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Sunday, 11 April 2004
"A reader writes" How to start?

Happy Easter everyone! I wasn't planning to write today, having gotten the bulk of my website homework done, but was delighted to get an email from Damon S. who wrote:

Dear Bob,

Thanks for putting out a fun and informative site, especially for
a beginning investor like myself. Your views and methods are a
breath of fresh air after all the hot air I read at other sites.

I`ve just opened an Ameritrade account with a rather small amount
of money ($5000). I was wondering how many stocks you would suggest
purchasing with that amount.. 5 stocks at $1000 each? 10 at $500?
Rather than buy the major stocks that industry folks recommend I`m
combing through stocks you recommend for likely buys. My short list is:

NHMC
GVHR
MMSI
SCHN
JUNO
LXR

Look okay to you?

You mentioned something recently about not buying in a Bear market.
Do you think Bearish conditions will prevail in the near future,
and it would be better to hold off starting this `game`?

Thanks a lot,
Damon S


In response, let me first point out that I am an amateur investor as well so I will try to avoid specific stock buys or sell recommendations for individual people. In general, I try to find stocks that MAY have good potential and since all of the group came off MY list, well what can I say about your selections :) ? And thanks for the kind words about fresh air and fun...I kind of think this site gets a bit long-winded....but I am glad you are bearing with me.

I think $5000 is a great number to start with. What I would suggest is determining what your budget can handle insofar as future contributions to your "fund" and then set up an automatic deposit into your brokerage, or make regular checks of some amount, whether it is $50 or $100 or more each month.

The number of stocks is a good question too. I read an interesting book not long ago "How to Make $1,000,000 in the Stock Market Automatically!" by Robert Lichello, which can be found at Amazon for $3.99 for a used copy which you also might enjoy. Mr. Lichello believes in setting up a portfolio so that he can switch back and forth automatically from equities into cash. I would suggest you do something like this.

Perhaps it would be wise to start with 3 stocks out of a planned 5. You may notice that my personal goal is 25 stocks but I am working with a larger fund of money....hopefully you get there too!

If you believe that we are in a bear market, I will defer to you, but I suspect we are through much of the short-term correction and are actually going to rebound going into the first quarter earnings report season, (boy is THIS a run-on sentence!), but if you think it is a bear, start with 2 positions (!)...using 40% of your capital. Otherwise start with 3 fairly equal sized positions using 60% (or $3,000) of capital. I do NOT think that smaller positions, like $500 are a good idea due to the excessive effect of transaction costs. This is already a bit of a problem with a $1000 position, making a discount brokerage an imperative.

O.K....so let's say 3 positions...you take your pick. I use an 8% stop. I would suggest with positions your size, I would use a bit more liberal stop, maybe 10 or 12% before selling. I would wait to add a 4th or 5th position, by seeing if we can sell a portion of the first three at a gain. Again, with an initially smaller position, you might want to wait for a 40% gain and then sell 1/3, 80%, sell a 1/3, 120%, sell a 1/3 etc. This will be a point when you can add a 4th position. However, if you hit a sell point FIRST that is DROP to two positions, then I would WAIT to go back to 3 until you sell a portion of your remaining two at a GAIN. Are you following me?

At all times, I would stay 40% invested. That is, if you sell down to two positions, and one of them sells at a loss, I would replace that position in relatively short order...no rush though...with a stock that has been strong recently.

This is a relatively mild form of market-timing. That is in LOUSY market conditions, you will be holding a 40% equity exposure, and in good market conditions, you will go to 100%. I am trying to help you do this AUTOMATICALLY so that you will not need to assess the market yourself, but instead let the market direct you through sales either at a loss, when you will be contracting your equity exposure, or at a gain, when you will use the proceeds to add a position.

I would not go to six positions unless you have built up the cash with the automatic deposits and a recent sale to add to the portfolio.

WOW, I didn't mean to write that much. I do not want to scare you off yikes. But I hope that is helpful to you. That at least is how I would set up a portfolio with $5000.

Remember to check with your investment advisors and do lots of your own investigations. I cannot be responsible any more for your losses than can I take the credit for your gains! Good luck investing, and be sure to write and let me know what you did and how it is working out for you!

All you others, please feel free to write and let me know how the BLOG is helpful for you and any way I can improve it!

Regards,

Bob


Posted by bobsadviceforstocks at 9:44 AM CDT | Post Comment | Permalink

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