Self Honesty: Stock Market Strategies Worth Considering June 6, 2008
Posted by Jeff Nabers in Self Directed IRA/401k.Tags: 401k, call, crash, crisis, fund, going long, hold, holding, home builder, index, inverse, investing, ira, lender, loss, mortgage, mutual fund, options, position, profit, put, risk, self directed, selling short, short selling, stock market, subprime, trade, trading
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While I generally avoid mutual funds like the plague, I don’t avoid the stock market altogether. I’ll split what I do in the stock market into two categories: long and short. Either way, I’m honest with myself in admitting that no matter what I do in the stock market, it will be speculative and risky.
Long
“Going long” means buying a stock and expecting its price or income to rise so I can sell later for a profit. There are millions of people who have access to the same information as you, and that is generally reflected in the price of that stock. If you know something non-public about the company, trading it may be illegal for you. I’ve bought individual stocks before; I just treat the situation honestly; it is speculative in nature, and I only make such trades with very small portions of my portfolio.
I don’t go long on mutual funds because I don’t know what I’m going long on. It is virtually impossible to know what I’m actually investing in when I buy shares of a fund.
Short
Selling Short… A short position is the opposite of a long one. Instead of buying low and selling high, selling short is a matter of selling high and then buying low. For me to do this, I borrow shares of a stock and simultaneously sell them at the market price in expectation of a price decrease. To close this position later, I just have to buy back shares of the same stock at the then market price and pay back the borrowed stock. If during my position the stock price declined, I profit; if the stock price increased, I have a loss.
Ex: ABC Company seems to be doomed. It’s currently trading at $50, but I think it will go much lower over the next couple months. I sell 100 shares short. This means I borrow 100 shares and simultaneously sell them for $5,000. A few months later I see the stock price has declined to $35. To close my position, I buy 100 shares back for $3,500. I pay back the borrowed shares and retain the $1,500 profit, less fees and commissions.
I like short selling more than going long. I often notice (more…)
Saving vs. Investing vs. Surrendering June 4, 2008
Posted by Jeff Nabers in Money, Self Directed IRA/401k.Tags: self directed, ira, 401k, investing, inflation, fund, saving, surrendering, mutual
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Has your saving really been a loss? Has your investing really been saving? Let’s find out. To start, here are my definitions…
Investing - the placing of assets to build wealth in a way where overall return can be maximized and risk minimized confidently, competently, and consistently.
Saving - the act of reducing spending in an effort to accumulate wealth.
Surrendering - the placing of money into a situation where you have little to no understanding of where your money actually went… and thus little or no control of what happens to it.
Building on that, my philosophy of wealth building contains 4 simple truths:
- Investing primarily in the stock market is only possible on a large scale (like Warren Buffett) or with nonpublic information. The latter is illegal and can result in imprisonment.
- In the current inflationary environment, saving US dollars results in a loss of wealth… even in a CD or money market fund.
- The average person’s investable assets are inside retirement accounts, such as IRAs or 401(k) plans.
- The average person cannot invest until they restructure their retirement accounts to have unrestricted investment options.
What you’ve called investing may have actually been saving and surrendering under my definitions.
Investing into a stock may be (more…)
How come I’ve been losing 4% per year over the long run in a stock market that returns 10% per year? May 2, 2008
Posted by Jeff Nabers in Money.Tags: 401k, average return, bond, charts, dollar, fund, index fund, inflation, invest, ira, mutual fund, peformance, real estate, s&p 500, self directed, stock market, stocks
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One investment philosophy that has grown in popularity is “Because most mutual funds can’t even outperform stock indices, just invest in index funds.” This idea builds on the assumption that “over the long haul, the stock market goes up 10% each year.” Guess what…
The stock market does not go up 10% per year in the long run
- The math is just plain wrong. Lying averages tell us if you average the annual returns of the stock market it will equal its performance… but, as the name implies, it is not true. Lying averages tell you that if you are aiming for a 10% average return, and you have a 20% loss one year, it will take a 30% gain the next year to get back on track. Truthful math will tell you it will take a 50% gain just to get back on track for a 10% average annual return. Think about that in light of the stock market activity in 2000, 2002, and 2007.
- Any returns less than inflation is truly a loss. With inflation currently at 11.58%, you’ll need a 21.58% annual return to grow your wealth at 10% per year.
Just look at the last 10 years of data…
On the chart above, the red line reflects (more…)
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