Goals and Markets

When it comes to investing everyone has a trading style and hopefully it coheres with their income, liquidity, and life goals. Personally I always start with the goal and work backwards. Here are my goals.

1. Maintain a lifestyle free of financial worry. In practical terms this means my wife and I don't want to fret over small purchases, medium expenses, vacations, or Murphy's law like the car breaking down. At least in a financial sense.

2. Retire comfortably before age 60. I'm 46 and have plenty of time, but I'd probably like to retire at 55. I've seen people decline rather rapidly from 60-70 and I don't want to wait to enjoy that freedom. That said, as long as I'm enjoying life without financial worry (goal 1), retirement age can be flexible. I have a retirement number in mind, not sharing it here.

3. Earn/save enough for tertiary goals (beyond lifestyle and retirement) as well as generosity. Tertiary goals are things like buying property, kids' college, etc. I don't like to break them out because I've not found multiple dedicated accounts to be helpful. For example, 529 accounts lack flexibility, college cost is uncertain, and what if the kids take an unconventional path?  I'd rather wait and when they do go to college I can just run the right amount of money through a 529 for the State Tax deduction. Could say more on this but bottom line is I don't want boutique accounts for my tertiary goals. I want enough money that's easily accessible in generalized accounts to put toward tertiary goals. My one exception is the HSA because of its wonderful tax benefits, but in reality I consider it more of a retirement account. 

Ok, looking at my goals, I'm on good track for Goals 1 and 2. I would like to start adding more aggressively to 401k, IRA, and HSA accounts (Goal 2), but not at the expense of building up Goal 3. Goal 3 -- a large and accessible pot of money to use for whatever -- is the focus of my next 3-5 years.

Digging into the Goal 3 plan, how do I expect to get there? In terms of investment vehicles, I have broadly 2 options. Option 1 is a family business and the investments there are largely out of my control. So, set that aside. Option 2 consists of personal investments available to me, from property to alternatives to public markets. I already have property in the family business and have no desire to be a landlord. I've dabbled in alternatives -- lots of work for suboptimal gain. So, public markets it is. Investing in equities is low fee, flexible, and frictionless. There are even no commissions anymore. The challenge is equity selection and trade management. That's it. Doesn't mean it's easy. 

Many personal finance advice givers extol the virtues of index investing which is great. Index investing dominates my 401k, so I don't really need more eggs in that nest egg. Too many eggs. For Goal 3, I want to focus on business equity that is frankly more interesting and potentially lucrative. It's not really about "beating the market."  I don't care about that as long as I achieve my goals. It's about investing in specific companies with the potential for upside returns. Again, not easy. But, I've been trying my hand at it for 20 years now and some simple guidelines based on experience are really paying off. Here are those guidelines. They are not novel but actually putting them into practice can be difficult. 

Actually I'll start with what not to do, because it's what I used to do and what I still see quite frequently.

1. Avoid all stocks because the economy is in being mismanaged and everything is overvalued and a crash will wipe you out. I spent a lot of time in this camp, thanks to some very smart economists who have been poor investors. It's frustrating. Here's where I think they go wrong. Everything they say about "the economy" or econ policy could be correct. But it doesn't mean that great companies like Apple or Moderna can't win. 

2. Buy a stock or ETF based on a macro-economic theme.  Examples of this are rampant on fin TV. The dollar might weaken so buy oil and emerging markets. The Fed will raise rates so buy cyclicals. And so on. It's interesting but I don't find it helpful or effective. It's important to remember that money managers often need to stay fully invested and to trade in very large and liquid products like ETFs. They also need to try to add value by making adjustments and opining about growth vs. value. It can be interesting but it's also distracting. 

3. Sell based on a macro issue. Say you have a great stock like Apple and you sell because of a housing crisis or pandemic. Yes those events impact Apple's business, but it's not an Apple problem. If you need to sell for liquidity or to decrease overall risk assets, ok. But I've missed out on many years of returns because I sold a specific company because of non-company news.

4. Sell with a small gain.  Oh man, this one kills me.  Over the years I've invested in several great companies. I would get to 20% and then fear losing the gain. So I'd sell. And five years later the stock had tripled. Meanwhile, I made my investing more difficult because after selling a winner I would need to find a new winner. 

5. Double down on a loser.  My brother, a great investor, recently did this with a stock. And then the stock really tanked. While it's difficult to know why a stock is going down, I try to think of it like a business. Generally if you're investing in a business, you don't take money from the well run business and pour it into a bad business. 

Ok, those are the don'ts. The dos are the opposite. 

1. Buy good companies with growth prospects. This seems obvious and yet not everyone does this. Lots of people think buying value means buying companies that are struggling. If a Boeing plane malfunctions or Wells Fargo has a scandal, that's not opportunity, that's a red flag. Meanwhile, Apple has an iPhone selling like hotcakes and people don't want to chase the stock. This is bass-ackwards. Good companies have good business plans that are going good. Good is better than bad. I think people just get too clever. They want to be Warren Buffett or Michael Burry and find that value deal that no one else could see. Sometimes the best companies are obvious. To be fair Buffett does own Apple. 

Now this guideline does not mention anything macro or anything about valuation. I'm very sympathetic to valuation concerns, having made my first ever investments during the dot com bubble. High valuation stocks can go down really fast. I would just say this. Great companies often have high valuations. People pay a premium for excellence and growth. There are way too many examples of high valuation stocks that win for many years. Netflix has rarely had a PE lower than 60, and more often much higher. Over the past 10 years, NFLX has gained something like 3,500%. PE needs to be taken in context. 

Final note on this: it can be difficult to identify good companies. There is plenty of information out there for generating ideas. To be a stock picker one really needs to be interested in these businesses. Read research, read earnings transcripts, etc. If you don't enjoy doing that, you should not be investing in the company. Personally I like to read about my investments and it helps me interpret news flow -- is that headline really important?  Sometimes it is, sometimes it isn't.

2. Let winners run; take profits if psychologically necessary. Most people don't get that 3,500% return because they sell too early for the reasons above (small gain, macro issue, etc.). I get it. I've seen gains turn into losses. If I start to get nervous about a winning stock, I've learned to sell a little. Taking profits can give the psychological comfort needed to hold the rest. MRNA is my example. I sold actually a lot of it early in the pandemic because I wasn't sure if their vaccine would work. It was totally unproven. And, it was going up so fast I was getting short term greedy. It's fear and greed together and difficult to resist. 

Now, I try to ask myself if the business is still executing, if it's a good company with good prospects. If the answer is yes, hold. It's the only way to experience the exponential gains that individual stocks can bring.

3. Cut losers before they become big losers; don't double down. Just as a big winner can make a portfolio, a big loser can wreck a portfolio. Stocks will occasionally go down by 10-20-30% after bad news. The question is whether or not that's a turning point for the company. It's tough. The temptation is to turn that position into a winner by averaging down. Now, if it's a very small position and you planned to add to it and the prospects are in tact, ok. Or if the stock went down because the entire market went down, ok. But, if it's a full position and you're trying to psychologically get your money back after bad company-specific news, it's a recipe for disaster.  It's amazing because it doesn't feel this way. When a stock you like goes down, it's incredibly tempting to plow more money into it. I get it. I've learned that it's usually an emotional decision that ends up being a bad decision.