investing

How to Buy and When to Sell in Your Stocks Portfolio

Key #6 To Building a Successful Stocks Portfolio: How to Buy and When to Sell

Dr. Thomas K. Carr

We have come to the end of our process for building a winning stocks portfolio.  You now have a full course on how to find the best possible long-term investments.  This is the very same research system I use to find the best investments for my IXTHYS Letter and The IXTHYS Portfolio (www.ixthysletter.com).

By the time you get to this stage, you should have one or two companies that have passed through your various filters.  Any company that comes close but for whatever reason is not quite there yet – perhaps its HPLM is too high, or it has a negative earnings report it needs to work out – put on a watch list for monitoring.  As for any passing candidates, you know that they are companies with a strong track record of organically growing earnings and sales; they are currently undervalued; they have a strong mission statement and cultural values you agree with; they are technically poised to move out from a bullish base; they are well liked by the analysts; and they have supportive items in their newsfeeds.  With all that going for what companies now remain on your list, all that is left to do is to buy some shares and start building your stocks portfolio.

Now, it might be possible that no company has made it through your gauntlet of critical research.  Know this: it is perfectly fine, even after devoting hours to research, to having nothing on your “buy now” list.  Get out of the trader’s mindset that you always need to be working your funds in and out each day.  You don’t.  Cash is seed, and seed can remain vital a long time without being planted.  What you need is good soil, and if you don’t have any this week, try again next week.  In some markets, you might go a few months before finding anything investment-grade.  That’s okay.  This is a marathon, not a sprint.

How (and How Much) to Buy

stocks portfolioLet’s assume, however, that your research process has highlighted a stock that you want to buy for your long-term stocks portfolio.  Your task now is to buy shares at the next market open.  To do this, simply put in a “market on open” order (sometimes listed as “OPG”), limiting either the number of shares you want to buy, or the amount of capital you want to invest, and hit “transmit.”  Once you’re in, you’re in.  All the hard work is behind you.

As far as deciding how much money to put into each position, I recommend maxing your number of concurrent positions at 18.  Why 18?  First, I know from experience that anything more than that and I cannot adequately keep track of the companies I’m investing in.  This is important because you need to keep tabs on what you’ve bought so you know when it is best to close out the position.  Second, I know from experience too that any fewer than 18 causes undue volatility in my stocks portfolio.  Yes, you may need to begin your investing with fewer than 18 positions because you have less than $18,000 with which to open your first investing account.  That’s okay.  It’s a necessary inconvenience.  But your goal is to get fully invested with 18 stock and cash (if needed) positions in your stocks portfolio.

My experience with the number 18 is actually backed up by evidence.  In their 2011 book, Investment Analysis and Portfolio Management, Frank Reilly and Keith Brown report that “about 90% of the maximum benefit of diversification” is derived from equally weighted stocks portfolio’s holding 18 stocks.  Beyond that number, the benefit begins to diminish.

So with that in mind, when I want to buy a new stock I take my current cash account’s net asset value (i.e., the total of all cash, dividends, interest and current market value of the stocks I own) and divide it by 18.  I then invest that amount into the new stock I’m buying.  Interactive Brokers makes this step simple.  I simply type in the amount of market value I want to purchase, and the trading platform automatically calculates how many shares I’ll be buying at the open.

Once you have bought your first stock, you are an investor in the underlying company.  Of course, your relationship to that company has only begun.  While the company no longer needs to “prove itself” to you in terms of its growth, valuation, mission and momentum, it still needs to uphold its side of the relationship.  Remember, by placing your seed capital into the company’s coffers, you have “clothed yourself” in the culture of its business and its mission in the world.  You have married a part of your destiny to its destiny.  From here on, what the company does matters to your stocks portfolio and you.

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Relative Weakness

The 6 Keys to Building a Winning Portfolio of Stocks – Part 3 of 6

“Relative Weakness”

By Dr. Thomas K Carr

The following article is adapted from Dr. Carr’s forthcoming new book, “Stop Trading, Start Investing: the 6 Keys to Building a Winning Long-Term Portfolio”

In my previous two articles in this series Pt 1 & Pt 2, we looked at how “organic growth” that can be sustained over time and “fair value” as measured by the price to sales ratio are essential to finding great long-term investments in the stock market.  In this article we are moving on to key number three.

The third key to finding the best stocks for investment is to look for stocks that show relative weakness.  Okay, this one may have you scratching your head.  Weakness?  Really?  Let me explain.

relative weaknessRelative strength in a stock is a function of the stock’s price per share.  Relative strength measures the amount of change in share price over a given period of time relative to a benchmark index (typically the S&P 500).  When a stock compared to its benchmark is moving up at a faster rate or down at a slower rate, it is said to have relative strength.  When a stock compared to its benchmark is moving up a slower rate or down at a faster rate, it is said to have relative weakness.

Stocks with relative strength can be great trading stocks.  Unfortunately, they make lousy candidates for long-term investing.  The reasons for this are numerous and complex.  But I don’t have to explain them to you.  I can simply show you.

Let’s take our base screen as we have set it up so far:

  • Price to Sales Ratio < 1.0
  • Earnings Per Share growth this year > 10%
  • Earnings Per Share growth the past 5 years > 0%
  • Sales Revenue growth the past 5 years > 0%
  • Sales Revenue growth quarter over quarter > 10%

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Fair Value Stocks

The 6 Keys to Building a Winning Portfolio of Stocks – Part 2 of 6

“Fair Value”

By Dr. Thomas K Carr

The following article is adapted from Dr. Carr’s forthcoming new book, “Stop Trading, Start Investing: the 6 Keys to Building a Winning Long-Term Portfolio”

In my previous article in this series that can be read HERE, we looked at how “organic growth” that can be sustained over time is essential to finding great long-term investments in the stock market.  In this article we are moving on to key number two.

fair valueThe second key to finding the best stocks for investment is to make sure that the stocks that show sustainable organic growth are also fair value; i.e., stocks that are trading at a fair price.  When you buy a stock, what you are buying is the right to share financially in the company’s current generation of net income (if the company pays a dividend) and in the company’s future growth prospects as appreciated by the market through rising share prices.  Since that right can be extremely valuable, you will always be paying a premium for it.  This is to say that, in most cases you are going to be paying more money per share than the company is actually worth now.  This premium is, in effect, your deposit on the right to participate in the future growth of the company the value of which, if you implemented the first key (“organic growth”) correctly, should be much greater than the premium paid.  Here in implementing the second key, what you want to avoid is paying a premium that overvalues that future growth and pay a fair value.

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Stop Trading & Start Investing

Stop Trading, Start Investing!

Dr. Thomas Carr

The following is adapted from my upcoming book, “Stop Trading, Start Investing” (due out in July, 2015):

stop tradingWith only a handful of possible exceptions, the greatest fortunes ever made in the stock market were not made by quick-turn traders. They were made by long-term investors. For every trader who manages to build a retirement nest egg from trading,, there are literally a hundred thousand stock market millionaires, and a thousand stock market billionaires. None of them made their fortunes by trading in and out of the markets. Rather, they earned their fortunes the old-fashioned way, by prudently investing in, and patiently holding long-term, a select list of high quality stocks.

Consider the following examples:

Until his retirement in 2003, Ralph Wagner managed the Acorn Fund which achieved an annualized return since its 1977 inception of 16.3%. Wagner’s investment philosophy is simple: find stable, long-term trends in the economy and invest in the best companies serving those trends. His value-driven, thesis-centered investing style worked very well. If you had invested just $10,000 with Wagner back in 1977, at his retirement just 26 years later, you would have had nearly $600,000 to your name.

stop tradingOne of my investment heroes is Sir John Templeton, founder of the funds family that bears his name. Templeton got his start in 1939 by putting $10,000 into some of the cheapest stocks on the New York Stock Exchange. He held everything for four years. During that time his original stake doubled twice. Then, armed with a $40,000 portfolio, Templeton took a more disciplined, value-oriented approach, eventually turning his assets into $300 million by 1954, and from there to several billion before he retired in 1992. Money Magazine called Templeton “the greatest global stock picker of the century.” Queen Elizabeth II knighted Sir John for his many philanthropic endeavors. Today, in the wake of his passing in 2008, Templeton’s legacy is the charitable work of his foundation which seeks to support Templeton’s Christian commitment to world peace and spiritual learning.

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Investing In Uncertain Times, A big Picture Perspective

Even the birds are shouting it off the top of the roofs: The times are uncertain and investing is changing fast.

Investors are potentially facing challenging times ahead, as a massive paradigm shift is afoot which is changing the entire cultural environment and the ways in which we do business and that  will affect investors’ psychology as the perceptions of the collective are changing.

The financial world is still in turmoil as Europe is moving closer to the brink of a major change of its system which in my opinion cannot be avoided. Whether you like it or not, Europe is in a state

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of decay which is part of a major cycle which cannot be stopped, no matter how hard governments try to kit the broken pot, employing the same old techniques over and over again.

Well, you know what happens when you insist on staying in a rut…

The issue is not so much whether you will be able to make money in the stock market in the next year or two, you will, – rather the real issue is that underlying value systems and belief systems are undergoing perhaps the biggest shift in the last 250 years or so.

Investors need to understand the big picture and become aware what really is driving the changing market environment, if they want to be placed correctly over the next 10 years or so.

Why the foundation upon which the capitalist system was built is changing

Up until the 1940ties capitalism appeared to be the holy grail for anyone willing to work hard and with the common sense to place longer term bets in the stock market or in property. Long term charts clearly reveal that markets have gone up over the long term and if you had the foresight to start cost averaging in a diversified portfolio some 50 years later you would have locked in nice profits in your share or property portfolio.

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