Investing Rules from an Old Guy

Rule #15

Play the market in a “sandbox.” My recommendation is to set aside 5% - 10% of your portfolio for individual stocks to “play” around with. That way you can have “fun” and gain experience playing the market without risking the bulk of your hard-earned wealth.

Now comes the fun part. How does one pick stocks to trade? How does one beat the professionals who live and breathe this stuff every day? How does one beat 50% of all the other investors out there?

You might be expecting some number crunching analysis looking at P/E ratios, revenue growth, free cash flow, etc. but I don’t have any such magical system. There are lots of stuff online on how to analyze and pick stocks and they can do it better than me. The next three rules are situations I’ve had success with.

Rule #16

You’re an expert at something. Whatever industry you work in, you know the underlying dynamics and changing market trends better than wall street professionals and definitely better than 50% of all other investors. Use this knowledge.

In 1986 I was a product manager in the PC Division at HP. IBM was the dominant player, Compaq was a strong second, Dell was a bit player in a new channel, and except for Apple everyone was running Microsoft DOS. I bought Microsoft and Compaq and did well. [Should have bought Dell but who knew?]

Somewhere around 2012 Blackberry was the dominant device for mobile phone and email. The iPhone was gaining ground and Android phones were new. I saw a chart showing phone operating system trends, and the trajectories were clear … Blackberry was about to be eclipsed by Apple + Android. Holy crap! I sold Blackberry short and did well.

A word of caution. Make sure you DO NOT use proprietary information for these trades. For example, if you know your company is acquiring another company and that information is not yet public, don’t trade on that insider information.

Rule #17

Major downturns are buying opportunities and the inevitable recovery is when a majority of wealth is created. The reason I have bonds, gold and cash in my portfolio is to prevent a major loss during a major downturn (market drop of more than 20%). These crazy events seem to happen every 10-15 years and when they do, that is the time to sell some bonds and gold and together with the proceed buy more equities.

The starter portfolio can be rebalanced to something like this to take advantage of the recovery which historically ALWAYS happens.

• 80% Equities             e.g. SPY (SPDR S&P500 ETF) + Individual stocks
• 10% Real Estate        e.g. SCHH (Schwab US REIT ETF)
• 00% Bonds                e.g. US Corporate Bond Index
• 00% Gold                  e.g. IAU (iShares Gold Trust) or GLD
• 10% Cash                  e.g. SWVXX (Schwab Value Advantage Money Fund)

When the market recovers, which may take a number of years and hits a new high, that will be the time to get more defensive and start shifting back toward 20 - 50% equities.

I missed this opportunity after the 2001 Dot-Com Bust. I missed this opportunity after the 2007 Housing Bubble Collapse. I don’t plan on missing this after the 2020 Corona Crash.

Rule #18
Winners keep winning. This one is from the Motley Fool. When you buy a stock and it’s up 50% or 100%, one school of thought says to sell some shares to take some winnings off the table. The Motley Fool says to hold or even buy more shares! Their thinking is that unless something has fundamentally changed, that company will continue to thrive.

Another way to think of this is that it is easier to stick with a known winner, than to sell some shares and with the proceeds find another winner.

Having said that, some examples of “high flyers” that tanked due to fundamental shifts in an industry or market are: RCA, Palm, Sun Microsystems, Kodak, U.S. Steel, Weyerhauser, and MCI. Most companies have a natural lifespan – it’s just having the foresight to see that and the guts to divest your shares in a timely manner.

BTW, if you have a few big winners, they could come to dominate your portfolio making your overall portfolio riskier and more volatile. A good problem to have!

Rule #19

A short window of opportunity exists when you know current prices are temporary. Unfortunately, it is not always clear how and when to take advantage of such situations.

Some examples come to mind.

• In April 2010, a well blew up under a British Petroleum (BP) oil platform in the Gulf of Mexico. This was the nation’s worst oil spill and 11 workers were missing and later declared dead. It was a PR disaster for BP and the rising costs of the clean-up and lawsuits was staggering. Over the next 2 months, the stock plummeted by 55%. Then I read that the costs, when viewed as a percentage of BP’s revenue was only a few percent! So I bought BP and sold it 3 months later after the news cycle had run its course for a gain of 15%.

• In February 2018, Snapchat released a UI redesign which was panned by users. Kylie Jenner tweeted to her 24.5 million followers, “sooo does anyone else not open Snapchat anymore? Or is it just me… ugh this is so sad.” I checked with my daughters and confirmed that they too had stopped using Snapchat. I did not think the rest of the market realized that Snap was having trouble so I shorted Snap. After 3 months I closed out my position and took a gain of 17%.

• In March 2020 Russia and Saudi Arabia could not agree on oil production cuts to stabilize oil prices. As a result, they both increased production causing the price of oil to collapse from $66 down to $20. With the world locked down due to covid-19, demand dried up and there was not enough storage for the oil that was being pumped out of ground! Future contracts that were expiring found no buyers because there was no place to store the physical oil and the price dropped past $0 and was briefly at -$37 a barrel! No one can predict how long this craziness will last, but you know eventually the price will recover to a more stable level.

• Also, in March 2020, the stock price of Zoom Video Communications (symbol: ZM) was taking off due to the Corona Virus pandemic. Some investors were incorrectly buying the stock called Zoom Technologies (symbol: ZOOM) causing this price to also skyrocket. Eventually the SEC halted trading on ZOOM but I wondered if it would have been possible to short ZOOM before trading was halted.