I have been trying to put together a good homeschool personal finance program to help Kelly and Christian get ready for “real” life. We just finished reading Dave Ramsey’s book on Financial Peace. We have pretty much been doing the things he recommends for several years now. Now that we are getting more settled here in North Carolina, I have started thinking again, not just on the debt reduction that Dave Ramsey hammers on, but on investing. I have talked some with my fellow homeschooling buddy, Eric about this and we have similar ideas. It is very easy for me to look at investing in the same way that gold-rushers looked at California in 1849. My great, great grandfather, Steve Jenkins, was actually a part of that gold rush. After traveling the Applegate Trail to Oregon in 1846, he went south to the California in 1848 or 1849. All he got was diphtheria and what must have been a painful ride back to Oregon in a weakened condition. I do not know if he was the wiser for his experience, but I like to believe he was.
So, my thinking about investing is that it is a necessary thing, but I do not want my life to be defined by it. I have always heard that the vast bulk of professional investors cannot pick stocks well enough to regularly beat the S & P 500. There are some who do, but awhile back I decided I would like to learn enough about how to buy stocks to control my own investment destiny. I read a book titled The Little Book That Beats the Market. The book is about Warren Buffet style “value” trading. I guess it would be just about as much of a polar opposite to “day trading” as is possible. I wrote a program to download data from the internet (for Linux), make the calculations and rank the stocks according to methods recommended by the book. Next, I did a year of dry trading. I did well (better than 25% return) with the program when I did not have any money in the markets. Then I put a relatively small amount of money into the market for a year and did about the same as with the dry trades.
Last year, I started putting more money into the program in a very controlled way. I never put in so much that it would hurt retirement. For some people it might have been a small amount, but for me, it was significant. I continued to do significantly better then the S & P 500 for about nine months, but then the economy started to turn. It dawned on me that all of the testing I had done was in “up” markets. When the market turned, I stayed even with or a little above the S & P 500 for several months. Then, one of the head guys at one of stocks got caught with his hand in the till. The price of that stock dived to less than 10% of the value of the initial purchase. Nevertheless, I was still only a few percentage points behind the S & P even though both of us were worth less than their purchase value when I started this investment cycle.
My stock picks stood a little below the S & P for the next six months or so until about a month ago when my picks started catching up again. Today, even though, the one stock that lost most of its value was still in my portfolio, my picks passed the S & P 500 again. I was still a little below water on the investments, but I was amazed because I was still beating the S & P. it dawned on me that if I would have put a stop-loss at 75% (or even less) of the purchase price of each of the stocks I had purchased, I would now be up about 25-30% for the period. At any rate, because I am death on debt, I decided to close out the investments to clean up a little after moving across the country and purchasing a new house. I am starting to get convinced, though, that for the money I have available to put in the market and after I add a stop-loss to each of my holdings, this is about as secure as I am going to get. I have a broad-based portfolio that I hold for a year or so that beats the S & P most of the time if I stay in it long enough.
I am not going to be ready to get back in the market for at least a year. My cash flow is all tied up in 401k’s, braces for the kids, college investments, etc., When I am ready, I think I will continue my experiment. In the meantime, I am going to continue refining the program I wrote and do another year of dry trading while I accumulate some funds. Maybe my brother-in-law, Rigo will be ready to join me when I start back up.
Note: I see Lyle is back in this brutal and merciless weight loss dogfight even though he is injured.