One more time …

You can check out 7million7years and other great personal finance blogs at Money Talks … in the meantime, here is today’s post

I’ve written a whole series of posts just focused on one thing: understanding whether you are in the BUSINESS of the stock market, or are you in some other profession/business just looking to save a little or invest a lot … and, have chosen the stock market as your vehicle (instead of, or as well as, real-estate, etc.)?

If you are in the BUSINESS of the stock market, and very few of us are (I’m not), then you treat it as a Making Money 201 BUSINESS i.e. to create income (either through dividends, profits on trades, or capital appreciation).

“You puts your money and you takes your chances”, as the old fair-ground spruiker once said.

If you are NOT in the BUSINESS of the market, then what should you do? Well, go back and read those posts, starting with this one …. they are designed to STOP you wasting your time chasing the impossible so that you can INVEST more time in the activities that will actually stand the best chance of making YOU money.

I received a couple of important comments from Moom to that post (and the one the day before):

I’m not sure there’s much difference between option 2 and being a speculator/trader. Most people aren’t going to beat the stock indices doing this on a risk adjusted basis. As I said yesterday, you’ve got to ask yourself: “do I have an “edge” that can beat the market” and if you do can it earn enough in above market returns to make your time invested worthwhile. If you only earn 1% above the market and only have $100,000 to invest it’s not worth spending much time on investing except in order to learn to be better.

It might make sense for someone with say $100-200k at least to invest to build a portfolio of just individual stocks they like. On the other hand ETFs/index funds in the US have very low management costs and so it might not make much sense unless they have an edge of some sort or just enjoy owning these different companies and their “stories”.

Another option is to select good managers. But that might be as tough for most people to determine as selecting good stocks.

My comments yesterday were that there are ways to earn equity like returns with lower volatility without trading (except rebalancing) or much in the way of security selection. You need to include lots of asset classes and use cheap leverage (mortgages and levered funds like SSO) where possible so that you can get an equity like return while including some stuff in your portfolio that earns less than equities (like bonds).

The point here is to understand which side of the fence that you lie; it’s a Binary Choice:

1. Dollar-cost-average into low-cost Index Funds over a 20+ year period, OR

2. Spend the time and effort to identify 4 to 5 undervalued companies that you understand, love, and believe have a strong reason for being able to stick around for, say, 100 years (try Coke … except it’s not undervalued) and buy those to hold for 20+ years or until the market ‘wakes up’ to their true value (I have nothing against you trading/in out of these stocks on the way up … equally, I have nothing against you just holding them).

The SAVER is looking for market returns over 20 years by dollar-cost-averaging into safe Index Funds: $100k becomes $400k+ (the reality is that they will be topping up regularly for an even bigger nest-egg circa $1 Mill.)

The INVESTOR is looking for circa DOUBLE market returns over 10 – years by investing in the stocks of a few well-chosen undervalued businesses: $100k becomes $1.4 Mill.!

To me, there are NO other [stock market-related] choices for the non-gambler (who is in the ‘business’ of trading/speculating a la Soros and a select few).

The 7million7years Binary Stock Strategy Selector 🙂 is designed to STOP you from wasting YOUR precious time and money chasing funds, managers, the market, etc …

… and, concentrate on building YOUR core skills (e.g. your profession; your business; your talents; etc.) and maximising YOUR return from THOSE.

This is not just me saying this; it’s Warren Buffett as well … but, we’re just two conservative rich guys (one ultra … Hint: his initials are WB … the other so/so) … what do we know 😉

But, here’s where I differ from Warren: IF your core skill is ‘speculating’ [AJC: and, this might be you, Moom?] … then, go for it … but, treat it as your BUSINESS …

…. and make sure you invest the proceeds in one of the other, safer ways available, just in case you ever get it wrong!

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0 thoughts on “One more time …

  1. hmmm thanks for quoting me extensively, but seems you missed my point, but it’s OK if we disagree. I said it will be hard for most people to pick those 4-5 companies and come out ahead. That trying to pick 4-5 companies was speculating and that people shouldn’t try that unless they were willing to be a speculator. On the other hand I was saying that it doesn’t hurt to be more diversified than just investing in stock index funds, but you need to use a little cheap leverage to keep your returns up when including potentially lower earning assets. But I do agree that if you want to be a speculator you have to be very serious about it.

  2. I think everyone has the edge (you have to have to get ahead in the stock market) they just need to find it. It may take a lot of work and time, but in the end it all pays off.

  3. @ Moom – if you pick a stock on the basis of technicals, hot tips, cyclical ups/downs, then you are speculating. On the other hand, if you buy stock in a business that you understand, management is strong, company has a large competitive advantage, and you can value it properly and find that it is (temporarily) cheap, then to me that is investing. Obviously, only a few can do this …

    @ Josh – I agree, but the ‘edge’ for some may be in stocks, others in Real Estate, others in business, others in their jobs ….

  4. ” then to me that is investing. Obviously, only a few can do this …”

    Agree – OK so a matter of wording rather than principle.

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