Cash Is King

How much money do you need to get started in the stock market?  The answer is as much as it takes, to keep you interested.  You need to care about your stocks, and care about the money.  This will cause you to pay attention to the latest news releases, and earnings reports for your stocks.  It will cause you to sell the stock, taking 10% losses, but saving that other 30%, had you rode it down.

An Example.  Fred invests $500 in Starbucks, and loses 10%.  His investment is now $450.

Jim invests $50000 in Starbucks, at the same price as Fred,  and loses 10%.  His investment is $45000.

Fred is down $50, and probably feeling pretty okay.  Jim is down $5000, and is probably seriously considering selling.

Think about that.  These are the same percentage losses, with the same entry point, only the amount of shares are different.  Who's correct to sell, or not, I'm unsure.  I do know both bets are exactly the same.  They must have the exact same answer.

Photo By scottchan

Caring about the money will make you take caution when the stock is sliding, and the nice profits from correct bets, will keep you playing this game.  You need to care about the money, and that goes both ways.

If I were starting a new investment account today, I'd like to have at least $5000 to get started, with a focus to get that level to at least $10,000 as soon as possible.  If that sounds like a lot to you, don't fret.  This market isn't going anywhere.  Taking a year off the market, to save, and study your possible buys, would be the ideal thing to do anyway.  I know you won't do it, I sure didn't.  I needed to "get in", but that feeling also causes you to miss great entry points.  Overall it's bad investing.

With $10,000, I'd be looking for a high dividend and portfolio stabilizing stock.  The percentage dedicated to my high dividend yielder, would vary year to year.  If I felt we are set to boom that year, that dividend yielder might be 20% of my portfolio.  In scary times it might be as much as 75%.  I trade around this core holding, and use it as my rock.

Some people might suggest a basket of dividend yielders to make up the 20-75%, I do not.  A basket is when you buy multiple stocks to spread around your risk.  I don't like that strategy.  This stock is my rock, like I said.  I need to trust it absolutely.  Good safe dividend yielders will find a floor, even in the worst crashes.  If the market wants to cut Altria (MO) in half, making the dividend a growing 12%, I don't care what's going on in the world, I'm a buyer.  I've never seen anyone lose, long term, buying a safe dividend, that was way too high.

Pay attention to what stocks are making money, when the market as a whole seems to be selling off.  That trait is special to only certain stocks.  Big money gravitates to a few key names in time of crisis, own some of those stocks.  Some of my best days are when the market is down one percent, and my stocks are flat.  Those are hidden profit, but they add up to generally outperforming.

The business needs to be able to pay that dividend, and grow that dividend, for years.  I watch one stock, listen to one set of conference calls, and trade around the holding as I see fit.  This also ensures you are collecting dividends on a high percentage of your portfolio at all times.

Photo By David Castillo Dominici

From there you can use the remaining portion to buy stocks you like, and speculate.  I tend to carry only about 5 stocks at any one time.  It keeps me focused, and keeps the percentage of my portfolio for that certain stock, higher.  With 20 stocks, the average stock would represent only 5% of your portfolio.  Even a double wouldn't get the blood pumping much.  You'd also incur more trading costs, being in and out of all those holdings.  Besides when you invest in too many different stocks, you end up taking an average, and that's not a good thing to me.  That's why I'm not a big fan of mutual funds in general.  You also can't keep up with the news, and the conference calls.

When I'm speculating, I only like to have 5% in any one spec.  In this case, that's $500.  I'm talking very small cap stocks here.  Stocks with no earnings, and big growth stories that could take years to develop.  If your Uncle Bob, approaches you with a great tip, resist the temptation to go "all-in".  Invest $500.  If the story develops further down the road, add more.  Five bucks says you don't.

People over invest in Uncle Bob all the time.  They lose their money, have no idea why, and become a thorn in new investors side, with their negativity.  In reality they invested too much money, in a super small cap they didn't understand, one that had all or nothing type of risk, and never followed what was going on with the company, or the stock, the whole time.  I have a word for that, but I do not call it investing.

Keep your investment level high enough, so you can clearly feel the positive and negative swings.  Balance that against broad market sentiment, and the fundamentals of your stock.  After a bear rally, I watch the technicals, to see a certain stock, or a certain group of stocks level off, and form a base.

A base is simply a period of time after a selloff, where new buyers come in with support, not letting the stock dip below a certain level.  This creates a sideways-like trading that is the foundation for the future move higher.  After further evaluation, I will either cut my losses, hold the stock, or buy more as the stock drops depending on the circumstances.  As your stocks trade higher and lower, whether they are a buy right at this moment, or not, changes.  A stock cut in half can be dead money, or a huge opportunity, depending on the fundamentals.

On to "The Dreaded PE Ratio"...