Today, Neenah Paper (NP) rose above where I sold it. This is of course a common pitfall of stock trading: watching what the stocks you sold did after you sold them. In reality, there is nothing to be gained from second-guessing, unless you notice you're missing a lot of such calls, in which case you might need to adjust your strategy. I made a small amount of money on the trade (one that would in fact allow me to hit my annual goal if I could do it every month) and I still don't have a good feeling about the paper business overall or NP's prospects in particular, so this short-term gain doesn't really change my mind about putting the money elsewhere. I got into it because it was slightly depressed from the Motley Fool recommendation price, and I had a hunch it would rebound soon. It did. In short, it was a trade, and while I didn't make as much as I could have if I'd timed the sale better, I did make a little. I think I'll be doing less trading in the future, though, and here's why:
I finished reading Peter Lynch's One Up on Wall Street over the holiday and found it made a good deal of sense to me. The Motley Fool's "Hidden Gems" newsletter, to which I subscribe, is heavily Lynchian in its philosophy: find smallish, boring businesses that are well-run and have great growth potential but which are largely being ignored by analysts, get in before the Street discovers them, and hold them while they increase in value by two, five, ten, or fifty times. The theory is that you only need one really big winner to make up for a lot of mediocre performers. It seems to work.
Unfortunately my current "chunk" of $1000 and contributions to date of $5000 (soon to be $6000) doesn't really allow me to hold stocks very long if I want to add a new stock to my portfolio every month. That would require selling stocks I'd held for only six months. My plan, therefore, is to buy no more than one new Hidden Gem every two months and try to hold each for a year. In a sense I am "wasting" three quarters of my HG subscription by not buying all their picks, but I probably wouldn't buy all their picks anyway, as some of them just don't appeal for one reason or another. In the meantime I can put together a mock portfolio and see how the stocks that I might have bought if I'd had the money would have done, which will be educational.
Alternatively, I could open a regular brokerage account and buy some of their other stocks when I have the money to do so. The tax structure would encourage me to buy and hold. However, I want to get a few grand into savings before doing that.
In August or September I'll be able to contibute another $1000 to the Roth, which will max me out for the year. I'll use this either for a sector ETF (I'm considering the iShares Emerging Markets ETF, symbol EEM, to get some foreign exposure) or to do a little shorter-term speculating. As Jim Cramer points out, speculation is useful to keep you excited about investing, but it should never make up much of your portfolio. (He also says not to speculate in your retirement fund, but my 401(k) already has my retirement covered, so the IRA is my play money.)
My goal is to save up another $4000 by the end of this year and be able to make my 2006 contributions at the beginning of next year, for a total of $11,000 in contributions. With any luck, I'll also have earned $1000 or more in 2005; as I cash out old stocks to buy new ones, I'll keep investing in chunks of $1000 and set the excess aside toward adding a new chunk. This will give me twelve chunks, allowing me to buy a Hidden Gems pick every month -- or to hold bi-monthly picks for two years, which might be more reasonable.
My portfolio closed at $5601.49 today, a new high. I'm well on my way to earning that new chunk.
There's still the question of what to do with the Lennar (LEN) and Toll Brothers (TOL). Obviously, those are sheer speculative plays in the homebuilder sector and right now I have two chunks tied up there -- way too much if I am to be a truly Lynchian investor. Lennar is up over $64 today and I should probably think about selling it in the very near future for a quick 9% gain. TOL went over $107 once since I've owned it, and I think it can get there again if I'm patient enough (it closed at only $100.70 today). So for now that'll be my speculative play -- as I mentioned last week, Toll reports earnings in late August, but I'd consider selling if it goes above $107 before then; that'd be a 16% gain, which ain't bad for speculation. At that point I'll probably put it into EEM and refrain from further speculating until I run into something compelling.
Lynch also points out that a home is one of your better investments. I really am not crazy about the idea of owning a home, but in 2006 I will begin to save up a down payment. With all the talk of a bubble, I'm kind of hoping to see real estate prices level off a bit or even decline slightly before I buy. In any case, by the time I have some money to put down, my credit score will be greatly improved.
Posted by kindall at July 5, 2005 02:58 PM