One method I’ve used to make tons of money investing is through buying shares of good (or in some cases only decent) companies when they’re distressed. It’s not rocket science. After many years in the market my mind is trained to look opposite the people screaming and running away. You only have to fall off so many cliffs following the herd of lemmings that you learn to become a salmon…..
Sometimes this backfires, and generally things go wrong when I purchase shares emotionally. That’s why, in the next several weeks, I’m going to begin a project that I haven’t done before (I know what you’re thinking….there’s some financial concept Joe hasn’t yet personally explored? Say it isn’t so!).
What I’m Going To Explore
I’m going to try to build an algorithm that captures good companies when they head south and sell them before the party ends.
Here’s why this is funny:
– I know zero (and I mean ZERO) about building an algorithm.
– I only have a cursory idea of what I’m trying to accomplish. I spoke with PK at DQYDJ.NET and I’m fairly certain he thought I’d been smoking something funny before I sat down at the keyboard.
I won’t call this financial planning. It isn’t. I also won’t call it responsible. I’m the guy who encourages people to stick to indexes, to asset allocate your portfolio (diversify appropriately), and leave it alone.
So why am I going to start making some stock trades?
I’m intrigued by books like Stock Market Wizards, where people have found algorithms that produce consistent results that beat the pants off the market. I also know enough people who read this blog who are afraid of the market that I’d like to show that while it’s a wilderness out there, you can find established pathways.
Here are a few areas where I’ve made money that I’d like to see if I can systematize:
– When Eli Lilly a number of years ago was denied FDA approval for a new drug, investors fled. Knowing that Lilly wasn’t going to go bankrupt, I jumped in. Within six months I’d gained well over 40%.
– When the financial crisis hit some firms in late 2010 I jumped all over it. I purchased shares of a quality financial advisory firm, Boston Private Financial Holdings, and have doubled my money.
– When Bank of America was in trouble with the government, I swooped in and made a purchase. I doubled my money in just less than 14 months.
– When Yahoo! Announced Marrisa Mayer as the new CEO, I purchased.Maybe this one doesn’t qualify, but Yahoo! shares dove and I jumped in, thinking that the new CEO would (at least through her fame) make some headway in the stock. Yeah….it’s rockin’…nearly 40% in seven months.
I’ve also stepped in it:
– I purchased BP shares when the disaster in the gulf appeared. While I had fantastic initial gains, I held on too long and now have been saddled with a pretty crappy return…18% in three years. Luckily, I invested a whopping $1,800.
– I bought Carnival when the ship limped in to port and shareholders fled, anticipating a class action lawsuit. The shares, even after lawsuit factored in, became very cheap. Who knew they could have another problem a week later? I sat on a rotten return for some time until shares finally rose this summer with the market.
– When JCPenny fired their CEO, I’d just begun a love affair with the company. I got it. Shares cratered and I swooped in. Oops. Apparently I’m still the only one who loves JCP.
That’s why I don’t recommend playing with individual stocks as an investor. It’s risky. However, I have two choices. I can either:
– Go back to 100% passive investing.
– OR learn from my mistakes and create a system. Then I can hone my system as I’m beaten up.
While I advocate option #1 above for most, I’m going to go down the road of option #2. Most investors I know touch the stove and then decide to never buy one again. I’m going to use my money as a learning device. Rather than decide I “won’t cook,” instead, I’ll tweak.
Here are my precepts:
– This isn’t with a major part of my portfolio. I’m using less than 10% of all of my money for the grand total of all of these buys. For most of my investment, I’m using ETFs or funds where ETFs aren’t available (Cheryl’s 401k).
– I’m not advocating this for my readers. However, I thought it’d be fun to follow along as I try this out.
I’m not sure how this is going to turn out. Sometimes I feel like I’m looking for an easy return, and will probably end up like this guy stealing a phone from a woman in Russia.
If I end up like him, hoping to steal something that isn’t really available, you can consider this series a public service announcement. 😉