Andy Sirski shares seven investing tips and strategies he wishes he’d known when he started investing
As we start a new investment year, I sometimes think how our life might be if we had had more financial skills 30 to 40 years ago. Not that I’m bitter. My wife and I and our family are richly blessed and I’ve learned many financial skills over the years.
Still it would have been nice to know more of this stuff before age 60. Better late than never, I guess.
Here are some of the things I wish I’d known.
1. Find someone to talk to
Most of us have had someone to talk to over the years. But usually it was someone who was trying to sell us something, or someone who had fears of their own and could only give us one side of the story. By “someone to talk to” I mean someone who had failed once or twice, had succeeded in the four aspects of life and had a vision of the future.
I try to be the one my kids can talk to. And I do spend a lot of time with our readers as they learn how to sell covered calls, buy right and protect their portfolios.
2. Follow trends
There are long-term trends and short term trends. Following long-term trends can make us serious money. But short-term moves can ruin or improve the chances of success of our long-term moves.
For example, starting August 1982 many industrial stocks began a 17-year run up. That mostly ended in March, 2000. During that time industrials such as big box stores and pharmaceuticals made good money for shareholders. That also was the beginning of the techie trend, but with techies, too much of a good thing helped crash the sector in early 2000.
From 2000 to early 2009 we had what some call the lost decade. Our Canadian banks made money until 2007, but the housing bubble caused governments around the world to tighten rules on banks and they’ve had to boost reserves, which has hurt share prices. That seems to be almost over.
Uranium started a long-term trend some years ago. New production and the uranium catastrophe in Japan in 2010 hurt uranium prices but I suspect the long-term trend will continue up and uranium will be an important source of power in the years to come.
As central banks started to print money, the threat or fear of inflation has pushed up the price of silver and gold. 2012 was the twelfth year of that uptrend. While the price of both has gone up many times, often the shares in those commodities have not. Why?
For one thing most mines are facing rising costs. For another, when a mine takes out a million ounces of silver or gold, that silver or gold is gone. Compare that to farmland where a farmer puts in a crop most springs, nurtures the crop, and harvests it but leaves the soil behind after he takes the crop off.
3. Sell when losses are small
This lesson would have made or saved me hundreds of thousands of dollars. There certainly are two opinions on this rule. One is that many good stocks have gone up, dropped, and gone to new highs again, so don’t worry about short-term drops.
The other opinion is that we don’t know which stocks will recover after a drop. Nortel, Enron and now RIM had their day in the sun. Stocks like Microsoft, Nokia, and Intel were high flyers, dropped, and aren’t dead but have not recovered.
It would have paid to use selling rules on every one of those stocks. I looked up stocks I mentioned in this column in June, 2011. Barrack Gold (ABX), Canadian Natural Resources (CNQ), Finning (FTT) and Silver Wheaton (SLW) are all well known and respected stocks. Here are the prices back in June and as of the end of December: ABX ($46/$34), CNQ ($42/$28), FTT ($26/$24) and SLW($35/$34).
Three selling rules could help you keep losses small. First, sell when a stock is down 15 per cent from its top. Second, sell when a stock has lost you eight per cent. Third, sell when the daily price crosses the 10-day moving average going down.
The point is, when a stock drops it could be a small correction or a big melt down. If you sell and the price suddenly turns up, at least you have most of your money. If you don’t sell and the price goes down a lot, your shares have to make big returns to get back to even. Most investors are more afraid of missing out on gains than of losing money so their brain makes it hard to sell at a small loss.
I often ask investors who are afraid to sell at a small loss or even a significant loss: if you had a race horse and he broke his leg, what would you do? The answer is usually: “Shoot the horse.”
It’s almost the same with stocks. If the stock is not doing what we expected it to do, be ruthless and start selling some or all of those shares. When a stock has started down, ask yourself: how big a loss can you tolerate before it hurts your attitude, and your portfolio?
Most investors start out thinking they have nerves of steel with their stocks but after they are down 30 or 50 per cent, their nerves turn to mush and they come down hard on stocks. It would be a lot better to sell with a small loss and be wrong than wait for a big loss and have a sour taste for stocks and a big hole in your portfolio.
4. Sell covered calls
This is a strategy I wish I had learned years sooner.
By learning to use options, you can make money on a stock whether it stays flat or goes up or down; you can be wrong about the stock and still make money; and, you can limit your risk and make money in a falling market.
Stocks are still one of the businesses where you can start small and learn as you go.
5. Look at start ups
I lucked into Consolidated Mining (CLM) just as it was starting to mine and sell iron ore. I started buying at $8, the shares went to $10, dropped to $7 and six months later I sold them for $17.25. My $48,000 turned into $108,000 in half a year.
Then, I found Copper Mountain (CUM). As it was starting up it seemed to run into every start up problem a start up could find. Then the price of copper dropped. I started buying at $5. Shares went up to $7.23 and down to $2.80.
I sold a lot of calls and eventually a lot of puts. I would guess my cost per share is around $4. As I write, shares are around $4 and the company’s news release on its outlook for 2013 is optimistic.
I could have suffered less mental pain and had more money if I’d waited to buy after the mine was up and running smoothly. Or, without that kind of patience I could have used my selling rules and been out of the stock as it started to drop. I wish I had learned to sell at a small loss years ago.
6. Consider streamers
There are three or four companies in this business: loaning money to mining company, and rather than receiving straight cash back, setting up an agreement to buy silver at a low price, process it and sell it at market.
I own two of these streamers. One is Silver Wheaton (SLW) which has about 17 contracts to buy silver. SLW share prices appear to be correlated about 95 per cent to the price of silver so you need to buy it right or be prepared to sell calls, or to see the value drop during some parts of the year.
Over the past three years SLW has moved up and down from around $20 to $49 and down to $23 and back to $38. Nimble investors could have bought SLW shares near the lows and sold them near the highs and made more money than the shares are worth.
Franco Nevada (FNV) is not nearly as volatile as SLW and has a larger assortment of properties. Like SLW, FNV operates with maybe 20-something staff and has some very lucrative contracts to buy gold and silver too.
I wish I had learned about streamers years ago.
7. Look for dividends
I started out with little respect for dividends, but over time I’ve seen that good, predictable dividends can create a nice cash flow. I can buy a decent dividend-paying stock, and sell calls a bit above the price of the day. This takes some work, but it sure can goose up total returns from our stocks.
The first thing to learn is how to keep losses small. Conquering that monster would help an investor be proud and confident in his or her ability to preserve a lump sum of money.
I think the next priority would be to learn to sell calls, which can bring in cash in rising, flat or falling markets. And then, learn how to sell puts. You can only sell puts in a trading account and you need special approval. Still, you don’t need to own shares to sell puts, which reduces corporate risk. Done properly on a rising stock, selling puts is one more way to bring in cash.
Another key priority: understand the trends. If you buy a good stock when the trend is against it, you likely stack the odds against yourself. It’s very hard for an individual stock to overcome a sector in a falling trend, so don’t fight it.
I encourage you and your children to learn most of these concepts sooner than later. †