The Prudent Investor

Although I stopped writing for the blog, I continued making my purchases for the Prudent Investor Portfolio.  All purchases were made through Zecco.com because they offered free trades, and the purchases were based on this premise.

Alas, the promise of free purchases was too good, as I just received an email telling me that as of 1 March they will start charging $4.50 for each purchase.  Needless to say, this changes everything.

It was my belief that I had chosen excellent companies that will look very good when the financial mess in our country is finally straightened out, but I was counting on continuing with regular purchases as we continue to slide down, then finally move back up.  A $4.50 charge for a $100 purchase obviously makes no sense, so the whole idea of the portfolio no longer makes sense.

So I will no longer make purchases through Zecco.com and will continue to build wealth through my DRiP Portfolio, where I make my purchases without charge.

In parting, I will suggest a visit to DRiPInvesting.org, where you will find a large community of individuals interested in building wealth a little bit at a time.

Cheers -

george

Last post I talked about how I do not believe in strict sell rules for positions as determined by the stock’s drop of a specific percentage. I do, however, take note and take action.

The most important thing in this situation is to understand the reasoning behind the drop in price. This has always been a problem for me with very small companies. For instance, one company I own is Ondine Biopharma (OBP.TO on the Toronto Exchange). This is an excellent company with a great product, but the company’s stock price can act like a roller coaster without any real significant new available. One reason for this could be the fluctuating currency exchange between the two companies, but a lot simply remains a mystery.

When a reason is found then one needs to decide whether or not the reason is worthy of a sale. Obvious reasons like a company having to restate its earnings due to accounting regularities, or a pharmaceutical company not getting a patent approved for an important drug kick me into sell mode. However, other reasons deserve careful consideration.

Since I am a long term investor, my questions go to the long term capabilities of the company. Will the problems affect the bottom line over the course of years? Is this something that can be corrected? Is this a one time happening or something that will occur over and over again? These questions lead to the most important question of all, “Is this a reason to sell or buy more?”

In the case of SJW Corp., as noted in a previous entry, the reason for the downturn was the weather, which is always going to be a major factor in a water utility. This is simply part of the cost of doing business, and for SJW Corp. this means that over the next few quarters they will not make as much as they would have if it had rained more. In my mind, this does not warrant a sell, and since the problem will show itself over the course of several quarters, there is no rush to take advantage of the lower price because I will be making regular purchases during the normal course of building the position.

So the course of action here is not to alter the course. I still see SJW Corp. as a strong company with a bright future, and this current downturn of price as an opportunity to continue building the position.

I remember reading a “rule” quite some time ago that when one has a loss of 10% then it is time to sell.  As far as I was concerned, this fell into the same category as other “rules,” such as to set a stop at 10% below the purchase price and never to buy high P/E stocks.  It hadn’t taken too long in my time investing before I realized that the latter two made little sense, after all, stocks quickly fall and recover, leaving one with a sale at a low point, and stock’s P/E should always be seen in comparison to its industry.

I don’t remember where I read the 10% rule, but I made a rule myself to reexamine a stock if it fell more than 5%.  The reason for not invoking an automatic sale as determined by an arbitrary round number is obvious.  More often than not, emotion drives the market, and it is commonplace for a stock to move too quickly in either direction as the response to an event.  If one wishes to engage in short term purchases, then finding these events can be the seed for ideas of companies to buy and short.  My investing philosophy is more long term, so I leave the short term scenarios to others.  Usually.

Watching short term emotion can be a tricky thing.  I’ve recounted the story on numerous occasions of Intel’s drop a number of years ago.  When I was a writer for The Motley Fool, Intel dove drastically one particular Friday.  I asked the readers of the forum what their plans were for Intel, and the vast majority said that they were going to dive in on Monday and make a big purchase – only one respondent said that they felt that Intel was going to drop further.  That one respondent was correct, as the stock fell, and fell, and fell.  We had seen emotion drive the price, but just about everyone underestimated that emotion.

So why did I say “Usually,” as far as eschewing short term purchases is concerned?  When my plan is to make multiple purchases over a long period of time, I use a strategy called InvestMete (http://dripinvesting.org/investmete/investmete.htm).  This was something that I developed about ten years ago that assumes that one is going to purchase a quality company and take advantage of a current dip in price.  I am not going to go into the full explanation at this point, I’ll do so early next month, but it is a means of adding some risk back into a scenario where a great deal of risk has been removed.

My next post will explore how the above thoughts have shaped my feelings on SJW Corp., which is currently showing a loss in the portfolio.

Item #0 – Introduction

The purpose of this blog is to occasionally post thoughts and updates on a portfolio I am going to create.

A while back it was brought to my attention that Zecco.com is a place where equities can be traded without a broker’s commission. Of course, my initial thought centered around how they must make their money, and if they only allowed for market orders then that would be rather obvious. However, limit orders are allowed, and they make their money by sending the orders through their routing process, so as long as I can purchase at my price then I am fine with this.

The purpose of this portfolio is to purchase equities with the expectation of holding for at least six months. Growth will be a consideration, as will the typical value assessments, as will be diversity of choices.

This money is considered to be my “Go To Ireland” money. A number of years ago I parked three thousand dollars into Vanguard’s Balanced Index Fund Investor Shares fund. The idea was to find a relatively safe location to place my money, as I planned to withdraw it and use the money for a trip to Ireland (of course, there were many safer options, but I’m always willing to take on more risk than is often considered acceptable). Because of numerous reasons, I was not able to take the trip, and having added $250 per month to it over this time, the fund has tripled in size. I will use a third of this to initially fund the portfolio, and will add $100 per month to continue funding.

My situation at this point is that I am 55 years old and expect to work full-time for at least the next ten years. Sometime over the subsequent five years I expect to switch to part-time, as the house will be paid off by then, and at 70 I will begin to take Social Security and become a full-time professional fine arts photographer (retire). I max out my employer’s 401k contribution, max out money going into my Roth IRA, and have no debt other than the mortgage (my car is paid for, and I save for the purchase of my next car throughout the life of my current car). In a worst case where all of my picks go to zero, I have properly saved in the right places, so I am able to handle increased risk, though this will not be an increased risk portfolio.

So there you have it. I have sent all of the proper documents to Zecco.com, and when the account is set up I will fund it and begin the portfolio. In the meantime, I will begin considering companies to add to the portfolio and will post those thoughts on an occasional basis.

Hopefully, I will learn something from this public document, which is really the point.

As always, please feel free to either enter a comment, or email me at George.Smyth@Gmail.com.

Cheers -

george