Gaining Wealth With Individual Stocks
- Adam Herod
- Apr 8, 2020
- 6 min read
With the recent downturn in markets around the world you might be asking yourself, "Is now the time to buy?"
Then you wonder, "What if I don't buy at the right time or the stock I bought moves even lower proving I'm no good at this stuff!?"
Throughout this article I hope to share some principles that will give you confidence in your stock investments. These principles are not exact formulas for picking winning stocks. Instead, think of them as foundational - a core for your investment strategy that will give you confidence in picking individual stocks.
Principal 1| You're not Ray Dalio or Warren Buffet.
You knew this already, I know. But it needed to be said.
Warren Buffett of Berkshire Hathaway and Ray Dalio, owner of Bridgewater Associates which oversees over $160 billion, have made outstanding reputations in the world of stock picking. Together, they're worth over $80 billion. Dalio himself has access to information and stock analysis tools the likes of which us commoners may never see.
So it's helpful to keep this principal in mind.
Picking individual stocks to get rich like these guys is the dream, but will likely not be the reality for most of us.
Tony Robbins calls them unicorns, and it's true. Grounded in the truth that nobody knows what will happen with the stock market - that all you can do is have a solid plan - you can equate hedge fund managers to a bunch of gorillas flipping coins. [1]
If three gorillas out of a hundred get heads 10x in a row are you going to dub them geniuses?
Probably not! So don't get cute.
There will be some traits and behaviors we can borrow from these two, and I'll even share a window into Buffet's world that most do not know. So stay with me you (honorable) commoner.
Principle 2 | Getting Rich Slowly Is Cool
When we watch movies like The Wolf of Wall Street we imagine astounding amounts of money within a matter of a few short years. A mansion, fancy cars, beautiful yachts and a stream of incoming money that is impossible to stop.
When asked, "Why don't more people follow your advice?" Warren Buffett responded, "People don't want to get rich slowly."
I am a student of getting rich slow, so in my view at the core of any investment strategy should be a foundation of regular, repeating investment into a 401(k), 403(b) or deferred compensation plan.
The goal here is to take advantage of dollar-cost averaging, which means you are investing with every paycheck and whether the market does well or does poorly those returns will eventually average out over the course of your career.
The goal here is to allow your brain to sit back and not be concerned with the day-to-day movements of the stock market. For example, if you're young and have a strong tolerance for risk you might put 85% of your retirement account in stocks and 15% in bonds, and as you near retirement age you slice your stock allotment and increase your bond percentage.
To find out what your balance of stocks to bonds should be use the following tool from Vanguard: Investor Questionnaire.
John C. Bogle, the founder of Vanguard was quoted as saying, "Owning the stock market over the long term is a winner's game, but attempting to beat the market is a loser's game."
He shared that watching the stock market every day and trying to make adjustments based on analysis leads people to lose money, and the statistics were there to back that up! His two top enemies for returns were fees and emotions, and when you make trades you incur fees and taxes. More on that in a minute!
Have a core plan, invest regularly in big funds like Vanguard's VOO, which tracks the S&P 500 and boasts a 0.03% expense ratio, and ignore all the noise.
In the end, you will get the average return of the market over your career, and remember NOBODY has control over the markets or can tell the future.
So put the core of your investment strategy on cruise control by setting your appropriate stock and bond allocation in your retirement fund, increase your contributions by 1% every year until you get to 15% or more of your total income and you'll be doing better than most.
Principle 3 | First and Foremost - Retirement, Debt and Emergency Savings
The debate between what should be done first - killing debt or investing for retirement - has been ongoing for years. If you read different experts you'll get different answers every time.
If you can do it, I have always supported the idea of tackling both debts and retirement savings at the same time. This is because money grows over the long term and it would be a huge setback to put off investing for retirement.
How much should I invest and how much should I put toward my debts?
That's a two-fold question with a two-fold answer - enough to meet your minimum debt payments so you do not go into default, and enough to earn your company match, plus any more if you can make it work.
Listen, if the government came asking for more money you'd have to find a way to pay it right? So if you can get yourself to 10% going toward retirement while paying off your debts you're off to an amazing start.
The key here is that you don't go off and start picking individual stocks while you're being dragged down by two vehicle loans and monthly student debt repayments.
Also, don't fall into the 40% that cannot afford a $400 emergency.
Your goal should be to have at least six to nine months of cash earning close to 2% in a high interest savings account.
The reason you want a higher interest savings account is because you don't want the cash you've shoved under your mattress to lose value to inflation.
Principle 4 | A Small Chunk for Stock Picking
Now, if you've checked all the boxes above it's time to have some fun.
Seriously!
Picking individual stocks can be fun if you're ready for this reality...
If you invest in a number of individual stocks you really only need one or two to help you become a winner.
That's the way stock pickers think. They're OK losing out on some of their picks, because they know they only need a few to come out ahead.
Here's an example: Let's say Jackie Appleseed puts $6,000 into six different stocks for $1,000 a piece. Five of the stocks fail for a $5,000 loss, but she is fortunate to have picked one winner and she stays in while the company grows at a 15% year after year for 20 years. She'll have over $16,000 and that's without putting a single dime in past her original $1,000.
According to Kiplingers, a few companies with an annualized return of near 15% with dividends include:
TJ Maxx
Sherwin Williams
Walgreens
Lowe's
McDonald's
How much of your portfolio should go toward picking individual stocks? A wealth-minded breakdown could look something like this.
Notice no debts and rent/mortgage payments do not exceed 30% of your income.
What about timing?
Market timing is extremely difficult.
If you're unfamiliar with the term, basically it's when someone tries to buy a stock, mutual fund or ETF at its lowest point and sell it at it's highest points.
Since frequent buying and selling creates tax events and other potential costs, it is smart to plan on buying a stock and holding onto that puppy for a while. Your goal should be at least a year so you do not incur a short-term gains tax, which is the same as your personal income tax.
Warren Buffett's favorite holding term is forever, so that might be another meter stick.
As of this writing it is April 8, 2020 and in these tumultuous times we have to be prepared that another major low could be waiting. The markets reacted terribly to the increase in COVID-19 cases, and they could very well react poorly to decreased earnings and lower Gross-Domestic Product figures.
So if you're looking to buy a few stocks it may be wise to space them out over the next year and try to buy when they've taken a negative hit of 20-50%.
Remember, when shopping we love prices that are slashed and red figures on a stock are deals to be had.
Another Buffett-ism to keep in mind here, "Never invest in a company you don't understand." And please, please, please stay away from recommendations from friends. Remember, they often don't know any better than you do!
A Window Into Buffett's World
If you've made it this far without receiving specific stocks to purchase, you ought to be rewarded in some way, right?
Here's your golden nugget: The Sequoia Fund.
If you want to make stock picks with the long-term in mind, and believe Buffett and his disciples know something about the world of investing, then the Sequoia Fund is a great meter stick to consider.
The mutual fund started as a request by Buffett when he closed down his investment partnerships and focused solely on Berkshire Hathaway. The fund follows his core principles and according to some research, $10,000 invested in The Sequoia Fund in 1970 would be over $4 million today. [2]
On their homepage you can quickly download and see what investments they hold by looking at their quarterly reports. It's a way to access the professionals.
Their top holdings right now are Alphabet, CarMax, Constellation Software, Berkshire Hathaway and MasterCard.
[1], [2] Robbins, Tony. "Money, Master The Game: 7 Simple Steps to Financial Freedom." 2014.
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