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Mother's Little Helper Launches

Welcome to my first post, EVER. Yep, this is my first post on my first blog. So why Mother's Little Helper? Mother's Little Helper was once a sarcastic euphemism for constantly being under foot. Today it's more a literal description for all the roles the whole family plays in our mother's daily life. This blog is a project inspired by my mom, her investments and the universal need we all have to live a financially independent life before and after retirement. The objective is very simple; see if an average investor can produce above average results.

There are literally thousands of blogs on stocks, options, investing and personal finance. A Google search for investing blogs alone returns 66,500,000 results; I won't list them all here. Yet with all this information at our fingertips, we're still doing it wrong. In fact there is a mountain of data that illustrates that trying to educate investors is futile. The average investor behaves a lot more like an impetuous teenager than someone who is seriously concerned about saving for retirement. It seems that no matter what education and advice is provided to investors they will ignore it and do the opposite. The sad fact is the average investor has under performed the market in all time frames; going back 30 YEARS!

DALBAR’s Quantitative Analysis of Investor Behavior (QAIB) has been measuring the effects of investor decisions to buy, sell and switch into and out of mutual funds over both short and long-term time frames. "The results consistently show that the average investor earns less – in many cases, much less – than mutual fund performance reports would suggest. No matter what the state of the mutual fund industry, boom or bust: Investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments have been more successful than those who try to time the market."

For the 20 year period of 1995 to 2015, the S&P 500 index averaged 9.85% per year. Boring until you try to think of any place else you could have earned nearly 10% on your money every year.

Let's look at it this way:

Invest $1,000 in an S&P Index Fund and leave it alone for 20 Years. At an average return of 9.85% per year your $1,000 will grow to $6,546.

Add just $20 every month and that investment will grow to $21,391. Anyone can find $20 a month or have it automatically deducted from their paycheck. "Wait a minute Clay, $20 a month for 20 years is a lot of money!" $20 x 12 months = $240/year x 20 years = $4,800. So for a $5,800 investment you got back about $21,391.

Okay let's really kick it into gear.

Invest $1,000, add $20 every month and give up coffee (assumes you're investing the coffee money) and your less caffeinated investment will grow to about $116,400. That's a college education, it's a house, it's emergency medical money and much more.

Can you find $20 a month and cut lattes out of your diet for that kind of a return? I think the fundamental problem is most of us just don't think about money this way. We often won't even talk about money. By any measure Silicon Valley is a pretty progressive place, yet I've been to parties here where it was okay to talk about religion, sex and politics to the point of insulting each other; but bring up money and and suddenly I've crossed the line into taboo. I think we can all relate to an event where we found that it wasn't really okay to talk about money. Money seems to be a part of a collective psyche where we all become uncomfortable and feel out of our own comfort zone when the subject comes up. It's time to shake that and learn that it's part of life. Money needs to be discussed, shared and learned and that education needs to start early.

During the 20 year period from 1995 to 2015 when the S&P returned 9.85% the average investor in stocks earned a market return of only 5.19%. Still sound good? That same $1,000 investment with a $20 contribution every month would have amounted to only $11,268, $10,123 less than the index investor. So what happened? Why did the average stock investor lose so much money, about 50% less. It's simple, he handled his money and it washed away. Most people simply can't leave their investments alone. They mostly buy when the excitement surrounding a stock is high and so is the price. Then when the market is down and the stock drops they rush to sell it for fear the stock may fall to zero. This is where paper losses turn into real money losses.

"Your money is like soap, the more you handle it the less you have" - Gene Fama Jr.

I advocate doing nothing, or as little as possible. The fancy terms are "active portfolio management" and "Passive portfolio management". In an active portfolio there is a big human element, someone who is making investment decisions on what to buy and sell, often trying to determine what will happen in the future and to buy stocks based on some predicted future. They measure their performance against an index such as the S&P 500. The problem is over 80% of large cap, mid-cap and small cap actively managed funds failed to meet or beat their respective benchmark indexes. Yet investors continue to plow their hard earned money into these funds. A passive fund simply mirrors an index and has very little human interaction. Passive investments can benefit the investor in two ways, less management means lower cost and without a human trying to divine the future the fund simply grows and expand with the market.

There are differing opinions on what a managed portfolio looks like. Some would say that my portfolio is a managed portfolio because I've made specific stock selections instead of investing in the whole market with an index fund. Okay I'll accept that, to a point. The portfolio published on this site will not be managed throughout the year. This is a buy and hold strategy. One of the many ways a portfolio gets 'managed' is by continuing to buy a stock when it's price is below the price you originally paid. That's right, buy more when you're losing money. The principal is simple, if the company was a good investment at $100/share then it's an even better investment at $75/share; assuming there are no fundamental problems with the company, management or it's products. When the price of a company's stock falls and there's nothing fundamentally wrong with the company then it's time to go bargain shopping. There's just one big problem with this strategy, it requires that you, the investor actually stop what you're doing each day to review your stocks and see what's on sale. Or you need to set alerts on every stock you own so that they will automatically appear in your email each day. Then you go and review all the latest news and try to divine what you think the future holds. I'm going to assume you don't want to do that because for 99% of us it's not practical. What's worse, the more you look at your investments the more likely you are to go do something and regret it later. So we're going to buy and hold. Another way to generate better returns is to allocate different amounts of money to different stocks, this is known as weighting the stocks. I'm going to equal weight the stocks in the portfolio. No one company gets an advantage over another. The portfolio will allocate the same amount of cash to each stock; roughly $5,000 give-or-take a few bucks.

Truth is, I can make this portfolio perform a lot better if I buy more shares when prices dip below my original purchase price; but I'll leave that out for this first years test.

The only buying I "may" do are those companies that I have placed on time-out. When the portfolio is published on December 27, 2016 there will be a selection of stocks that are bought at the opening price. There will also be a group of stocks with no transaction data, these are on time-out. When I evaluate all these stocks I go through a checklist of all the things I want to see to determine if they belong in the portfolio or not. Many stocks don't come anywhere close to meeting all the conditions of my checklist. But there's a group that are missing just one condition. Talk about frustrating! I want to invest in these companies so badly but I just can't. Without a 100% approval the company just doesn't offer a high enough margin of safety. When I evaluate company I want to know that if I'm wrong or something severe happens to that company over the next 12 months that my margin of safety is high enough to allow it to still be a good investment. For example, let's say I project that the stock price of company XYZ is going to appreciate 20% over the next 12 months. But mid-year the CEO everyone loves resigns for "personal reasons" and the stock price falls. By the end of the year the stock has only appreciated 5%. 5% ain't bad and more importantly it's not a loss. But what if my initial evaluation suggested a 10% price appreciation and the same thing happened? I'm sure we'd all be less happy with the result. So for company's that are on time-out I'm leaving them in the portfolio and if at any time during the year the fundamentals change and enable a company to meet 100% of my criteria then I'll go ahead and buy $5,000 worth of that company's stock.

Here's the plan in simple bullets:

  • First I'm going to identify a group of stocks that are cheap, have potential for high growth and have a number of characteristics that make their financial statements attractive to an investor. I do not evaluate political, economic, cyclical conditions. I also do not use technical analysis or wait for more favorable prices.

  • I will stick with them for the next 12 months. We're going to buy and hold. Typically when a stock I like goes down I buy more shares because a good investment just went on sale! This reduces the overall cost in all my shares so when it goes up I have bigger gains. I'm not going to do that. One of the main points of this portfolio is to stay simple, so we're going to search and buy in December, hold for a year and then do it all over again. The only additional buying after December 27th will be for stocks on time-out that become favorable.

  • Because we're holding for 12 months we get the reduced tax rate for long term holdings.

  • During the year there will be many events about every company and I'll use this blog to share my thoughts and I hope you'll all share right back.

  • In December 2017 I'll do the same analysis and produce a new list of companies.

  • I'll compare the two lists and keep companies that appear on both lists. Anything new will get added to the portfolio and anything that doesn't make the new list will get sold.

Thank you for reading and sharing your feedback, I hope you'll add this blog to your regular reading list and share it with your family and friends.

Stay Invested,

Clay Baker

"Whenever I get the feeling I want to sell, I lie down until the feeling goes away" - Clay Baker

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