it is going to do. Dollar Tree is just an example of how fast some stocks grow, there are many others. 

Hint: Investors have always enjoyed telling tales of incredible growth. Always check the actual results. Look at the 1-year, 5-year and 10-year charts. If you trade often, look at the 7-day, month and YTD charts.  Don't always expect growth to continue. Most people talking about some great investment probably didn't buy their shares way back in the day. It could still be a good investment. People often sell a stock at the wrong time.

I invested in Dollar Tree 10 years ago. Is it time for me to sell my investment?  I'm not sure it is. Dollar Tree just bought Family Dollar, if the integration of the two store chains goes smoothly, the combined firm and the stock could be worth a whole lot more. That is if people keep going out to stores to get items they need for $1.

I invested in Apple, Inc. (NASDAQ:AAPL) 12 years ago. Apple shares are up 972% over the past 10 years. Apple also paid dividends for part of that time. Even Google (NASDAQ:GOOGL) didn’t chart that type of performance, but in different long-term periods the search engine/advertising behemoth is not far off. These are the kinds of investments careful research will reveal. I still do the same research because there are always new great firms to discover. 

CSX Corp. (NASDAQ:CSX), the freight train people in the logistics sector, or Johnson and Johnson (NYSE:JNJ) in consumer and health care. have performed well above market average, while paying dividends, especially over the past 5 years. You’ll notice my emphasis on Consumer Products, Retail, Logistics and key Technology firms. Google and Apple are both, in some ways. Cisco (NASDAQ:CSCO), Amazon (NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and IBM (NYSE:IBM) past results all stood out at one time, but where are their competitors going today? Where are their customers going? What are the underlying numbers telling me? 
Hint: John D. Rockefeller, offered to pay owners of oil wells and pipelines shares of Standard Oil stock instead of cash. Many well owners demanded cash. The people that took Standard Oil shares mostly became very wealthy as the stock price went up and up. The monopoly eventually got split up, but stock holders earned even more as a result!
Some other firms did even better than the well-known firms mentioned above. Some businesses you never heard of grew rapidly, but that is a level of risk most people cannot tolerate so close to retirement. Maybe XYZ Labs will come up with a cure for some type of cancer. Those kinds of questions are tougher to research. Do you or any of your friends or people at school carry a particular model of phone or all buy your shoes at one place? You may have the secrets to some good investments in your pocket or the pocket itself.

The firms I just mentioned could also flounder over the next few years. They could be trading at 52-week highs for the last time this year. You can only understand future performance by looking very closely at the industry direction and whether particular firms have positioned themselves to grow. I actually listen and take notes during quarterly conference calls for key firms. They announce these open meetings weeks in advance, sometime after the end of each quarter. You must listen cautiously, every CEO thinks the business will grow even more next year! Listen to how they explain why that will happen.

I'll never forget listening to early morning conference calls for a Norwegian oil firm I owned for years, Statoil (NYSE:STO). They asked anyone with a question to press a button on their phone. I assumed that was only a feature for the big analysts. One quarter I had a great question, and pressed the button, I was suddenly asking the CEO in Oslo a direct question. It was about natural gas versus oil wells, I think. He answered my question as carefully as any other question that was asked. Conference calls are typically not that open to questions from individual investors. 

Annual meetings are also part of owning stocks. Owning even one share gets you a ticket into a party, someplace. Each year public firms hold an annual shareholder meeting. Some are just big meetings held in a conference room. Others offer food, free samples and a chance to meet management and ask questions. If you go to one of these annual meetings you may start attending them every year. My mother went to annual shareholder meetings for years.

Most of the firms listed above are positioned to keep performing, by having management with proven track records, well-known premium product lines and industry-leading recent results. They are making smart acquisitions of strong companies that will help them grow. If you visit their stores in different places you see similar foot traffic patterns. They are in business all over the U.S. or all over the world, not just in one small region. These are some of the key performance indicators good research reveals.

The retail sector is a tricky place to invest these days. Many people are ordering on-line more and more. Some may have had a good year recently and that’s it. What is the price of each share worth, when compared to the past earnings (P/E ratio)? Lower P/E ratios, say below 20, may reveal a bargain stock. Maybe. Amazon’s 173 P/E is shocking, but that only reflects Jeff Bezo and Amazon management’s style of spending earnings to get future results. Past performance is no assurance of future performance, but sometimes you take what you can get. Try the research techniques described above on completely different stocks. Gems will rise up out of such research.

Careful with the game of guessing which firm will buy another big firm. I did correctly guess the AT&T (NYSE:T) acquisition of DirecTV well in-advance but never suspected Dollar Tree was going to buy Family Dollar. This is a dangerous game to play when you know you’ll need this money to retire on. Think instead about which firms are still likely to be around and thriving when you actually do retire. Since so many changes are coming along so quickly, also look at emerging technologies. WalMart’s (NYSE:WMT) recent investments have me intrigued though I don’t see them passing Amazon. 

Walmart has very profitable divisions in Mexico, South Africa and other places. Massmart (JSE-MSM) is Walmart's growing African division, with 470 stores, and expanding out of South Africa into other sub-Saharan nations. Profits at Massmart Holdings Ltd. grew a healthy 12% last year. The shares on the Johannesburg stock exchange (JSE-MSM) are up 34% over the past 3 months, and they pay nearly a 3% dividend. That's a clue something is working. This means owning Walmart shares would give you exposure to growth in a fascinating emerging market, Africa. 

In addition to Walmart shares I owned shares of Wal-Mart de Mexico at one point. Careful with foreign stocks, if you are beginner, they can be more difficult to understand than domestic firms. I do invest in businesses in India, Europe and South America, but only after considerable research. I hold funds invested in these places during a periods of high growth. Key foreign firms can be real strong growth stocks.  Some did quite well. Others did not. International funds, with their associated fees, give you exposure with less risk than owning the underlying shares. Annual dividends from international funds, often paid in December, can be a real pleasant surprise some years!

Study the components of a strong performing fund. If the fund is doing well, that means certain shares held by the fund are probably doing fantastic. Figure out which stocks in the fund are strong growth stocks, buy those shares directly, if you can. Look for ADR-type shares sold in the U.S. but representing foreign businesses, if you want to own overseas ventures. 

People chuckle at me when I mention I am an owner of some firm. I don't talk investing much in most social circles. My investing is typically private, though here I am sharing my overall philosophy in this essay. Researching and writing it all down is how I was taught to invest and stay enthusiastic about investing.  I have written hundreds of personal research reports on stocks that I might never share with anybody. Be an owner. If you own shares in a business, you are one of the owners. No question about it. You even get to vote your shares once a year by proxy.

Your research might delve into labor and environmental practices at the firms where you want to invest. For example, I do not buy tobacco shares or certain chemical or defense manufacturers. I look for firms investing sustainable clean energy. Apple, Inc. does this effectively. So does Tesla  but so do many other socially-conscious enterprises.  

Find out what the other parts of a firm are and who they compete against. I once invested in Level Three (NYSE:LVLT), a fiber optic cable company, without knowing they also owned a mine at the time.
Hint: If your company offers to give you shares at work in some way, think carefully about the offer, and then take them. Lucky you, that is profit-sharing, not all employers do that. You might not be able to sell them right away. How long were you planning to work at that job? They gave you stocks you cannot sell right away to encourage you to stay! At some point you can sell the shares and take the cash, but you just might want to hold onto them, especially if you think the place where you work is a success story.

Finally, my mix of some of the above shares didn’t return 50 or 60% annual returns over time, though I hold a high percentage of excellent performers long. I diversify, to an extent, though brokers always say I hold too many of certain shares, the results have been worth the added risk, for me. My total portfolio returns, including dividends and other special items, over the 10-year period ending 12/31/2016 were 330%, or 33% a year on average. Tough years (2008) were balanced out over many great years. All of that money is still in play and still growing. If I get a tax refund, I invest it in shares, not a new TV. I can buy the new TV later, with the dividends from the shares. I contribute $100s of dollars each month, every month, to my brokerage accounts, sometimes much more.  I privately call it Tom’s Hedge World Fund, or the THW Fund. Who wouldn’t?

(DISCLAIMER: I own, have owned or will soon own most of the stocks mentioned above. I do not just write about investing, I am a lifelong investor.  Several of my friends are successful brokers for big firms. They buy and sell stocks for other people, but we rarely talk about their work or my portfolio. Our conversations are more likely to be about the NFL or World Cup Soccer or art/fashion. I’ll admit, they listen to me more than I listen to them! They say I skew hard to NASDAQ-listed firms. That’s because those are the type of places I know. My neighborhood. Some firms are listed only as examples to help readers compare stocks. I do not work in the securities industry, buy or sell for others or directly advise other people for pay. I’m a technical consultant, writer and instructor. I often get paid to do lots of research, business processes mostly. I was not paid by anyone to write this or any other article in this blog.  I am paid to author or edit many other documents, mostly Standard Operating Procedures.)

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