The green line is the economy and the blue line is the price of stocks.
My investing started at he beginning of the first peak, tough.
My Start and Dot Com Crash
When the dot com bubble burst it took all stocks down with it. We were the same. We lost all the money we made and half our principle. My fears about the stock market were realized. It still made the idea of managing my savings scary. I was in debt and losing money.
As I said before, I got my first start with an investment club from work. It started out like a complete winner with our holdings going up 66% in 1999. We bought solid stocks like the Bank of Nova Scotia, BCE and tech companies like Sandisk.
When the market crashed, as a group we liquidated, lost a big part of our capital and disbanded. If we had stayed the course today the Bank of Nova Scotia would have appreciated 4 times our original price, BCE would have doubled and Sandisk is up 10 times the price we bought it at in late 99. Long term the markets have worked out well but one just cannot panic during big drops. Stocks are still the best performing asset class in the long term.
The lesson to be learned is do not buy high and sell low if the company is legit it will come around over time if you bought at a fair or better value. Do not panic or as Warren Buffet says “be fearful when others are greedy and greedy when others are fearful” in simple terms is when the crowd is selling it is a good time to buy because prices are low and when the crowd is buying that is when one might want to doe some selling of investments as the prices will be high. That is the essence of contrarian investing similar to buying household goods when they are on sale.
In Fall of 2000 the market was at the top and showing volatility. I was on strike so I had lots of time to study and watched the charts. I learned about many different chart patterns. I was convinced that charts followed the collective human emotions of the market and in a way it does but it does not always predict future moves particularly for me. In my studies I did see technical signs of what I thought were real weaknesses in the market but we did not sell our stocks in the investment club until they had lost half their value.
Because the 90’s had been such a surreal investment time many people were having success with day trading, chart reading, buying on dips and momentum strategies. They all worked because the stock market was a party that was disconnected with the real value of the assets people were buying.
In the 90’s people were speculating and not investing. Internet start ups with no earnings were having their stock price appreciate based on the speculation that the internet would change the economy. Warren Buffet warned people that it was not sustainable but the common point of view he was out of touch with the new economy. Boy was that wrong!
I was not studying or listening to the likes of Warren Buffet and thought the next wave would come. I persisted in focusing on the charts and not on the fundamentals. I looked for chart patterns and speculative stocks that had speculative potential. In many cases the potential speculated was not realized and many chart patterns I had studied did not seem to work when I bought in. I often had to sell because of losses or stop losses (online instruction to sell a security if it drops to a determined price to keep losses to a minimum) that are used by traders.
The Sub Prime Crash 2008
I continued this way and was active in the market but not doing very well when we hit the next crash beginning in December 2007 and lasting through February 2009. The market lost similar to the dot com crash, around 50% of it’s value. People were pulling their money out and saying they would never invest in the market again. They were selling out of fear opposite of Warren Buffet’s advice.
Myself I still was chart focused although I since I had seen the stock rebound from the dot com crash and saw chart patterns like double bottoms so I started looking for those. I did not have a lot of money so I was looking for one good buy. My target was Toronto Dominion which at the time the price got as low as $16 adjusted for splits (where a shareholder is given more shares but at a lower price ie $32 a share becomes $16 a share but you now have two shares for every one you used to own). I waited for a double bottom that never happened.
At the time Toronto Dominion Bank (TD and TSX:TD) was at $16 and fundamentally the stock was selling at a cheap price to it’s valuation. The price was only 8 times earnings which is much lower than the 14 or 15 time earning it usually sells for. Also it was paying a 6% dividend so no matter what happened in the stock price I would get a 6% return on my original investment regardless. In fact good companies like Toronto Dominion increase their dividends. TD has increased it’s dividends 30% from the 2008 crash so that dividend on the original money invested would be around 8% in 2014.
I missed the boat entirely, the TD bank went as high as $58 which would have been a price increase of 360% but also would have given up four years of 6% plus on my money through dividends. This is the key thing that set me on a new contrarian value based investing strategy.
With my current value investing style, a drop in price means a good asset is selling for a better price. This takes a lot of nerve and a lot of conviction in my fundamental evaluation of the company but in my opinion this is the best way to buy low.
Getting companies who pay dividends while makes it easier to wait out volatility in market prices. I will write about dividends in later posts as they are a great wealth builder and they help people’s nerves allowing them to stay the course and hold good investments through the rough times. Also what I did not realize that quality companies can grow the dividend often annually which after many years can be a consistent return on investment.
Finally I Studied the Greats
I realized I needed to study what successful people like Warren Buffet were doing. In studying I found various books to read. I will go into these books more in the resources part of the website or you can follow the links if you want to find out about them earlier.
The first one that had an impact on me was The Intelligent Investor that Buffet calls “by far the best book on investing ever written”. It is written by Ben Graham who also was Buffet’s Mentor. Here i learned about how the market is inefficient and you can get very good prices on businesses that are worth more than the market price. Also on the other hand you can be offered prices that are way over the value of of the business, good to avoid.
After that I read books from or on various great investors and found websites that followed the work of the greatest investors. It is from these books and websites I developed my own investing plan that I currently have been very happy with.
After that I found a website GuruFocus which expanded my study of successful investors beyond Buffet including David Tepper, Prem Watsa, Bill Ackman, David Rolfe and more. I will do posts in the blog on some of my favourite investors as time goes by.
I will go into more detail on the books and websites in the resources section but will refer to them throughout my writing.
Once I had developed my contrarian value investing strategy I first used it in 2010 with great success and had a 30% gain. This is the best return I have had in the five years I have been using this system. Since that year I have had one down year (2011) and had returns that are a little shy of the S&P 500 which is the bench mark I watch. My portfolio has out performed the Toronto Stock exchange all five years. In 2010 and 2011 I had more debt than investments so I really started this full force in 2012 so that is the first year I will report on for my portfolio results published in this blog.
Not matching the S&P is okay because I have allocated my portfolio in 2013 to have more cash and to 2015, at the time of this post, to hedge for a potential correction or more. In 2014 I added US long term treasuries because they often go up in down markets. I did this because since the market crashed in 2008 it has run up 300% from it’s 2009 lows and I find that the value is higher than I like and I want to protect my capital even if it means getting a little less on this run up. October 2014 has had some volatility and because of my allocations my portfolio has outperformed the markets significantly on the days where market sold off.
A final note before going on to the education and strategy portion of the site. I had a roommate who had all the bells and whistles for day trading. Three computer screens and subscription to top day traders. We were working from two completely different strategies. He has dropped out of the market and I am loving being in it. For me value based investing is the best way to invest.
What is your story, do you invest for yourself, thought about it or other? Please post your comments below.
StockStory is not a financial advice site and content should not be considered for investment recommendations.
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