A little thank you to Warren Buffet

[Rain Man]

Originally Posted by DaKCMan AP

Are the returns listed the return on the 20% non-principal investment (i.e. what you left in there after pulling out your principal)? Do they include the original 20% gain or are they the performance after the initial 20% return?

The figures I show would include the original 20% gain. So as an example...

I buy 50 shares of a stock at $100 for $5,000.
It goes up 20% to $120 and $6,000.
I sell 42 shares at $120 to get my $5,040 back (roughly), and still have 8 shares that are worth $960.
I then let those 8 shares ride. If I report a 30% gain, it's 30% over what I originally paid, or $130. So at a 30% gain, those 8 shares are worth $1,040.

And of course there are some sale fees and stuff.

Originally Posted by DaKCMan AP

At what point did you double-down?

I've doubled down on a few stocks. Because I've held most of them for a while, I get a feel for when they seem to be priced low. I did great on the stock for a financial services firm after the crash because I only had my profit in it, so it didn't destroy me when that $1,000 lost 90% of it's value. I looked at the company and it was still doing well, so I bought it three more times on the rebound back up.

I've also bought Carnival when it tanked after the Costa ship problem. I already had the stock, so it seemed like it got hit too hard. I've done it with a couple of other stocks that way too, when they got bad news.

The only double-down I've whiffed on was General Electric. I initially bought it and it tanked 20% and I doubled down, but I didn't know the stock well enough. It then dropped another 20% and has been vexing me ever since.

I should note too that a key part of my strategy is to get dividend-paying stocks, too. If I do that, I see three outcomes:

1. The stock goes up 20% and I implement my system.
2. The stock is stagnant, in which case I still get a 2 or 3 percent return.
3. The stock tanks, in which case I'm hosed anyway, but the dividend at least helps me slowly recover my losses.

[Amnorix]

Originally Posted by Rain Man

The only double-down I've whiffed on was General Electric. I initially bought it and it tanked 20% and I doubled down, but I didn't know the stock well enough. It then dropped another 20% and has been vexing me ever since.

You're not the only one on GE, and you're talking to a guy who has bought into MAYBE 12 or so different individual stocks in his life. I'm starting to do more now, though, just because. Slow and steady wins the race, but it is damn boring. I'm finally at a point where I"m comfortable making fairly small plays on my own, so sure.

But yes, GE was one of my early ones, and it has been a problem for a while. It's finally gotten to the plus side of the ledger, however, thank goodness.

I'm terrible at selling, so I'm probably going to implement your system, or a variant of it. I watched Alcoa go waaay up and then come all the way back down to negative. I think I was up 100% at one point, but now I'm at +3%. Your system seems like the kind of thing I need to enforce some kind of discipline on myself. Otherwise, I tend to buy and hold forever.

But I'm never going to hold onto shares that are up 20% after a merger/acquisition is announced.

[Rain Man]

Originally Posted by Amnorix

You're not the only one on GE, and you're talking to a guy who has bought into MAYBE 12 or so different individual stocks in his life. I'm starting to do more now, though, just because. Slow and steady wins the race, but it is damn boring. I'm finally at a point where I"m comfortable making fairly small plays on my own, so sure.

But yes, GE was one of my early ones, and it has been a problem for a while. It's finally gotten to the plus side of the ledger, however, thank goodness.

I'm terrible at selling, so I'm probably going to implement your system, or a variant of it. I watched Alcoa go waaay up and then come all the way back down to negative. I think I was up 100% at one point, but now I'm at +3%. Your system seems like the kind of thing I need to enforce some kind of discipline on myself. Otherwise, I tend to buy and hold forever.

But I'm never going to hold onto shares that are up 20% after a merger/acquisition is announced.

Your Alcoa example is another reason why I implemented this system. I too have had a few stocks that have had a really good run, and then it frustrated me to see it drop back down. I set the 20 percent threshold because I figure it's low enough that a stock could have a good run and go up that far and then drop back down within a short period of time. If I get that return and then eliminate the risk to my initial capital, then I'm willing to take the risk that it'll cool down if my only downside is losing profit.

The other side of my equation was that, in an Alcoa type of situation, I would buy back the original shares if the price dropped back down to the original purchase price. I haven't had the discipline to do that yet because I've always found another shiny stock beforehand, but in theory it seems like it should work. Ride the stock up, sell the original investment amount high, and then just invest it right back if it goes back down. If it keeps going up you still get a little piece of the action with the profit that you've left in it.

The model only seems to break down when you buy GE and it gets on a train south and never comes back.

[ptlyon]

Do what you want Rain Man, but if it were me, I'd parlay that $1,200 into a nice Carnival cruise for you & the Mrs..

[Strongside]

Pass go. Collect $200.

[Rain Man]

The one downside of my system is that it's very, very confusing on first glance. When I open my account, I have several stocks where I've made money off of them, but it looks like I lost money. If I cashed out my initial investment and just left the profit in, and then the stock tanks, it shows the money as a loss, when in reality it's just less profit.

I don't have that problem if it keeps going up, so that's what I shoot for.

[Amnorix]

Do you track the dividends you receive at all? In theory, if I had limitless time, what I'd like to do is track the dividends I get per stock and that way I'd be able to precisely calculate the "real" return on my investment. That isn't a tool that my brokerage firm seems to have, unless I'm missing something.

But it seems like a heckuva lot of work too.

[Rain Man]

Originally Posted by Amnorix

Do you track the dividends you receive at all? In theory, if I had limitless time, what I'd like to do is track the dividends I get per stock and that way I'd be able to precisely calculate the "real" return on my investment. That isn't a tool that my brokerage firm seems to have, unless I'm missing something.

But it seems like a heckuva lot of work too.

I've been going back and forth on dividends. My account is with e-trade, and with a bit of work you can tell it to reinvest dividends, which seems like it would make total return tracking easier. Apparently you can get partial shares of stock by doing so.

I've held off because I'm not sure how rounding works when you only have $1,000 worth of a particular stock, but I'm tempted to do it. Right now I'm not tracking dividends at all other than just saying, "Hmm, 3 percent per year means I should add..."

It's a bit of a gap, because I have one stock that nominally has just been break even for the past five years or so. It's up perhaps one percent. But it's an REIT and it pays some ungodly dividend, around 8 or 9 percent. So it's actually been a good stock for me. If I reinvested, I'd eventually sell it even if it didn't appreciate, and I can't figure out if that's a success or not. I think it is, but I'm not sure.

[Amnorix]

Originally Posted by Rain Man

I've been going back and forth on dividends. My account is with e-trade, and with a bit of work you can tell it to reinvest dividends, which seems like it would make total return tracking easier. Apparently you can get partial shares of stock by doing so.

I've held off because I'm not sure how rounding works when you only have $1,000 worth of a particular stock, but I'm tempted to do it. Right now I'm not tracking dividends at all other than just saying, "Hmm, 3 percent per year means I should add..."

It's a bit of a gap, because I have one stock that nominally has just been break even for the past five years or so. It's up perhaps one percent. But it's an REIT and it pays some ungodly dividend, around 8 or 9 percent. So it's actually been a good stock for me. If I reinvested, I'd eventually sell it even if it didn't appreciate, and I can't figure out if that's a success or not. I think it is, but I'm not sure.

Right. The dividends paid ought to be part of the increase in value, I'm thinking. If the company announced a special, one-time dividend equal to 20% of the value of the stock, that's no different than appreciation (other than tax treatment I guess) of 20% really.

You could modify the target to 25% if you're including dividends, so you don't undercut appreciation by selling too quickly if you view the stock as having upside when you buy.

REITs and power companies and sin companies (tobacco) seem good on dividends, overall. I did some quick research online and had some weird results. Companies like Lukoil and some mobile telephone company in Brazil. Could be an interesting diversification approach too, since we're all so US-centric... Of course the risk is higher too. Everyone knows GE and AT&T, but Lukoil?!?

[DaKCMan AP]

Originally Posted by Amnorix

Right. The dividends paid ought to be part of the increase in value, I'm thinking. If the company announced a special, one-time dividend equal to 20% of the value of the stock, that's no different than appreciation (other than tax treatment I guess) of 20% really.

Dividends absolutely should be included in your return. Total return = interest + dividends + capital gains + distributions.

In my investments I have the dividends reinvested.

[Rain Man]

Back in the old days when we didn't have internet trading, I had a broker, and I remember that he steered me away from REITs. He said that the dividends were good, but that the stock price deteriorates rather than increases over time. Something about depreciating assets. However, I've got two REITs now and they both pay good dividends and have held their own on price. They haven't appreciated, but they've held their own, and that's fine when you get an 8 percent dividend.

And by golly, I think you're right. I'm going to start reinvesting dividends. I've been back and forth on that, but I'm going to do it.

[Amnorix]

Originally Posted by Rain Man

Back in the old days when we didn't have internet trading, I had a broker, and I remember that he steered me away from REITs. He said that the dividends were good, but that the stock price deteriorates rather than increases over time. Something about depreciating assets. However, I've got two REITs now and they both pay good dividends and have held their own on price. They haven't appreciated, but they've held their own, and that's fine when you get an 8 percent dividend.

And by golly, I think you're right. I'm going to start reinvesting dividends. I've been back and forth on that, but I'm going to do it.

I view real estate exposure as important for diversity. Real estate can hold up while other segments of the market suffer. Of course, we're all a bit gun-shy having seen what went down in 2007, so real estate isn't impervious to market forces, but still, it can be very resilent compared to many stocks in certain situations.

[cdcox]

I had some stock options that I received as compensation for serving on the advisory board of a start up. I exercised them a couple of years ago. It was a pretty small investment, but the company has attracted $75M in series C investment since then. The start up still isn't generating any revenue, but the paper increase in the stock value would win this thread by a large margin. The chances are this will be a boom or bust investment: it will either grow significantly more than what it has so far or it will be worthless in a few years.

[Amnorix]

Originally Posted by cdcox

I had some stock options that I received as compensation for serving on the advisory board of a start up. I exercised them a couple of years ago. It was a pretty small investment, but the company has attracted $75M in series C investment since then. The start up still isn't generating any revenue, but the paper increase in the stock value would win this thread by a large margin. The chances are this will be a boom or bust investment: it will either grow significantly more than what it has so far or it will be worthless in a few years.

Not that I do alot of VC work, but good luck. The number of busts for every boom is depressing. Even companies that eventually take off sometimes see the early investors get killed. The dread downrounds and dilution that wipe out all that came before the new money (except for management).

Why in the world did you exercise them, unless the option period was about to lapse? Make the 83(b) election, but otherwise, wait and cross your fingers is the normal rule.

But good luck!

[DaKCMan AP]

Originally Posted by Amnorix

Not that I do alot of VC work, but good luck. The number of busts for every boom is depressing. Even companies that eventually take off sometimes see the early investors get killed. The dread downrounds and dilution that wipe out all that came before the new money (except for management).