Invest What I Save
Posted by creining | Filed under Financial Independence
In my last post, Save More I outlined how I save money. A professor of mine once said “poor people work for their money, rich people have their money work for them”. I liked that then and I like it now. I want to grow my portfolio so that it gets to a point where I can generate an income off of it. Traditionally, people would save money their whole life and then have this beautiful nest egg they draw down during their golden years. My goal is to grow my portfolio to an amount that I can generate an income from without impacting the principal. The only way I can do this is to invest in stocks. There is no way I can do this by saving my money in a savings account or “investing” in CDs.
I started investing in 2006. And what I’ve learned over the years is that I like to invest in consumer companies that offer something tangible and that I personally use. I really like Retail/Restaurant and Technology sectors. For instance, some of my holdings are Apple, Amazon, Chipotle, Coach, Google, Netflix, Priceline, Panera, Whole Foods and Starbucks. I like these companies because I use and am familiar with their products. I have an Apple laptop, I shop at Amazon, I eat at Chipotle, I use Google search products, I get hotel rooms from Priceline, I shop at Whole Foods, I drink Starbucks. This makes investing in these companies fun! I can walk into an Apple Store and say to myself, I own part of this company! One of Buffet’s quote is “invest in what you know” and that’s true for me.
I currently hold positions in 20 companies. That is the maximum I want to have as it takes time to follow that many companies. How much time? I would say I spend 2-4 hours a week following the companies I’m invested in, watching the market and deciding when, where, and how much money to invest. Investing to me is something I really enjoy doing so I make the time for it. Some people have told me that they don’t have the time to invest, or it’s too complicated. While I can buy the complicated argument, although it is simply something to be learned, I think it’s about priorities. I have made it one of my life priorities to be financially independent 10 years from now. In turn I spend the time it takes on investing to reach that goal. Some of these people will spend hours watching sports and reading the sports page. I am not much of a sports fan and the time I would spend watching sports I can spend on my stocks. I can make way more money with my stocks than watching sports, so that’s an easy decision for me.
Another Buffet quote is “only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”. I can say that is true for my holdings. The companies I invest in generally take care of themselves so I don’t have a lot of work to do. I only have to find points in time to invest more in them. This happens when the markets and people are most fearful. I think that when the markets can no longer grip you in fear is when you’ve truly become an investor. Fortunately, I have been through a recession now so I understand when and when not to be fearful. In 2008 my portfolio peaked on September 22 and it dropped to its lowest point on November 24, taking a haircut of 40% – ouch! This year, 2011, my portfolio hit an all time high on July 8 and it dropped to its lowest point on August 8 taking a haircut of 14%. Not bad; it seemed worse than that without doing the numbers. I was a bit more concerned with the recent drop because my portfolio is much higher compared to 2008 therefore the paper loss was much more this time. In fact the 14% paper loss I just experienced is far larger in dollars than the 40% paper loss I experienced in 2008. What am I doing? I am doing the same thing now I did during the downturn in 2008, invest a set amount of dollars every month. My horizon is 10 years out so I am not sweating the ups and downs in the market. I sweated it in 2008 a bit as it was my first recession experience – I started investing in 2006 – but I can see that my investments came out of 2008 super strong because I kept investing in great companies at great values and didn’t pull any money out of the market.
I’ve read a handful of books on investing. My favorite is One Up On Wall Street. This book is good for a new or seasoned investors. I’ve also read and recommend Common Stocks and Uncommon Profits, Your Money and Your Brain and Debunkery.
In Your Money and Your Brain the author suggests writing an Investment Policy. This is an excellent idea and is a way to take the emotion out of investing. Having emotions tied up in investments is a dangerous trait. I have written and use an Investment Policy, and I revise it as needed at the turn of the year every year. The other beneficial habit I have is keeping an investing journal. I have an entry for each stock in my portfolio that I use to jot down the date I purchased shares, how many shares I purchased and at what price, along with the P/E ratio and/or cash flow yield. I also note the reasons why I purchased more shares and how I felt about the company as an investment at that time. This has been really useful in order to look back over previous purchases of a particular stock and reflect on my decision to invest at that point and to notice and fix any investing mistakes I’ve made. I also use the journal to look at the multiples of past purchases to be able to set a target for additional positions at a better value points; meaning more attractive multiples. That is a principle of how I invest.
I may write another post on investing in the future; I have just scratched the surface of how I invest.