There are lots of different ways to invest your money, to be sure, and even within the stock market there are numerous sectors, strategies and types of company or vehicle to invest in. When the market goes down, that doesn't mean everything goes down -- only that the average has declined. Even in the worst days of the depression, during times of war, and for the many decades when the stock market virtually stayed unchanged, there were still very successful companies whose stock prices rose dramatically (as well, of course, as those whose prices declined).
The trick is to choose which companies have the best chance of success, and to avoid those companies or sectors which seem to be disadvantaged by circumstances or by their own mismanagement. This is, above all else, the singular advantage enjoyed by the investor in individual stocks -- we can move our money around easily (and cheaply, thanks to brokerage competition and computerized trading), and we don't have to buy "the market". Large investors whose investments are big enough to move markets have to be careful to invest only in the biggest companies, lest Heisenberg holds extra sway and they cause the prices to rise or fall too much solely from their own movements. That means institutional investors must focus primarily on large capitalization stocks, which are more likely to mimic the rest of the market because they ARE the market. Likewise, index fund investors intentionally (and there's certainly a great argument for doing this) mimic the market as a whole.
This belief that an individual can beat the market is the hubris behind many portfolio collapses, but what can I say -- lots of people do beat the market, and diversification of a portfolio of individual stocks can go a long way toward minimizing volatility without giving up the advantage that we enjoy as small individual investors.
Looking back, there are definitely some areas I have moved money out of, and areas that I have embraced more fully. This is the "trading" part of my brain more than the "investing" part, I suppose.
Oil Tankers -- I was heavily invested in oil tanker stocks for about 18 months, from the Summer of 2003 until December, 2004, when I (ironically) cashed out on 200%+ profits in order to buy a new car. This was largely the case of lucking into a huge trend, as I found these stocks when searching for high dividends and, after analyzing the industry, was able to capitalize on a huge upswing in tanker rates and the prodigious cash flow that brought to some of these companies (my favorites were Frontline (FRO), OMI (OMM), Torm (TRMD) and overseas Shipholding Group (OSG)). They all paid (and pay) good dividends, though Frontline stood out as they paid more than a 100% return in dividends while I owned it, thanks both to shareholder-friendliness brought on by a single dominant shareholder and the divestiture of some assets.
The biggest influence on these tanker companies, however, was simple supply and demand -- growing global oil consumption caught people somewhat by surprise at a time when single hull tankers were being phased out even while investment in new double hulled tankers was a few years behind the curve (it still takes a few years to get a new ship built, thanks to limited shipyard capacity). I'm still keeping an eye on these if they drop to more affordable levels again, but the industry is wildly cyclical and the stocks are incredibly volatile -- Frontline over the past four years or so has gone from a low of $3 to a high of about $60 (and more like $80 if you take dividends into account).
REITS and Mortgage REITS -- I also picked up several of these early in my investing career, again attracted at first by the dividends and by the urge to diversify my holdings into a different sector. The ones I picked up at first were General Growth Properties (GGP), Prologis (PLD), Friedman, Billings, Ramsey (FBR), and Annaly Mortgage (NLY). The first two I ended up selling at a nice profit because I thought (as did everyone else) that they would eventually collapse with the inevitable rise in long term interest rates. It turns out that I should have trusted my judgement of the individual companies and left trendwatching to the experts -- these are still excellently managed companies that are growing fast in good market areas and pay nice dividends. FBR and NLY are a different matter, both pay dividends based primarily on the carry trade, which depends on a certain amount of slope to the yield curve. (If that doesn't make sense, the "carry trade" is institutions borrowing money at short term rates and lending it at long term rates, and pocketing the difference. If short and long term rates are too close together, they take on more risk and lose income -- that's exactly what seems very likely to be happening to the mortgage portfolios of both FBR, which also has a banking business that has been hit by scandal recently, and NLY, which is almost exclusively a mortgage investment trust. The yield curve is the graph showing the difference between yields on, for example, the 2-year bond and the 10-year bond. The recent flattening of this curve is part of what Alan Greenspan has been calling the "conundrum" of long term interest rates of late).
The short analysis is that I sold FBR when their scandal emerged, simply because it was risky to hold them with a flattening yield curve anyway and I didn't have the heart to also risk any potential fraud they may have committed. To make it clear, I don't personally believe that anything terribly bad was done by the company, but it is a risk. I lost a fair amount of money in FBR, bought most of the shares in the low 20s and sold around $13, which can't even be covered up by the $1.50 or so I received in dividends during that time.
NLY was more or less a break-even for me, I lost confidence in them well before I lost confidence in FBR, and they didn't have the investment banking arm that I thought would smooth earnings for FBR. Sold out of them at a loss of about a dollar a share nearly a year ago, and their stock price has amazingly stuck around the same point that I sold, so I've since missed out on some nice dividends.
So ... one big success on a sector bet based on fundamentals, one relatively small failure. There are other failures, I'll be sure to share those as well intermittently. Now I have to figure out a way to provide a good representation of my live portfolio .... hmmmm, maybe I can java it up in the corner or something. We'll see, stay tuned (he types to himself -- it's always best to write a blog for your own edification, since God knows no one else is reading these giant clumps of text).
The trick is to choose which companies have the best chance of success, and to avoid those companies or sectors which seem to be disadvantaged by circumstances or by their own mismanagement. This is, above all else, the singular advantage enjoyed by the investor in individual stocks -- we can move our money around easily (and cheaply, thanks to brokerage competition and computerized trading), and we don't have to buy "the market". Large investors whose investments are big enough to move markets have to be careful to invest only in the biggest companies, lest Heisenberg holds extra sway and they cause the prices to rise or fall too much solely from their own movements. That means institutional investors must focus primarily on large capitalization stocks, which are more likely to mimic the rest of the market because they ARE the market. Likewise, index fund investors intentionally (and there's certainly a great argument for doing this) mimic the market as a whole.
This belief that an individual can beat the market is the hubris behind many portfolio collapses, but what can I say -- lots of people do beat the market, and diversification of a portfolio of individual stocks can go a long way toward minimizing volatility without giving up the advantage that we enjoy as small individual investors.
Looking back, there are definitely some areas I have moved money out of, and areas that I have embraced more fully. This is the "trading" part of my brain more than the "investing" part, I suppose.
Oil Tankers -- I was heavily invested in oil tanker stocks for about 18 months, from the Summer of 2003 until December, 2004, when I (ironically) cashed out on 200%+ profits in order to buy a new car. This was largely the case of lucking into a huge trend, as I found these stocks when searching for high dividends and, after analyzing the industry, was able to capitalize on a huge upswing in tanker rates and the prodigious cash flow that brought to some of these companies (my favorites were Frontline (FRO), OMI (OMM), Torm (TRMD) and overseas Shipholding Group (OSG)). They all paid (and pay) good dividends, though Frontline stood out as they paid more than a 100% return in dividends while I owned it, thanks both to shareholder-friendliness brought on by a single dominant shareholder and the divestiture of some assets.
The biggest influence on these tanker companies, however, was simple supply and demand -- growing global oil consumption caught people somewhat by surprise at a time when single hull tankers were being phased out even while investment in new double hulled tankers was a few years behind the curve (it still takes a few years to get a new ship built, thanks to limited shipyard capacity). I'm still keeping an eye on these if they drop to more affordable levels again, but the industry is wildly cyclical and the stocks are incredibly volatile -- Frontline over the past four years or so has gone from a low of $3 to a high of about $60 (and more like $80 if you take dividends into account).
REITS and Mortgage REITS -- I also picked up several of these early in my investing career, again attracted at first by the dividends and by the urge to diversify my holdings into a different sector. The ones I picked up at first were General Growth Properties (GGP), Prologis (PLD), Friedman, Billings, Ramsey (FBR), and Annaly Mortgage (NLY). The first two I ended up selling at a nice profit because I thought (as did everyone else) that they would eventually collapse with the inevitable rise in long term interest rates. It turns out that I should have trusted my judgement of the individual companies and left trendwatching to the experts -- these are still excellently managed companies that are growing fast in good market areas and pay nice dividends. FBR and NLY are a different matter, both pay dividends based primarily on the carry trade, which depends on a certain amount of slope to the yield curve. (If that doesn't make sense, the "carry trade" is institutions borrowing money at short term rates and lending it at long term rates, and pocketing the difference. If short and long term rates are too close together, they take on more risk and lose income -- that's exactly what seems very likely to be happening to the mortgage portfolios of both FBR, which also has a banking business that has been hit by scandal recently, and NLY, which is almost exclusively a mortgage investment trust. The yield curve is the graph showing the difference between yields on, for example, the 2-year bond and the 10-year bond. The recent flattening of this curve is part of what Alan Greenspan has been calling the "conundrum" of long term interest rates of late).
The short analysis is that I sold FBR when their scandal emerged, simply because it was risky to hold them with a flattening yield curve anyway and I didn't have the heart to also risk any potential fraud they may have committed. To make it clear, I don't personally believe that anything terribly bad was done by the company, but it is a risk. I lost a fair amount of money in FBR, bought most of the shares in the low 20s and sold around $13, which can't even be covered up by the $1.50 or so I received in dividends during that time.
NLY was more or less a break-even for me, I lost confidence in them well before I lost confidence in FBR, and they didn't have the investment banking arm that I thought would smooth earnings for FBR. Sold out of them at a loss of about a dollar a share nearly a year ago, and their stock price has amazingly stuck around the same point that I sold, so I've since missed out on some nice dividends.
So ... one big success on a sector bet based on fundamentals, one relatively small failure. There are other failures, I'll be sure to share those as well intermittently. Now I have to figure out a way to provide a good representation of my live portfolio .... hmmmm, maybe I can java it up in the corner or something. We'll see, stay tuned (he types to himself -- it's always best to write a blog for your own edification, since God knows no one else is reading these giant clumps of text).
This article posted by One Guy @ 6/24/2005 02:16:00 PM 1 comments
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