Chapter 16
Small Investors Take Heart
I hope all you beginning investors are still with me. I'm one of you and I want to show you that this system works for you and to prove it to you using real-world data.
In this chapter I charted our 10 semi–aggressive stocks starting with $1,000 in stock and $500 in cash. Also I included commission costs. Look at the spreadsheets and see how it is set up. I strongly recommend you include commissions on your spreadsheet.
Let me explain how you figure the commissions into your spreadsheet. It’s simple. You merely subtract all commissions from your cash balance. For example: beginning CASH $500 + MARKET (SELL) $200 - commission $24 = $676 + $3 interest = next month's CASH total of $679.
For additional buys and sells under the system, you do the same thing. You add the amount of the commission to your buy and sell. This is what I did in the spreadsheets in this book. I always bought the full amount the system said and paid the commissions from the cash balance.
For example: look at the January 1986 buy for Alaska Airlines. The system tells you to buy $248 worth of stock. You check out the commission schedule and find that your broker charges $12 on trades up to 5,000 shares. So you add your buy amount of $248 + commission of $12 and tell Merrill Lynch Blueprint to buy you $260 worth of stock. This will ensure you receive $248 worth of stock. Your broker will automatically subtract out their commissions and buy you 100% of the stock the system told you to buy. My examples do this because the commission is deducted from CASH.
For sells it will be difficult to sell exactly 100% of the stock the system tells you. As you remember from chapter 2, you tell Blueprint to sell a certain number of shares when you have a sell under the system. Here's what I propose you do: figure out what the commission is going to be and add enough shares to sell to roughly cover the commission.
For example: (I did not do this in the examples in this chapter for simplicity sake) look at Alaska Airlines. On January 1985 the system told you to sell 8 shares but wait – the commission to sell $119 worth of stock is $12. So you look and see Alaska Airlines is currently selling at $14.62 a share. So to cover the commission, tell Blueprint to sell 9 shares. Again Blueprint will automatically deduct the commission but you have to sell an extra share to cover the commission. Again I strongly urge you to have your CASH in a money market account with your broker.
After you sell any shares of stock, tell your broker to invest your sale proceeds into your money market account. If you tell your broker always investor sale proceeds into your money market account, he or she will do it. You need to stick those proceeds into your money market account to wait for future purchases. You're much better off having your CASH with your broker.
Now look at the summary sheets a few pages ahead and you'll see that as a small investor you are doing very well. Your 10 stock portfolio was up 15% after one year, up 48% after two years, up 110% after three years, and up 527% after seven years. You're averaging about 75% simple interest after paying commissions and had no years with losses. After the fourth year we sold five stocks and bought five new ones. After the fifth year we sold the remaining five original stocks and bought new ones. On the next page I give you a summary of why I sold the five stocks. After use the system a while, you'll know when to sell your stocks.
After a while you will understand the stock market and know when you should dump one of your stocks and that will lead to even bigger profits.
At the end of four years I evaluated my portfolio – remember I told you you're not married to your stocks. I would recommend you evaluate your stocks regularly. I have changed my thinking over the years and feel that this is the best advice on when to sell all remaining shares of a stock. Say you bought a stock and the low was $5 and the high was $15 and you pay $6 a share.
Play the system until the price of the stock is near the previous high and then sell all remaining shares rather than the number the system says to sell. Take the proceeds from the sale of the remaining shares and buy another stock you like that is currently at or near its 52-week low. If you love the stock you just sold, don't despair, it will soon go back to its 52-week low again and then you can buy it again when another one of your other stocks hits its high and it's time again to sell all remaining shares. Remember you're always trying to improve your portfolio and some stocks need to be retired. It's easy – sell those stocks and buy new ones.
I hope from reading this chapter you see I'm not rigidly telling you to hold all 10 stocks for four years and then sell five of them. I'm giving you a philosophy to follow and illustrating it with examples and showing you the happy results.
So I've looked through my portfolio and decided to sell 5 of the 10 stocks I now own. I’ll try to give you brief reasons why I decided to sell. Check the summary to see percent gains for the first four years – again that is in your Adobe Acrobat version of my investing book.
Graco – Graco did well for us the first three years, up 10% after one year, 63% after two, and 97% after three years. But in the fourth year it's down 4%. The stock is plateauing. A check of the fourth year price range shows a low of $20.12 and a high of $33.37, only a 50% difference. We started with a PORTFOLIO TOTAL of $3,040 after three years and wound up at $2, 978 – not very good and the price shows a steady decline. Maybe it will bounce up but I can find better stocks at their lows now also. Also the stock is little too high priced – I'd rather have a stock under $10 and go for more profits.
Hovnanian Enterprises – stock took a big nosedive in fourth year – total profit declined from 137% to 110%. Also the company has a heavy debt load that could be weighing it down. I think I can do better with another stock my fifth year.
Continental Info Sys - had to add $2000 to buy more stock in fourth year. I've been reading rumors about the company – something seriously wrong could happen – maybe bankruptcy. Let me sell now and buy later if they go into bankruptcy, then the stock will be cheap. Good time to exit.
J P Industries - another loser and fourth year – profits down from 77% to 38%. Stock doesn't seem promising, time to sell.
Prospector- a bad choice from the start – had only one good year (third year went from 0% to 60%). Gold closed-end funds just don't seem to fluctuate enough to make money under the system – probably take a nuclear war to make gold really go up in value and who wants that – time to sell. Obviously it didn't take a nuclear war to make gold really go up in value as I wrote in the late 1980s. It seemed like crushing European debt, crushing American debt, high unemployment, numerous bank failures, seem to be enough to get gold up over $1,500 an ounce.
So I sell my five stocks. I sell my five stocks and divide the total and five new stocks. My total after commissions comes to $13,950 that let me start five new stocks at $2,790 each. After the fifth year I sell the remaining five original stocks for $27,985 which gives me $5,597 to start five new ones in the sixth year.
After the fourth year I picked five new stocks quite quickly. I picked the November 1988 issue of Barron's and look for stocks selling near their 52-week low. It's not hard to pick stocks that work well with the system. You're always trying to maximize your profits and the best way is to keep up with the latest stock info so you can have replacements lined up when you need them.
As you can see from the summary sheets, you're ahead 527% after seven years or 75% a year simple interest a year after commissions. Your profits will only go higher because commissions will be smaller percentages as your portfolio grows higher. You will get better and better at picking stocks. Enjoy the future – you earned it!
Remember like in the last chapter – increase PORTFOLIO CONTROL 100% of the buy amount when you buy additional shares with the cash over 1/3 of PORTFOLIO VALUE for the same reasons listed in the prior chapter.
Now a brief exclamation of the stock summary and cash in one account sheets. Again the sheets will be found in your Adobe Acrobat free version of my investing book. The percentage for each year is based on the percent of gain each year regardless of stock. Thus each year’s PORTFOLIO TOTAL is divided by $1,543, the starting amount for each stock.
On the cash-in-one-account sheets, I kept a running total for each cash balance – for example: if one stock had "borrowed" $2,000 and then had a cash balance of $500, I showed the cash total as - $1500. Also if I sold the stock and it had a negative cash balance, I carried that balance forward with the new stock. For example: Claire’s Stores had a starting CASH balance in November 1988 of $930 but on the cash summary sheet shows as $917 in November 1988 because Prospector finished with the - $13 cash balance when I sold it. All Claire's cash balances have $13 subtracted from them. You cannot compare the CASH summary sheets to the actual CASH balance sheets in most cases.
The cash summary is merely to show the actual cash balances as poor stocks "borrow" from rich ones. You can see from review of the cash in one account spreadsheet that your CASH balance only went negative for one month, February 1988 and only one negative $52. Your balance fluctuated widely for several reasons: one reason is that you are adjusting your cash/stock ratio every year. Also the stock market had downturns and upturns that tended to make most stocks go up or down in large amounts. But isn't this just what you want? YES it is! This caused large sell or by orders that affected both your cash and stock value.
The large fluctuations are perfectly normal to the system. Don't view your CASH total like a savings account or Certificate of Deposit. The only reason for your CASH account is to provide money when it's time to buy cheap stock. A review of the seven-year summary will show you that cash did the job very well. Look what your $15,430 has grown to after 7 years – $96,814, a 527% increase. The system is doing exactly what you want it to do. Again look at the numerous spreadsheets at the back of Chapter 16.