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Good Morning Readers.
Today I
wanted to spend some time on the difference between investing vs. speculation
and I want to highlight a stock that I have held for about 6 months that just
may be beginning to breakout. It is US Gold (UXG).
OK.
Let’s start with the difference between investing and speculation.
These are my opinions but it is also how I go about handling my affairs. Take
it with a grain of salt.
I have
two pots. In one pot are my investments. I have a friend that calls them
"drawer stocks." You put them in your drawer and forget you have
them. I believe that while that is a great “one liner” it is
oversimplified. I characterize investments as stocks that have been around
for a long time - that kick off a solid dividend and have all the signs of
continuing to do so. This pot has a diversified group of stocks that yield 5%
(+/-) or better and have a long proven track record of doing so. It is
important that I tell you that the most important tool an investor has is
dividend reinvestment over a long period of time. It is amazing that by
taking the dividends that these stocks kick off and reinvesting them back
into the stock, the stock will compound quickly making this pot grow. I use
Computershares and Bank of New York Mellon as holding companies. The stocks
are held in these two companies and I have set up my account to automatically
have the dividends buy more shares (or reinvested). You don’t have to
do anything except set it up to dividend reinvest. If from time to time you
find that you have some extra money send it to them and they will buy even
more shares. Even better, if you can afford it, have $100 a month
automatically deducted from your checking account to buy more shares. Just
make sure you are not stretching yourself to thin. This will only lead to
frustration and in time you will give up. Setting up a dividend reinvestment
portfolio is like getting married. You have to be fully committed.
So what does a diversified portfolio
mean? It means that your stocks are in different sectors. I will use my account
a proxy to demonstrate what I mean. This is by no means the be all and end
all. Use it as a template. I have holdings in Altria (MO), consumer
discretionary, Con Ed (ED) utility, Exxon Mobile (XOM) oil, Verizon (VZ)
communications, Johnson and Johnson (JNJ) pharmaceuticals, and Lockheed
Martin (LMT) defense. To review you can see that my diversification is in
consumer staples, oil, utilities, communications, pharmaceuticals and
defense. By all means do not think this is the best of the best. There are many
stocks that fit this bill. For example instead of Altria (MO) you could hold
Phillip Morris (PM), instead of Johnson and Johnson you could have Abbot Labs
(ABT) or Bristol Meyers (BMY), instead of Verizon you could have AT&T (T)
and instead of Exxon Mobile (XOM) you could hold Chevron (CVX). You have to
do your homework by reading about the companies and chose the ones you feel
most comfortable with. Under any circumstances, however, what you do not want
to do is “have all your eggs in one basket.” That means you have
5 or 6 completely different sectors in your holdings.
My
brother has Pitney Bowes (PBI). My son owns American Express (AXP). My dad
owns IBM and McDonalds. They are all good solid companies and I would
recommend them all. Every
one of these companies has solid earnings and solid dividends. I would
suggest however that you do not hold more than five or six. It becomes
overwhelming and while you never want to trade these companies it is
important that you watch them and stay on top of any “Black
Swans” that might affect how they perform. I suggest you review these
companies every six months to make sure that there has been no fundamental
change in them. If you feel that nothing is broken don’t fix it! Leave
them alone and continue to let them dividend reinvest. I should add that my
in-law, Nat, says that there is only one way to be truly diversified and that
is to own the Vanguard S&P Index Fund (VFINX). This is a perfectly solid
strategy because you are getting all 500 companies in the S&P in one
holding. If that makes you more comfortable you have my blessings. The most
important thing to remember is that the golden rule is that “dividend
reinvestment over time is the most powerful tool an investor has.”
OK. That
is my little parable on investing. If that is not clear please email me at maniereg@gmail.com and I
will be happy to answer any questions you may have.
Now
I’d like to speak about speculation. Rule number 1, 2 and 3 is never;
ever turn a speculative trade into an investment. Speculation is the
“art” of finding a stock that you think will perform in a certain
way and dollar cost average into it as the price rises. Before you buy the
stock you must know how low the stock will go, how high the stock will go and
what the time frame is. The great financier Bernard Baruch taught us that to
be successful speculating in the market you only have to be right 4 out of 10
times. In this hypothetical if you are wrong 6 times you have a net loss of
$3.00 per share but if you are right 4 times you have a net gain of $15.00
per share.
So you
buy a small stake of ABC at $10.00 and you think it might go as low as $9.50
and the upside is $25.00 within six months.
1) When you
buy the stock at $10.00 you put a stop under the stock at $9.50 because you
have determined that you will not sustain a loss greater than 5% for this
stock. What you and you alone must determine is an acceptable loss you are
willing to sustain. I know people that use stops of 3% and some that use 10%
stops. That is something that you must determine by understanding the
fundamentals and the charts before you even buy a share.
2) If the
stock acts as you thought it would you buy a little more and you raise you
stop to 5% below the new price. It is a very hard concept to understand but
the successful speculators buy a stock high and sell it higher. Denis Gartman
uses the analogy of grabbing onto a rocket that has taken off and holding on
as it moves higher. If however the stock drops past your stop get out and
don’t ever look back.
3) The
tricky part is knowing when to get out. A study of the charts will often give
you a clue as the stock becomes over bought but I have found that by
consistently raising my stops as the stock moves up I am able to lock in my
hard earned gains. As an editorial note I would like to add that I,
personally, do not use triggered stops but rather mental stops because along
the way institutional buyers will short the stock to shake out the
“faint of heart investors” so by using mental stops I can sell
when I see that this is really the time to get out or if it is simply a
“shakeout”. This comes with time and experience so in the
beginning use triggered stops because nobody ever got hurt taking a profit.
So to quickly review, we have determined that
there is investing and there is speculation. I believe as we grow older
investing should be a greater part of our portfolio but when we are young we
have time on our side so to be a little more risky is not such a bad thing.
Again if you have any questions
about what I have written please email me and I will be happy to answer any
questions you may have.
The second part of today’s post I want
to devote to a holding that I have had for over six months, US Gold (UXG). Four months ago Rob McEwen
became the CEO of this company and took 20 million dollars of his own money
and vowed that he would not let the stock fall below $6.50. If the stock went
under $6.50 he would buy it. He essentially put a level of support of $6.50
on this stock. Please see the chart below.
As you can see I had in intraday dip below
$6.50 and true to his word the stock closed on Friday at $6.71. I want my
readers to go to http://usgold.com/ and read
about this company but as the chart shows if history repeats itself this
stock is about to breakout. I will watch this stock today and tomorrows post
will be devoted to this company. Please do your part and go to the website
and read about this company.
Please stay tuned for any updates.
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