The Writers Coin

Finding new stocks to invest in isn’t easy, and it certainly isn’t fun. For an investor interested in fundamentals like myself, I like to take a look at a few things: recent performance, some numbers (P/E ratio, Earnings per share, the overall financial statements, etc.), recent news, and what other people are saying.

It’s very unscientific.

I also try to do some research on the person running said business. It’s usually pretty easy to read up on CEOs these days—where they’ve worked before and how they’ve performed in the past.

Since I’m a writer, I know that reading someone else’s writings gives unique insight into that person. But most of the CEOs out there don’t write their own stuff, they have a PR department handling that. And even when they do write something worth reading, it’s usually just a few paragraphs at the beginning of an annual report.

Which is usually all fluff.

And then you have Warren Buffett, who makes picking an investment easy by combining an impeccable track record, a quirky personality, and volumes of insightful, interesting letters.

The Buffett Shareholder Letters

Reading about financial topics is usually pretty dry, that’s why I enjoy Michael Lewis’ work so much: he manages to make just about any topic way more interesting than it deserves to be. The Big Short is a great recent example, but that’s just the way he rolls.

Warren Buffett’s shareholder letters are right up there in Michael Lewis territory. They are a fantastic commentary on the economy, the overall market, and Berkshire Hathaway itself. What other CEO has a whole book that compiles the wisdom from all these letters?

I was finishing up his 2010 letter today and it hit me how much easier it would be to find a company to invest in if all CEOs wrote with the clarity, sincerity, and honesty that pervades Buffett’s letters.

Nowhere else would you find a line like this mixed in with brilliant investment insight:

Our elephant gun has been reloaded, and my trigger finger is itchy.

Why It Matters Now More Than Ever

Being that Warren Buffett is in the business of investing in stocks and buying businesses, he has even further to go than your average CEO. There is a deep mistrust out there for all things “Financial,” especially stock pickers.

But Warren Buffett is above reproach. Why? He’s proven, over the years, that he will stick to his guns. He won’t take any shortcuts to make a little bit of extra money. How do we know?

We have 60+ years to look back on. His track record is spotless.

Management and Stock Picking

Usually I only give a little bit of weight to the management of a company when I consider a long-term investment. But after reading some of Buffett’s letter yesterday, I’m rethinking that mix. A business can have all kinds of problems, but if it has an honest, intelligent, capable CEO that has gotten results in the past, it can go a really long way.

At the time I bought my BRK.B B share (which cost over $3,000 before it split), it was a big commitment. I had very little money to spare.

Yet I found a way to bring the money together because of the man running the business. I’ve read enough of what he’s written and paid close attention to his track record to know this is a man I would gladly entrust my money to.

How often can you say that?

I own shares in Berkshire Hathaway B shares.

This story was included in the Carnival of Money

January is a great time to do all those things you never think about during the year but know you have to do at least once a year.

So this is when a lot of people are doing “annual checkups” on things like their bills, paperwork, re-balancing your portfolios, etc.

I want to add one more thing to your list: taking a snapshot of all your investments with the Morningstar X-Ray tool.

It’s a great tool that helps investors take an overall look at all their holdings in a new and fresh way. And even if you don’t look at it as closely as I”m about to do, it’s still kind of fun to see where you’re money is invested and how it compares to the S&P.

I last used the X-Ray tool back in 2008 but have now incorporated it into my annual routine.

Let’s take a look at what it says about my Roth IRA, which is where I own most all of my investments:

Asset Allocation

The chart on the left shows me where my money is—and as you can see about 74% of my investments are in US stocks. The rest is in foreign stocks and I have a tiny sliver of cash.

For the most part, I’m 100% invested in stocks.

I’ve been meaning to add a little bit of bonds to this mix, but with the whole bond bubble going on, I’ve delayed that. I’ll be turning 30 this year so I think it’s time to at least add some bonds to start building on as I get older.

Stock Style Diversification

Only the valuation box has any value for me here, and it tells me I’m focused basically on large companies. I have a bit of exposure to mid caps, but I should have a more defined view on how much small cap stuff I hold.

I’ve been meaning to add a small cap index fund from Vanguard but last year I went with their REIT index fund instead. So this is a good reminder that this is probably the year I buy some small cap stuff in the portfolio.

Stock Sector

This one has some pretty interesting bits of information. For one, it shows I’m light in the technology sector, which is weird because I’m a big tech guy and all the trades I make in my “mad money” account are tech related. So this is interesting…I should probably change something here to at least match up with the S&P.

The other bit that’s interesting is how heavy I am in the financial services area. I’m guessing this is mostly due to Berkshire Hathaway since most of the funds I own mirror the S&P in one way or another. Having the S&P comparison right there for me is perfect since that’s how I like to judge my performance.

Stock Type

All I can learn from here is that I’d like to be closer to the S&P when it comes to classic growth and aggressive growth. I don’t want to mirror the S&P exactly (boring), but for those two line items I’d like be a little closer. Not much else for me to see here.

World Regions

I guess this is to be expected: I’m concentrated mostly in the US and Canada. I do have a fund dedicated to international stocks, but it’s spread out very thinly across lots of countries, so that’s why this still looks like I’m mostly in the US and Canada.

I’d like to spread it out even more and get heavier in Latin America (Brazil) and Asia and not so concentrated in Europe. That’s kind of scary to me right now, what with Greece and Ireland having the issues they’re having.

Fees and Expenses

This one is my pride and joy. My expenses are really low and there are two reasons for that:

1. I use Vanguard index funds for a large portion of my investments
2. I am very careful about which investments I pour money into—expenses play a major role in the selection process, regardless of the account I’m investing in

Every dollar you spend on expenses is a dollar you have to make up in performance, so the less you pay, the better off you’ll be.

Stock Stats

The S&P comparison here isn’t as valuable since the numbers are so far off. I’m guessing that’s due to the nature of the S&P vs. my portfolio of holdings, but if anyone else has some enlightening thoughts on this section, feel free to share.

Conclusion

I highly recommend people use this tool. You might find some interesting things about where your money is that you didn’t know before.

It’s always good to take a step back and look at things in a different way, and this tool makes it easy and interesting to do just that.

It’s true! Recent studies show that investors that have babies outperform baby-less investors by a whopping 72%!

Just kidding!

If it were that easy to become a better investor then CNBC would actually be worth watching and the Octomom would put Warren Buffett to shame.

So obviously, having a baby won’t automatically boost your portfolio, but here are some lessons that parenthood can teach us all that can make us savvier investors:

• Think Long Term: Even though babies are a continuous time bomb (they get reset over and over and over again and keep blowing up over and over and over again), parents are always thinking long term. Will breastfeeding make them immune to every allergy and ailment under the sun? Will reading to my newborn mean she’ll get into Harvard? If I watch too much TV with her, will she wind up living in an alley behind the 7-11? Some of it is extreme, but investors should take this advice to heart: always think long term because the short-term stuff is for traders, not investors. We want to grow our money over time, not try to get rich in a month or two. Don’t confuse the two.

• You’re always in the market: When stocks plummeted last year and everyone panicked, lots of people took their money out of the stock market and said “Forget it, I’m done!” They thought that by getting out of the market they wouldn’t have to worry about what was going on with the economy and that their money would be “safe.” But, like parenthood, you are always on. When you take your money out, you are basically watching it rot on the sidelines until you put it into some other interest-bearing vehicle. Once you have money, you are in the market whether you like it or not. Same thing as having a baby—there is no down time. Even when you hand her off to a relative you know and trust, you still worry that said relative will trip and fall and crack baby’s head on the granite counter top. Call it paranoia if you like, but investors and parents are always on.

• Don’t get greedy: When baby dozes off, it’s tempting to want to put her in the crib and start laundry, the dishwasher, some dinner, and vacuum. All while you check the 13 voice mails you have. Oh and then you’ll email all those people back that you never got back to. Guess what? It’s not gonna happen. This is as foolish as chasing all those “35% annual return” programs you see on TV and online. Take what the market gives you and don’t expect any favors. Don’t try to push too hard because you will get burned/overwhelmed when things don’t go as planned (disclaimer: this is coming from a guy who once said greed is good).

• Things can get really messy really fast: The mortgage meltdown was kind of like having your baby decide to projectile poop right as you’re changing her diaper in a relative’s living room and starts screaming as loud as she can. And then it hits you: you forgot the bag with the diapers and wipes in the car… at home. Doesn’t sound very likely, does it? Well, that’s what they say about every recession. In order to minimize these catastrophic events (because you can’t eliminate them altogether), you’ll need to…

• Always be prepared: I can’t stress this enough. Maybe tech stocks will flourish, foreign stocks might surge, and small caps could take a nose dive. Just like a baby, you never know what might happen, so be prepared for everything by keeping your asset allocation up to date and making sure you’re diversified in case a major swing (in either direction) happens. And if you’re close to retirement, for God’s sake please don’t have 80% of you portfolio in stocks. It sounds simple and maybe too easy, but it’s the same with baby: between dirty diapers, hunger, and tiredness, that’ll solve 90% of the crying/fussiness issues that can come up. That’s why parents carry huge bags with diapers, wipes, formula, changing pads, and pacifiers…that covers everything they can control. If you stay ready, you won’t have to get ready.

• Sleep when the baby sleeps: This has nothing to do with the market but for all those readers that will eventually have a baby, remember it and just do it.

• Prepare for the worst: Just like parents always have more diapers/wipes/outfits/formula/toys than they could possibly need, investors should always try to have some cash on hand. When the recession hit and the stock market took a nose dive, having cash to buy depressed equities puts you in the driver’s seat. Why do parents carry all that “extra” stuff around? Because they’re prepared for the worst and because it gives you peace of mind (which cash also does).

Any other parents have some investing tips that they’ve learned from having a baby?

This post was included in the Carnival of Money Stories

Image by Andrew Mason

There were a couple of interesting stories in the “papers” yesterday that I are worth mentioning. An AP-CNBC poll found that 55% of investors feel the market is only fair to some investors and that they don’t have confidence in buying and selling stocks. I understand that the flash crash spooked a lot of people, but take a look at what people are feeling:

Wild gyrations on Wall Street have made U.S investors leery of buying individual stocks and skeptical that the market is a fair place to park their money.

A random Joe on the street chimed in with some pearls of wisdom:

I don’t have any confidence in the stock market, to be honest. It’s just a gut feeling.

Gut feeling my ass—I’m guessing it has more to do with the intense media coverage (Will Stocks go to Zero??) and the uncertainty surrounding the flash crash. But as I read the story it almost felt like I was reading a news item from the Guatemalan papers: there’s a deep distrust/paranoia going on here.

People actually think that the stock market is/was rigged and they don’t stand a chance at making any money unless they are “in the know.” It’s a conspiracy!

Presumably, the people that are “in the know” are rich people. Not millionaires, but billionaires.

Which leads me to the other story I read that was pretty interesting. This one’s from the Wall Street Journal and it’s all about where those billionaires are putting their money right now.

What was surprising about the lunch was where the attendees are putting their money. Topping the list were vacant office buildings, farmland and Africa. Stocks look attractive, but the attendees pointed out that no one has made money investing in the indexes for 12 years.

I was thinking about all these things and then it hit me: just ask people what they’re feeling. So I’m doing that: are you guys scared of investing in stocks right now? Why? Do you believe the system is rigged? How much of a role in what you feel does the flash crash play and the fact that we still don’t have an answer?

Image by Capture Queen