Personal Investors As Risk Averse

Investing, Not Gambling
It may seem odd  that I would see the best investors as being risk averse.  After all, no risk, no reward, right?  But this isn't gambling, this is investing.  The odds are stacked against the gambler - eventually the house always wins.  I invest only when I believe the odds are in my favour.  I see people putting their money into penny stocks, or wanting in on the next hot thing, or Initial Public Offering  (IPO).  I ask myself, why? Now, I'm not saying there is no money to be made in these areas, I'm just saying for most Personal Investors the odds are against it.  Very few people have the necessary skills.  These are also areas that manipulators work to their advantage.  People get fooled, believing their loss would be small while their return could be almost infinite.

Loss vs. Gain
Personally, I am less interested in how much I can make as I am in how much I can lose.  The bottom line is, any loss is significant.  I believe the best Personal Investors have a low pain tolerance for loss.  That is one of the reasons I now believe it makes no sense to buy anything with only the hope that, one day, it will be worth more than what I paid for it.  Such is the thinking behind Buy and Hold - buy now, hold until it is worth more than what we paid, even if it means suffering major losses.

Lesson Learned
But, what if the markets go down before going up?  It happened to me - once. Leaving the company I had worked at for many years, I took the proceeds of what was to be my pension and invested that money in the stock market.  In the following six months, or so, the market dropped by more than 25 percent.  I sought advice, which went from, no need to worry, to, too late to sell!  In my case, I was lucky.  It only took a little more than a year for the market to get back to even.  Knowing what I do today, I would have made more than a seven percent rate of return during that same period of time.

Capital Gains or Capital Losses?
When the Tax Free Savings Accounts (TFSA) were first introduced, some advisors were saying not to hold equities in such accounts since we can never claim the losses as a tax deduction.  My reaction to that was, if we are losing money in our TFSA, then we are doing it wrong!  I would rather avoid the taxes on my capital gains than on my losses, as long as I keep my losses small. 

First Rule Of Investing
Warren Buffett has said the first rule of investing is to not lose money.  After the experience of mine with my pension proceeds, I looked for methods of limiting my losses.  I could buy and hold and just wait it out and hope I lived long enough, or I could develop an exit strategy which would leave me with most of my money to buy at a better price.  People will point to the cost of commissions and fees and taxes and say it isn't worth it.  But, why wouldn't I pay a couple of commissions to end up with several percent more in my account?  Seems like a reasonable trade off to me!

Win or Lose?
The successful personal investors, I know, aren't easily fooled by the promise of huge returns.  They know their success lies in the ability to limit their losses by minimizing risks.  Doing so let's even the smaller gains accumulate and compound while others are praying for a chance to get back to even.

How is your risk tolerance? 

The "Social Media" Investing Model

Good Advice
I was doodling on my note pad at the Social Media seminar I attended earlier in the week.  It occurred to me the advice we were receiving would be useful for those wanting to learn more about investing.

Learn/Listen
The fastest way to learn anything (other than from adversity) is from other people's experience.  Since there are as many investing strategies as there are people, look for the classics like "The Intelligent Investor", by Benjamin Graham, "Stocks For The Long Run", by Jeremy Siegel, "The Wall Street Journal Guide To Understanding Money and Investing", by Kenneth M. Morris.  I like "How To Make Money In Stocks", by William O'Neil.

Technical Analysis has increased in popularity of late.  I recommend achieving an intermediate (as opposed to beginner) level of understanding.  Search Amazon, and look for something of interest.  I started with Stan Weinstein's "Secrets For Profiting in Bull and Bear Markets".  The investing world is divided between fundamental and technical investors.  Why rely on a monaural approach when we can enjoy the advantages of a fully enhanced stereo experience?  I suggest using fundamental analysis to determine what to buy, and technical analysis to identify when to buy. 

Set Goals
Do you want to become independently wealthy?  Do you want to supplement your income?  Do you want a fully paid vacation?  Remember, goals should be SMART (Specific, Measurable, Achievable, Realistic, Time-sensitive).  Consider setting short-term goals based on longer term ones.

Practice
Paper trade.  There are sites and contests on the internet which allow us to buy and sell stocks using practice accounts instead of losing real money.  It is rather like learning to ride a bike.  We are bound to fall and get a few scrapes before we can hold our own at the Tour de France.  Understand, however, paper trading only goes so far.  There is nothing like the feeling of losing significant amounts of money in a bad trade, or the excitement of riding a huge gain.  Learn to set limits based on the level of personal experience.

Participate
Keep accurate records.  Use those records to identify what works for your situation and what doesn't.  Do more of what works and less of what does not.  What works in some situations will not work in others.  Nothing in investing works all of the time.  Anyone who says otherwise is lying.  Be prepared to shorten time horizons, or lengthen them.  Trade more; trade less.  Never fall in love with an investment, or a trade.  They all have their day, then, can turn on us in a heartbeat.  Investing is like public speaking; getting too comfortable or too lazy is usually a mistake.  Anticipate various scenarios and plan appropriate responses.  Plan ahead, do not react.  Instinctive reactions are necessary for survival; they usually go contrary to good investing practices.

Measure
Measure progress toward goals.  Make improvements without relying only on the advice of others.  Investing is like playing poker.  People come to the table with their own agendas and strategies.  If their real agenda is consistent with what you are attempting, then fine.  Understand that nobody in the Financial Services industry wants to make you money if it interferes with how they make their money.  Also, understand that they almost never get paid based on the amount of money they make for you.  If that were the case, there would be a lot of starving workers in the industry.  Ever wonder how companies can afford to pay those huge bonuses?

The advice for determining the percentage of equities in a portfolio based on age is only a guideline.  Revise your goals based on your results and your desired results based on your goals.  I know that sounds like double talk, but just like fundamental and technical analysis, we are not limited to one instead of the other. 

Repeat
I started out in the safest of mutual funds, then sector funds, then Exchange Traded Funds (ETF's), then leveraged funds, then individual stocks.  I will be trying my hand at options when I open my first Tax Free Savings Account (TFSA).  Each time I found myself repeating the process.   Sometimes it is necessary to repeat the process because of a change in goals, or because of differing results.  It took me a long time to determine what works and what doesn't, and that wasn't for a lack of asking questions - I rarely received straight answers.  According to the industry, we are not supposed to do it ourselves ("Doctors don't operate on themselves!"), and we sure as heck are not supposed to time the markets ("It is time in the markets, not timing the markets!")  I invite you to take advantage of what I have learned.  Use me as your resource.  I love doing this stuff, it is what I do, and I am more than happy to share what I do with others.

Have you followed a similar approach?  How do you test your ideas?
    

Saving For Retirement

I find the media debate about what is wrong with the pension "system" in Canada to be somewhat amusing.  While the situation isn't funny, I do find it interesting how the politicians and the professionals in the financial services industry can't seem to put their finger on the problem.

In my personal experience, the opening to the pension bucket is too small, while the bucket, itself, is filled with too many holes.

By that I mean, if they really want people to save more, you would think they would make it easier.  When I was making sufficient money to actually top up my RRSP savings, there were too many income restrictions, and no Tax Free Savings Account to do so.  With all but senior executive and government compensation decreasing in real dollars I am afraid that window of opportunity is lost.  At the same time our governments, in my opinion, have done a lousy job of protecting hard-earned Canadian pensions from foreign controlled companies, and even the likes of Nortel.  Besides, given the state of modern computer technology, why are pensions not portable?  Why does it matter where I work, as long as it is in Canada?

The holes in the bucket I am referring to are the enormous commissions, fees, and charges imposed by the financial services industry on people trying to save for retirement.  What is worse, in exchange for all of that hard earned money that could have been going toward people's retirement, we receive terrible advice since most of it is designed to make the institutions money at the expense of the "client".  No person, it has been said, can serve two masters, and since one of the two is directly in charge of compensation, we can guess which one is being listened to.  At the same time, I am expected to save more so, in future, I can help pay for those indexed pensions of our faithful civil servants despite having no pension of my own.

It all reminds me of the debate over why people don't vote in Canadian elections.  The politicians run around acting like little children, while spending like drunken sailors (sorry to slight any sailors out there) on shore leave.  Then, when it comes time to vote they can't understand why everybody has lost interest or any hope of ever seeing any positive outcome.

It has always been my opinion that if people are not acting in the desired fashion then those doing the managing have failed in their job.  We can call people lazy, indifferent, and even ignorant, but wouldn't that tell you they have not been educated, motivated and inspired?  I keep hearing, "Save more, save more!"  I don't think, "Do as I say and not as I do", is going to inspire people in this situation any more than it has in the past.