Investment Strategies for Life

Trafford Publishing

Contents

Chapter 1 Your Foundation for Wealth...................................1Chapter 2 Your Nucleus of Your Portfolio...............................13Chapter 3 Holding Certain Stocks with Dividends........................25Chapter 4 International Stocks.........................................39Chapter 5 New School vs. Old School....................................47Chapter 6 Speculation..................................................55Chapter 7 Don't Invest Your Rent or Mortgage Money.....................57Chapter 8 Dogs of the Dow..............................................61Chapter 9 Stocks Under $12.............................................65Chapter 10 Manage Your Own Money.......................................67Chapter 11 Initial Public Offerings (IPOs).............................71Chapter 12 Timing and Analyzing the Market.............................77Chapter 13 Knowing What You Own (Sin Stocks)...........................79Chapter 14 Giving Back.................................................83Chapter 15 Reflections.................................................85Chapter 16 Conclusion..................................................87

Chapter One

What's Important to You?

Everyone wants to be rich or well off. Whether you are born with it or you are struggling to get there. If you are born in America or another country that has free trade and enterprise, you have all the opportunity in the world to be successful and to get you a piece of the American pie, especially if you are investing.

It is important to invest for many reasons. The first reason is to invest for safety and financial security for you and your family. Providing for your family is one of the most important jobs that you will have during your lifetime. Invest to help yourself and your family. Another reason to invest is to have an income when you decide to retire. When you retire, you want to keep the same lifestyle you had when you were working. And some people tend to travel and vacation more in retirement, so make sure you build a good retirement nest egg. Invest for your children's college education. Your child deserves a college education, so while you are maximizing your retirement, put something aside for those little ones running around your legs. The next reason is so you can pass down wealth to your children and your children's children. Teaching your children about wealth and then putting that wealth in their hands is a very powerful act and will be a game changer for them and their children. My final reason, but this should not be your final one, is investing is important to you. That is right, you! You should invest for yourself. I always wanted a BMW, a luxury car that is quite expensive. One way to purchase it free and clear is to invest your money and let it grow. Or that dream house you always wanted, invest and pay cash with a down payment of 20 percent, half the value of the house or even the whole price of the house.

I had my first job, and I couldn't save a dime! Every month, I would go through my whole two paychecks. I paid my rent, food, car note, car insurance, hanging out, cable phone, cell phone, and parties. Until one day, I decided to invest fifty dollars a month in McDonald's (MCD), and after a small number of months, I put another fifty dollars in Duke Energy (DUK). Before you know it, you'll have a few thousands put away. This is something anybody can do, put away a few dollars a month and put youself on the path to wealth.

Does your family live paycheck to paycheck? Are you one paycheck from poverty? If you lost your job, would you be homeless in less than three months? Investing your money can change this. And if you truly care for your family, this step will give you the baseline to achieve security. By investing as little as fifty dollars a month through a brokerage firm or discount brokerage firm, you can change your life. Fifty dollars a month may seem like a lot, but check how much you paid for your cable last month and get back to me about not having any extra money. I started off building my future with fifty dollars a month with an oil company ExxonMobil (XOM). I started a few months after getting my first job in 2002. I invested in a direct purchase plan company called Computershare. I consistently put fifty dollars a month into this account and, sometimes, as much as a thousand dollars a month when I had a high tax return or a promotion at work. By doing this consistently, I amassed a large sum of money close to seventeen thousand dollars by 2005. You can do the exact the same thing through Computershare, with ExxonMobil (XOM), or some other stock company they offer. You can use this money to put a down payment of a house or buy a car.

During these times in 2012 when economic downturns are imminent, investing can be your key to your future. Our economic periods in the United States are cyclic in nature. Consistently investing over time can act as insulation to your investing future. We are going through a difficult time now; prepare yourself.

I beg you in these difficult times to invest. While the overall market and country is down with high unemployment, stocks like General Electric (GE), which have been beaten down during this downturn, are ripe for the picking, and must be bought especially if they pay a dividend. Blue chips that were vulnerable should be bought if the fundamentals are sound and ought to be held long term.

No financial institution wants you to read this book. The American dream is supposed to be dead. You are supposed to be in credit card debt and upside down on your house and car note. You are supposed to work several different jobs in a lifetime; you're not as privileged as your father or grandfather to get a pension from working the same job for thirty-six years. You are supposed to spend uncontrollably and leverage yourself to your eyeballs.

You will not get a pension, so you better learn to invest. If you're working now, you are likely to have a 401K that is matched in some form or fashion. With a 401K, your retirement is what you make it. What you put in is what you get out. It is all up to you now.

What Is a Stock?

Stock = Ownership

Stock is a fraction of the ownership of a usually publicly traded company. If you own stock, you are called a shareholder. Ownership is the cornerstone of life. If you own stock, you own a piece of a company. The more stock you purchase, the more equity you build up in the company of your choice.

Stock, which can be represented by a stock certificate, entitles you to a portion of the profits and assets, or both, of the institution on paper, and this paper gives you ownership of profits and voting privileges on matters concerning the company. These profits are usually paid out in the form of dividends.

Stock certificates can be requested from your brokerage accounts. The certificate is mainly just a physical representation of the company and the number of shares you own. I recommend that you do not keep high-valued stock certificates in your home. Would you leave a large sum of money in your home?

An Old Investing Rule!

In investing there is an old rule for the percentage of stock you should own in your portfolio: the number 110 minus your age is the amount that you should own in stocks. A quick example of this is a twenty-eight-year-old wanting to know how much stock to own. So to get her percentage of stock that she should own, you take 110 - 28 = 82. She should own 82 percent in stock and 18 percent in bonds within her portfolio. The newer rule calls for 125 minus your age. This new theory is in place because people are living longer into their eighties and even their nineties. A little more risk in your portfolio is needed because your money will be expected to last longer. This is the new portion of your portfolio that ought to be in stock. There is another rule that I go by, it states that you should be in all stock until you reach the age of 30, and as you get older, you should add a percentage of bonds. For example, a person aged 35 should have 5 percent in bonds and 95 percent of your investable money in stocks. This rule applies up to fifty-fifty stock to bond ratio. I also believe you should keep 50 percent stock in your portfolio as long as the stocks pay a dividend even if you're seventy-five years old or older. Basically, I believe you should be in stocks in some form or fashion your entire life.

Rule 72 and Compounding

Rule 72 or sometimes called Rule of 72 is a technique for figuring out the estimating time of an investment doubling. For example, if you were to invested $500 with compounding interest at 5 percent yearly, Rule 72 states 72/5 = 14.4 years required for the investment to double and be worth $1,000. This is not a math trick, as some people may say, but a basic math computation that is closer to an approximation.

Compounding is earnings reinvested in order to generate their own earnings or more commonly thought of as making interest on interest. Compounding also can be stated as the addition of interest to the principal so that the interest added also earns interest and continuous until it is withdrawn or interrupted. When your money first starts to compound, it may seem small or modest, but if you stick with it year after year, your returns will accelerate exponentially assuming an average return of 7-10 percent return annually. Compounding can help you with the pesky problem of inflation eating at your portfolio's value. Regularly contributing to your portfolio through cash purchase of stocks makes your portfolio compound quickly.

A Hundred Shares or Round Lots

As a small investor, you may not be able to afford to buy 100 or 200 shares of a certain stock. If you buy a 100 or 200 or any multiple of hundred, you will be buying what is called a round lot. I feel that it is not necessary to buy a round lot if you can't afford them. It is okay to buy 10 or 25 shares if that is all you can afford at that time. It doesn't matter how many shares you purchase at first, if you've done the research; it's okay to purchase stock that are 200 dollars, 300 dollars, 400 dollars, 500 dollars, or higher a share. It's okay to buy 25 shares of Apple (APPL) to start a position or 35 shares of MasterCard (MA) at 400 plus dollars a share. I want you in these well-performing stocks; I don't care how expensive their price looks. I am more concerned with how strong their fundamentals and earnings are. You should build your position over time in these great stocks—25 shares here, 25 shares there. It all adds up. Just please get in!

Why Own Stock?

Investing is a joy for me. I love to invest. Investing should be done for enjoyment, for the fun of ownership, and to help you get to retirement. Don't make investing a second job. It should be done for enjoyment. Let's briefly look at other investments.

Cash loses its purchasing power over time because of inflation. So being in all cash hurts you over time.

Bonds will give you 2-4 percent return on your money.

Gold is very volatile but, over the past few years, has come on strong in returns.

Stocks will return usually anywhere from 7-11 percent annually with dividends that percentage will explode higher.

Ticker Symbols

Each stock discussed in this book will have its ticker symbol next to it in parentheses. What is a ticker symbol? You may be asking. A ticker symbol is an alphabetical series of letters that represent a given company. Heinz's, ticker symbol is (HNZ). This is an example.

Strategy No. 1: Buying on Splits

One of my favorite strategies when I first started investing was buying right before stocks split or right after they split. I understand that when a stock splits, the monetary value of the stock is the same. Make sure you buy on common stock splits that pay a dividend of some sort. A dividend is like an umbrella of protection. So when investing, make sure you're under it.

There are companies that do not like when their share price gets too high, so they split their stock to make their share price more attractive to investors.

Before a stock split, there is a period of stock appreciation up until the stock splits. If the stock market is in an upward trend, you can reap these benefits before and after the announcement. Good research will help you figure out who is an outstanding split candidate. Read as much financial news as you can stand. That includes magazines, internet, newspapers, and newsletters. Once you have found a couple of candidates. Dig your teeth into them and bite down like it's a juicy T-bone steak, side of potatoes, and garden salad.

After a stock split, it is a great time to get a stock at an inexpensive price. It may rise a few points, and then it usually trades in a range dropping then rising and dropping then rising for a few quarters. Don't be alarmed; this is normal that a stock trades in this type of tight trading pattern. What is a stock split? A stock split is usually when a stock's shares double, but its price is halved.

There are companies that do not like when their share price gets to high, so they split their stock to make their share price more attractive to investors.

Strategy No. 2: Breakups and Spin-Offs

Companies buy each other all the time. The big fish gobbles up the small fish and keeps adding companies or swallowing up smaller fish. Look out! When the big fish gets too big, it's usually time for a breakup to unleash the company's hidden value. If the two separate companies are worth more than the whole, usually the company is split or broken up. Do not confuse the word stock split with company split or break up. A stock split, remember, is when the shares are usually split or the common stock is doubled 2:1, 3:2 (for every three shares, you get two more), or 4:3 (for every four shares you have, you get three more). So do not confuse them.

Buying when it is announced that a company is breaking up is ideal. (1) Normally, the stock will rise in value from the time of the announcement until the actual breakup. (2) For the most part, two companies are better than one, and finally (3) if both companies will pay dividends. Examples of this are Abbott Labs (ABT) and Kraft (KFT) that by all means should be purchased ahead of time before breakup.

Spin-offs are when the company remains intact and a piece of the parent company becomes its own standalone company. One such company that has done this of recent years is Altria (MO), spinning off companies of the likes of Kraft (KFT) and Phillip Morris International (PM).

Joel Greenblatt, in his book, You Can Be a Stock Market Genius, describes the purpose of a spin-off. He states, "Spinoffs can take many forms, but the end result is usually the same: A corporation takes a subsidiary division or part of its business and separates it from the parent company by creating a new, independent free-standing company."

I recommend buying the parent company before it spins off any parts of its business. And please get in early. The earlier you buy, the better off you are because in most instances, the company will announce about a year or more in advance that they will be spinning off a section of their business. So after you have done your homework, jump in with both feet. This allows the stock price to go up because the company usually does not have two companies priced into its stock price. In most cases, it only has the value of one, giving you a year of momentum before the spin-off. In most cases, there is another pop when the spin-off IPOs and is given to shareholders of the parent company.

What Gives You the Right?

What gives me the right to write this book? What are your credentials?

I am not an insider. I am not a high-flying investor. I am not a Wall Street guru. I am a regular guy who works every day, making $45,000 a year. I am not a CNBC analyst making millions. What I am is someone who has an engineering and mathematics background in industry and academia. I have been successful in investing long term, and I want to give you the skills and knowledge to make rational investing decisions in any financial climate.

I only want to see you successful in the future. I want you to reach your goals financially and otherwise. I want to guide you through the stock market with sound intelligent investment strategies.

What Every Investor Should Know?

Stocks are risky; it does not matter what kind of stock you own. When investing in a stock, it can do one of two things: go up or down. No stock stays where it is, contrary to what some people think and say.

If you invest money in "good" stocks over a five- to ten-year period, you should expect 7-10 percent return annually; with dividends, it is 2-5 percent more.

Find your comfort level with stocks. I will help you find that level, if needed. I will hold your hand and walk you through the progression of building a portfolio that you and your family can live with. I will give you a step-by-step breakdown of sectors, portfolios, and even a few stocks that will give you confidence to going forward with portfolios that you can enjoy and have assurance in.

Some Winning Quotes

In the Wall Street Journal (WSJ) is a quote, "Long-term portfolios are going to have short term volatility." This makes very good sense because the longer you hold stocks, the less severe upward and downward swings you will incur in your portfolio.

In thinking long term, IBD in Monday, June 28, 2010 special report states, "that investing in small-cap and large-cap stocks if you invest $10,000 per year it will take 22 and 23 years respectively to grow to a million." Now let's analyze this. Small caps should greatly improve your portfolio, yet it only gives you a one-year lead on large cap; this reinforces that large caps should be at your core, with large cap returning 11.23 percent annually, and small cap returning 12.23 percent yearly average rate of return. Large-cap stocks normally pay a dividend, making them less risky and a hedge against inflation and a saving account.

Albert Einstein states, "The power of compounding was said to be deemed the eighth wonder of the world."

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Excerpted from Investment Strategies for Lifeby Walter E. Simmons III Copyright © 2012 by Walter E. Simmons III. Excerpted by permission of Trafford Publishing. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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