Dec 19th, 2007
Some Ideas on Individual Stock Management
It’s the end of the year, which means it’s time for me to consider what to do with my portfolio, as well as to deposit money that I would miss the chance to otherwise (like that Roth IRA deposit that must be done by April 15) or take advantage of changes (like taking a loss) to help my tax situation (I almost never do this). One of the things I do at the end of the year is consider what to do with the stocks in my Roth IRA account. Since the account is tax advantaged, I don’t have to worry what affect changes will have on my tax bill; I just need to consider whether or not the stocks I’ve had in there for the past year are ones that I want to continue to have in there.
When I purchase stocks, I take one of two courses: I’m either looking for something that I think is a “best in the world” type company, or I’m looking for a large cap, dividend paying stock that for some reason has become undervalued, despite the company itself still looking solid. In the case of the first type of stock, some of my picks over time have been Toyota and Apple–these are companies that make products I use, believe in, and have been very financially successful. I consider them to be the best in the world at what they do (which I acknowledge is arguable) and bought their stock as long term holdings. In the case of the second type, some examples of stocks I’ve purchased have been GM, AT&T, and Caterpillar. I consider them to be out of favor (for whatever reason) with the investment community and I’m hoping that they will come into favor while I own them, so their prices soar. These stocks may or may not be long term holdings–GM and Caterpillar were one year wonders, and AT&T has been a few years now but I’m not sure if they’ll be a long termer; I evaluate them at the end of the year.
Why the two different approaches? It was a learning experience. The second method mentioned was my original method; it came from studying the Dogs of the Dow theory, as well as Motley Fool’s now discredited Foolish Four. At that time I believed that a mechanical method of picking stocks was the way to go. The problem is that while there’s some validity to this method, the stock market, as always, is unpredictable.
Along came Google. While I have never owned a share of Google stock, what I learned from it was that if you have a company that is the best in the world at what they do, it’s not likely they’ll hurt your portfolio. So from that point forward, I decided to look for stocks of companies that were the best in the world. I also did some studying of the Beardstown Ladies methods of evaluating stocks (which seemed sound, despite the issues found with their investments long after their initial fame was gained) and the Motley Fool books. I decided that it was important to own stocks of companies with products I understood; companies with solid earnings; companies with products that I actually used myself; and companies that seemed to have room to grow. If I had known now what I knew then, I would have been banging at the virtual door to get onto the GOOG express from day one.
The two paths of how I choose stocks crossed in mid 2006; I was looking at the price of AAPL sitting in the mid to high 50s and thought, “That looks undervalued.” I have used and loved products from Apple since the early 1980s, and I thought this was a great time to buy.
I didn’t. I kick myself for this all the time, but in early 2007 (remember “end of the year”), I went ahead and pulled the trigger with AAPL closing in on 100. Now, when AAPL is near to 200, I think I did okay.
How do I know when to sell? For the most part, I try not to. I tend not to be a guy who will sell my winners; if anything, I sell my losers. But I’m not always convinced a loser in a year will be a loser forever. I think that i’ve probably sold only about 5 individual stocks in my entire life; the rest have become keepers.
Are my systems scientific and perfect? No, no system is (and even when they’re close to perfect, I am not, as the AAPL story above points out). I have faith in them, but they’re much more about judgement calls than numbers; yes, the numbers have meaning, but they’re not infallible. I protect myself by limiting my individual stocks to a small percent of my portfolio. But I have fun with them, and some of my stocks have done much better than the rest of my portfolio (and yes, some have done worse). And once a year, I’ll take a look at them and make some decisions; I like to think I make the right ones.
