Rule #1 Finance Blog

With Investor Phil Town

RULE #1 WARNING: BEWARE OF SHOPPER’S DISEASE!

I get a lot of questions from people asking how many businesses they should be in compared toPhil_town_125  how much they have overall to invest. The letter that follows is from someone who came down with a case of what I call "Shopper's Disease" — the desire to be in a bunch of businesses instead of only one.

Phil Town,

Hello!  It's been a while since I've written but let me tell you what's been going on.  I have bought/sold a handful of stocks and I think I've learned some lessons.  I've been acting on emotions; therefore, I'm down about $150 (invested $3500 total)!  But… it might be the best $150 I've spent because I think I got the hang of how things work when a little patience is involved and hopefully I got a few things out of my system.  I'm sure there are a lot of beginners out there that buy and as soon as the stock starts going down, they panic and sell.  That's what I've been doing. Not to mention it cost me $7 for every buy and sell I do on Scottrade!  As it turns out, if I would have held everything I initally purchased the end of October and the beginnning of November, I would be up!  But no… I had to buy/sell, buy/sell, etc… you get the picture.

I didn't follow RULE #1 very well but I learned and that counts for
something.  By the way, I have a copy of your book on order and can't
wait until it's released.  And I purchased David Bach's Finish Rich
series package and I've read The Automatic Millionaire and Smart Women Finish Rich so far.  Great series and I can finally understand what
someone is saying about how to save a little and where to cut corners.
I'm also reading Suze Orman and a few others right now.

Anyway, I've given in and purchased 5 shares of GOOG, 10 shares of YHOO
and 18 shares of ASVI for now.  My next investment will probably be
WFMI or APPL, even if it's only 5-8 shares.  And then maybe a gold
stock (GG) or something like that.  I am also watching IRBT and ET.  I
don't know if this is a good portfolio for now but I read the blog a
while back on your site about ASVI and I've been watching it a while
and decided to dive in with a hanful of shares.  I will keep my eye on
everything and try not to panic if things drop just a little bit.

Thank you for your time and I wish you a prosperous 2006!!

T.

Ahhh… Notice how many companies are in, or will be in, her portfolio. Now read my response.

Dear T.

You have the same problem one of my daughters had when she first
started: Shopper's Disease.  You have $3500 to invest and you own or
are buying… let's see… 6 or 7 companies?  Where did I go wrong?


Rule #1 is all about not losing money.  Not losing money includes not
wasting money on commissions.
With $3500 and 7 stocks, you've got an
average of $500 per stock.  I often average getting in and out 7 times
in a year.  That's 14 trades per stock that you might do in a year.  14
trades times 7 stocks.  That's almost 100 trades in a year in a small
portfolio.  At $7 a trade that's $700.  If your portfolio that started
at $3500 went up $700 in a year your rate of return is 20%.  That is an
awesome rate of return, Tadgi.  Warren Buffett would be proud.  But with the $700 in commission fees, you
have to do that just to break even.  For you to make a net 15% return
doing what you are doing, you are going to have to make 35% a year.
Not that you can't, but wouldn't it be nice to keep most of that?

Here's how you do it:  With less than $10,000 I want you to buy ONE
business.
  Just one good one.  You are going to have to do your
homework and decide what business you want to own… as if this is the
only business that you will get any money from for the next 100 years.
Dig in.  Do the homework.  Learn the business.  Become an expert at it.
Because you only get one.  That way, if it goes up 20% and you go in
and out 7 times this year, your commissions total $90.  That's much
more acceptable on a $3500 investment: about 2.5%.  High, but not bad
for a small portfolio.  If you make 20% you get to keep 17.5%.  Much
better, no?

Google, if you've been reading my blog, is in my Risky Biz portfolio.
Now think about this for a second.  If that's a risky biz, and if you
can only own one business, do you really want it to be Google?  Or
Yahoo?  Or any other business that is difficult to predict, or
inconsistent, or that you don't understand?  NO!!!  You need something
that you totally love, that you buy their stuff, that you like their
CEO and that has a huge MOAT that will protect your money!!!!  And then
you need a big Margin of Safety.

Do NOT just start randomly buying stuff.  Buy what you know.  Buy one
thing.  Only one.  And save your money and get more money into your
trading account so that commissions become less important.  I'd like to
see you with ten grand in a year.

Now go play!


Phil Town