Trading Stocks Two or Three Times a Year

So I got a watch alert today, that told me that my position in Verizon went up 10%. So what I did was balance out, selling off enough stock to get to my target balance.

In case, you don't know the math behind it. The basic concept is this. Suppose you have a target balance of x in a particular stock. Then, suppose the value goes up 10% so you now have a balance of 1.1x in a particular stock. If you sell off .1x (hopefully you either get free trades or you have a large enough position that the commision is small), then you will have .1x in your money market account and your target balance of 1x in the stock. If the value then drops to the original price. Then, the position in the stock will be (1/1.1)x so you will need to buy (.1/1.1)x of the stock, to obtain your target position. This will leave (.1-.1/1.1)x in your money market account and a target balance of x in the stock. So you just made about 1% event though the stock ended up back at the original price. A similar case holds if the stock dipped and then went up. Wow this math is probably too complicated for most people already. I like to cover details, because that is where the truth lies.

Anyways, you can use real numbers or real date and check out how balancing works. Try just having a target balance of 1000 and when the stock price increases by 10%, sell enough off to get back to the target balance of 1000 and when the stock price decreases by 10% buy enough back to get to the target balance. This is why balancing is good each year. I also like a 60% safe, 40% more agressive ratio. This is very conservative, but works for me, because I like to protect the principal.

So let me explain why I like Verizon and why I don't like Google. Think of companies as machines. At any time, you can work on the machine, to make a larger machine (production capability) or you can crank the machine to produce (production). I believe any investment should be good now. Speculation is well and dandy, but is a bit like gambling. You guys already know how I already feel that there is a thin line between stocks and gambling. In stocks or real estate, the numbers should work now. Then, if things go well in the future, its just icing on the cake.

By the way, the production versus production capability comes from Steven Covey, so I might as well throw my book recommendation in now.

Imagine going to the bank for a loan. The bank will give you the loan, but you need to pay interest while you are trying to make your money. You need to start being profitable quickly. Such is the same with companies. A stock that pays dividends is making money and cranking the machine enough to pay back investors. The need for additional money is to be able to take on larger deals, but they are paying back investors now.

Now, Google just continues to buy more and more small companies which may or may not pay off and they just continue to expand the machine. The question I have to ask myself is do I want a piece of a company. Why, would I want a piece unless I could get like 50% of the company and make some decisions that affect the company to actually get paid back. I basically have to hope stock goes up, based on speculation, and hope someone will buy it from me when I feel like giving up the stock. Do I make money when the stock goes up. No. I must release the position at the right time to get value. Timing the market is very difficult. Investors on average get a return of 2.1%, trying to time the market, not even beating inflation which is at 2.5%. And trust me, some of those day traders are some pretty smart people. One person even wrote a bot to go out and look at the conceptual feeling of a stock by automatically gathering twitter and facebook posts. When the general feeling was bad, they might sell, etc. Anyways, the point is, the more agents discuss stocks, the more people exchange stocks, the more money the agents make, the less the investors make. So please don't read this post and go out and buy Verizon or Google!

The third piece of the puzzle is that I like the strength of the company Verizon and believe they are in a good solid position to do well.

So let me tell you what I just told you. I believe in making only a few trades per year (like to balance). I also like companies that are paying dividends now and have a solid position.

This post was reposted from http://sizuservices.blogspot.com/2012/07/trading-stocks-two-or-three-times-year.html, originally written on July 17th, 2012.