IFB159: Trailing Stops For Value Investors and Aggresive Investing In Your 40s
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You’re tuned in to the Investing for Beginners podcast. Finally, step by step premium investment guidance for beginners led by Andrew Sather and Dave Ahern. To decode industry jargon, silence crippling confusion, and help you overcome emotions by looking at the numbers, your path to financial freedom starts now.
Dave (00:38 ):
Welcome to the Investing for Beginners Podcast episode 159 tonight, Andrew and I are going to pick some time out, and you’re going to talk About some listener questions that we got recently. We’ve got some fantastic ones as always. And so we thought we would take some time and answer those on the air for you guys. So I’m going to go ahead and read the first question. It’s in two parts. So I’ll go ahead and read the first part of the question. We’ll answer that. And I know we’ll come back to the second part.
Dave (01:00 ):
So the first part is, hello, Andrew. My name is Tim, and I started investing in January of this year. I’ve been listening to the investors podcast around episode 42 now, and have been very grateful for the advice that both you and Dave have shared as it has helped me get a broad understanding of the stock market and the confidence to get my feet wet. I’ve also appreciated that I choose your podcast. I chose your podcast and ebook to get started as all the metrics and strategy of value investing general makes sense to me as a nerd who likes numbers, yay.
Dave (01:32 ):
The ratios and rationale behind them make so much sense. So the first question is listening through the podcast so far, I’ve heard both you and Dave talk about the importance of setting trailing stops to stop your losses before they get too far down, which makes sense at the time I am 27 years old, and I’m, it makes sense to hold for the longterm and not to buy and sell all the time. Both of these strategies seem to clash heads a little bit in the current environment of a stock market collapse. From what I have learned, I would think that the trailing stops are when the market is relatively stable, and stock is still hitting the trailing stop that you are talking about—otherwise, everything you need to be sold. And then the compounding of drip would not take effect. Also, I know that I have not lost money until I finally sell, from listening to some of the more recent episodes. It seems at times like those, it seems at times like these, that it is about whether you trust it and the research you’ve done in choosing a good company, is this the correct way to think of things? Or am I missing something? Andrew? What are your thoughts?
Andrew (02:36 ):
Yeah, this is a great question, Tim. So it kind of comes down to one of those ideas where it sounds nice, but in practicality, it’s not the greatest strategy depending on how you’re approaching the stock market. So this is something that I covered in June the June 2018, eLetter issue, where up until that point, I had split my portfolio into two sections. I had a regular portfolio section and a dividend fortress portfolio section. So the dividend fortress section never had any trailing stops. The regular portfolio ended up having those. I found as time went on that I was being forced to sell out a company’s a, I didn’t want to sell out of. And for all the reasons that you mentioned here, I mean, you lose the compounding of drip—you lock-in that loss. And if anything, sometimes when a stock drops, it makes you want to buy more and you, you become more confident in that investment, not less. And so the following stop kind of takes a lot of your freedom away. So I think it’s good, it’s a good way to kind of get some training wheels on when you’re first starting a trailing stop, how it works in practicality is you have a certain percentage that you’re comfortable with.
Andrew (04:01 ):
And so basically it’s setting this bottom for the risks you’re willing to take. And then as the stock moves up, that trailing stop trails along with it. And that that floor, that risk floor continues up higher with it. And so you get to participate in all of the gains and then if the stock turns the other way, you’re able to get out and hopefully, you know, lock in the gain. But at the same time, when you mix that with the value investing approach, what you’ll learn the longer you do value investing is a stock that’s beaten up, can stay beaten up for a lot longer than you’d think. And a stock that’s beaten up can get a lot more beaten up than you might think. And so, you know, sometimes that means that it does need some serious considerations and maybe you need to rethink your analysis, but you know, a lot of the times it doesn’t.
Andrew (04:57 ):
And so where in the past, you know, the first couple episodes we did mention the trailing stop, it was something I used for a part of my portfolio. It’s not something that I use now. I think somebody with maybe a more momentum or growth type portfolio might see more success with the Charlene stop. But I am coming from somebody who’s trying to buy value. And, you know, at times, that means buying beaten-up stocks. I found that for my style, it didn’t work and you know, everybody’s, the style’s going to be different. Your Shay, the value might be different. So it might be worth a try, particularly if you start now and if you think you like the sound of it, but I no longer recommend it in general for most investors, if you’re following a value approach like I am, I would agree with that. I think that’s a great way to look at it. And I like the comment that
Dave (05:58 ):
You made about the shade of value investing. I think as Andrew and I have gone through this process of working together and teaching and talking on the podcast, it has become more and more apparent to me that there are so many different shades of value investing in. You look at Warren Buffet and Charlie Munger and Ben Graham, Phil Fisher, a lot of those early mentors, pioneers, the people that laid the groundwork. They really kind of set the tone for value investing, but it’s evolved through the years. And the younger air quote, the younger generation has morphed it into different things. And everybody has just a different way of looking at investing in value, investing in particular. And I think of somebody like Vitaly, or I think of somebody who likes Tobie Carlisle, or I think of somebody like Guy Spier and all three of those guys practice value investors.
Dave (06:58 ):
Have you asked them, are they value investors? And, absolutely say that they are, but they all have different ways of looking at it. And I, I like what Andrew is talking about with the trailing stops. And I agree with them. I think at the beginning; it’s probably not a bad idea as, as a training wheel to help you mitigate some of the losses as you’re learning more and more about the market and how companies work and how to value companies and what is going to set one company apart from another. And I think as you learn more and more, you’re going to learn to trust more and more of your analysis and your research that you do. And when you do find a good company, and for example, in this current market, a couple of months ago, a great company could have gone down, and you would have been forced to sell all of it.
Dave (07:49 ):
And it would have rebounded, you know, not only what a month, month and a half later, depending on the company, of course, if it were something I bought, it would still be down because that’s me, but that’s a whole other conversation. But I guess the point being is that it can be limiting. And as Andrew was pointing out in his conversation, there are times where you’re going to want to stick with the company, even though it is going down, because there are other mitigating circumstances that are causing it to fall. Like every business in the United States is being forced to shut down because of a pandemic, as opposed to economic disaster, where nobody wants to buy your clothes anymore. Now people aren’t going to buy your clothes because they can’t. So it’s two different situations. So I think at first, having a trailing stop is probably not a bad idea, but as you become more confident and get your wings about you, if you will, I think removing that as an option is probably not a bad idea.
Andrew (08:52 ):
Yeah. I like that. That’s good advice. I can take the second part of this. So Tim continues, he says, I recently listened to the episode where you and Dave talked about different tax shelters for my stock picks. I have an individual brokerage account, which I realized does not offer any tax advantages through my work. I can only contribute to a traditional IRA. So I am putting in at least the match on this at the previous job, I was able to split my contributions and tended toward Roth IRA, but I’m still doing a little bit of side work so I can not roll that IRA into my account yet. Still, hopefully, soon, there might be an opportunity to start another Roth IRA account in the next few months, but that’s not guaranteed. I know that I can open up my own Roth IRA through a broker. Should I bite the bullet and sign up for an individual one or way a few months? And see, I understand that the sooner something begins, the more it can compound but is that really what I am losing out on
Dave (09:52 ):
Dave? What do you think? I think that boy, that’s a good question. I would open the Roth IRA as soon as possible and started investing in it. I guess there’s no better time than the present. And what does that phrase the best time to build a tree was 20 years ago. The second best time is now. And I think that now would be the best time. And if you have the time and you have the inclination to do it, I don’t see any reason why you would want to wait because let’s say that for whatever reason, we don’t know all the circumstances around the other Roth, IRA possibility, but let’s say that six months go by now. You aren’t able to do it. And seven months go by or ten months go by, I guess, biting the bullet and going ahead and doing it is going to force you to continue down the path that you are starting on.
Dave (10:53 ):
And I would encourage you at this point to do it as far as the individual account. Unfortunately there you don’t, you’re not going to have the ability to roll it into the Roth or the traditional if you want to continue it; obviously, you can continue it and just invest into the Roth IRA going forward, and then just deal with the tax ramifications of the individual account, or you have the opportunity to sell those positions and, or rebuy them in a Roth IRA or something else if that’s what you choose to do. But then, of course, you’re going to have to deal with any sort of tax liabilities and also lose out at any sort of compounding with drips, any other opportunities along those lines. So those are some things you’re going to have to weigh in. I can’t tell you what to do. I could just give you, I guess, my guidance and my opinion, my opinion would be to start right away, open the Roth IRA and go from there.
Dave (11:51 ):
As far as the individual brokerage account, I guess I would talk to my accountant and see if that’s something that he feels like Maybe in a shorter Term, it would be a little bit of a bite to sell it and deal with any sort of taxes they may have to deal with and just move on and have to worry about it any longer. And, or you could just roll with it and just kind of go along with it as you go along, and eventually it will be less and less a percent of your portfolio, and it won’t be as big of consideration at that point. You won’t have to worry much about it. So I guess that be kind of my thought and or what are yours.
Andrew (12:29 ):
Yeah. I mean, I agree with that. And I like the idea of starting as soon as you can. You just don’t know if, if the coronavirus taught you anything, that’s that, which we’ve tried to talk about time and time again, you hear over and over and over again, time in the market, beats timing the market. And so after the biggest jobs are when some of the best recoveries come. So it just makes sense over the long term to be invested as long as you can. And so I also agree with, with trying just to get as much money as you can in there now, you know, through some dollar-cost averaging and making sure you’re building diversification, all of those things, the only thing I would add to is that keep in mind that there’s a max that you can contribute to an IRA every year.
Andrew (13:21 ):
And that’s, it goes for both the traditional and the Roth. So if you’re contributing to the traditional on your employer match, make sure whatever that is, that there’s still enough left over to put to the Roth. I would max the match. That’s what I would do too. And then if you’re still allowed to contribute more based on what the IRA says, based on what the IRS says, you can go ahead and, and contribute. Whatever is left to, to help you hit that, that maximum that you can contribute for the year. I don’t want to say what the number is because it changes every year. You know, the IRS has tended to bump it up as years. Go on. So that’s a good thing. So, you know, I know people listen to this in the feature, so just look up, it’s an easy Google search, look up what the contribution limits are for an IRA. And that way you don’t get hit with a penalty or anything like that for contributing too much, that’s a very good catch. And that’s a great point. I would highly recommend that you do what Andrew was saying. That’s fantastic advice.
Dave (14:28 ):
All right, let’s move on to the next question. Hi Andrew. I have been reading your content for a couple of months now. I don’t have any experience buying or selling stocks, but learning a good amount as I go through your stuff. I’m interested in the Activision Blizzard stock ATI at the moment, I don’t have enough funds to buy a lot of shares, but is it worth it to buy only one share to get started with investing? I read some good things about the company. I noticed that the dividend payment has increased throughout the years. Anyways. Thanks, man. We’re looking forward to hearing back from you.
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Dave (15:18 ):
Well, that was going to be my advice too. Yeah, that’s a, I would agree. I would encourage him to buy the company. Here’s why you have to start somewhere and not always as your first choice is going to be your best one. It could be a home run. You just never know. Andrew and I both happened to buy the same company when we first started investing, and that was Microsoft, and I have not bought it since, but I did buy it at the beginning. I bought two whole shares, and it spent a, I think it was a whopping $70, I believe. I still own the stock, and it’s gone up to $189 a share. So I made a lot of money on that to those two stocks, but it was a great place for me to start. And, it gave me more confidence that, Hey, I can do this.
Dave (16:06 ):
It was scary. I’m not going to lie. It was scary. I was terrified when I was going to hit that buy button, but I figured it’s 70 bucks. It’s, you know, it’s a dinner, it’s a bad dinner out. And I could learn something from this. What? Or did I know where I was going to take me, but I definitely would encourage you to do it, pull it, pull the trigger, bite the bullet, whatever acronym you want to throw out there. Just go ahead and do it. And once you do it, you’re going to feel a lot better about it. And you’re going to have a lot more confidence, and you’ll learn so much that once you start buying companies, then it becomes real. And the learning begins.
Andrew (16:46 ):
Yeah. I’m getting a bit nostalgic now, just thinking about it. It was that that was like a big moment for me. Particularly there wasn’t anybody out there online telling anybody just to buy a share. So, you know, I was innovative here with this crazy idea of buying just one share. And nowadays it’s not even one share. You could buy like a 10th of a share. You know, if you, if you’re just really, really cautious about getting your feet wet, but, you know, I understand it’s, it’s kind of nerve-wracking the, to put something where you don’t feel like, you know, hardly anything about it, but you know, you’re going to learn as you go. And there’s nothing like having ownership in there, having your feet in there, and you’ll be surprised how much you start to tune into the things around you, and it becomes more a part of your world. And that’s when you’ll start to absorb and pick up things and learn things. And
Dave (17:51 ):
You know you don’t have to become Warren buffet overnight. I don’t think any of us will be so, you know, have fun with it and try to stick with some decent principles. And don’t be afraid to like buy some crazy stocks too, every once in a while. It’s, you know, it’s not the worst thing in the world, to have experience in all sorts of ways in the stock market. So that’s what I would say to Dan there. Sorry, what are we going to say?
Dave (18:20 ):
I was going to agree with you. I think that he, whatever it takes for you to get started, I encourage you to get started. And even if you make it, even if you make a choice and the company ends up not being a good choice, it’s okay. You’re going to learn from it. I’ve learned from my mistakes as well.
Dave (18:37 ):
I know Warren Buffet has, we all make mistakes. There is no perfect person. There is no perfect investor. And you just have to look at it as this is my first step towards whatever goal it is that you have. That’s causing you to want to start investing. Whether it’s saving for your retirement, you want to buy a house Sunday, whatever it may be. Once you start down that path, it’s going to take you to better places. And the only way you can learn is by doing it. And if you don’t step out there on that branch and take the chance, then you’re never going to get where you want to go. And it just takes the first time to try. And then you can go from there. It’s no different than anything else that we do in life. Whether it’s learning, how to drive, learning, how to ask somebody out on a date for the first time any of those kinds of things.
Dave (19:30 ):
Those are all terrifying things. But once you step out on the ledge and do it and realize, Hey, I can do this, and it’s not so bad, then things get a lot easier. It’s good. It’s the same thing with the stock market. So by all means, Dan, by Activision buys one, share if that’s what you can afford right now, go for it. Do it love it. Alright. I think we’ve got time for one more. Yeah. Yeah, we do. Okay. Alright. Hi, Andrea. I’m from the UK. So I wasn’t sure if investing in us stocks was a good idea. What would be the cost for me also as I’m 45, would you suggest some more aggressive approach to buy particular stocks to make up for a lost time? Look forward to hearing from me kind regards Christian. So that’s a good question. So here’s, here’s my thoughts.
Dave (20:17 ):
He’s in the ballpark of my age range. So I feel like I can maybe talk to Christian A. A little bit about this. So here’s my thought. You have to do what you’re comfortable with. Now. I’m not saying that as a cop-out, I’m saying that as you have to do what you’re comfortable with, I am more comfortable trying to be a little more aggressive and putting more money in the stock market. There are different ways. I guess I’m looking at aggressive. So let’s back up for a second. So you can either be more aggressive by putting more money in the market than you would normally think you would want to do. The other option is you can be more aggressive by trying to find those companies that are going to explode and drive up your portfolio much, much quicker, latching on to the next quote, unquote, Amazon or Facebook or Google or whatever company you want to to make up.
Dave (21:11 ):
That’s one way to do it. The other way to do it is to look at buying more conservative type companies, but putting more money in the market. So let’s say that you’re, you’ve been putting a hundred dollars in the market, and now you want to put in $400 a month in a market. If those are things that you can afford to do, by all means, do it. But I think that you have to balance what you’re comfortable with. And I always come back to something that Charlie and Warren talk a lot about is they sleep like babies because they think about, they don’t think about their portfolio when they’re going to bed at night. You know, raise your hand. I’m raising my hand if you’ve ever struggled, sleeping at night because you’re stressing out about something. So I don’t want it to be your, your portfolio.
Dave (21:57 ):
That’s causing you not to be able to sleep at night and being miserable the next day and taking it out on your media and other and your coworkers and everything else. So you have to do, what’s what you’re comfortable with. And if you’re comfortable with investing more aggressively, either with more money or buying more aggressive type stocks, then, by all means, go for it. But if that’s not something that is going to, if it’s going to hinder your life in any sort of significant way, then I probably wouldn’t advise that. I think that it has shown that really once you start investing and once you start finding your groove and what’s going to work for you, those things, as far as making up for lost time, some of that you can overcome by being more aggressive. Still, unfortunately, some of it you can, and that’s just that’s okay.
Dave (22:53 ):
But one of the things that Andrew and I have talked a little bit about, and I’m going to try to mention more as we go forward with this is we have social security as an additional benefit that will help us in retirement. And not a lot of people think about that. And depending on the income that you’ve made in the course of your life, and when you retire and hold, do you are a lot of those things have a bearing on this, but that’s an extra amount of money that you can help you pay for things. As we get closer to retirement, our end is in retirement. So that’s, I don’t want to say a safety net, but in essence it is, and it’s, it’s there to help us, but we also have to think about what it is that we’re investing in and how we’re going to be going about doing that.
Dave (23:44 ):
And you have to be smart about it, but you also have to be, I guess, aggressive about it. If that’s something that you’re comfortable with. But I think you have to think about those kinds of things and realize what it is your goal is and how you want to go about doing that. But by all means, you have to think about your risk appetite and how much you can handle that. If you’re one of those people that can’t handle the ups and downs and getting on those big roller coasters and going down really fast, if you’re the person that likes to sit in the front, then Hey, be more aggressive. Your person likes to sit in the back where it’s a little slower. I think personally, then, you know, that’s okay too. So I think it comes down to what your risk appetite is and how aggressive you want to be with either putting more money into the market or using more aggressive styles of stocks.
Andrew (24:38 ):
I liked the idea of being more aggressive, maybe with your finances versus necessarily doing that with stocks. I would just say, if you are going to be very aggressive with your approach, you know, trying to find the next Google, Amazon Facebook type company, that your level of aggression, your level of effort needs to match your level of aggressiveness. And you need to, you know, ideally, your, your level of skill and expertise should be there too. I think, you know, I think it can be done for certain individuals, but at the same time, take biting off more than you can shoot yourself in the foot and dig yourself into a deeper hole. Particularly if, if, if you don’t know what you’re doing, or you don’t know what you don’t know that you’re doing or not doing. So maybe it’s a, it’s a, it’s a thought process of what’s the what’s, what’s the ROI here between if I’m more aggressive from a personal finance perspective versus a stock investment perspective, what, what, how does my personality fit into that?
Andrew (25:52 ):
What do I enjoy doing? What makes me feel accomplished? And, and it keeps me energized moving forward. Do you know if, if these things are draining your energy or, you know, if it’s like Dave said, causing you not to be able to sleep at night even like George was, I think it was George Soros, brilliant dude just made a ton of money. And he was, was it, George Soros? Or was it Druckenmiller? I can’t remember exactly who it was. It was one of the guys who just made a ton of money, but basically whenever he had too much risk, and he was making these trades, like he, this guy was leveraged a lot, but you know, when he took it too far to the extreme, literally his body would ache and they would get sore. And that’s how he would know that he needed to change his, his portfolio.
Andrew (26:45 ):
And so, you know, if that’s if that sounds like a nice trade-off for you, then go ahead. I guess I think there’s a balance there, and there’s a lot of opportunities. I like, I would just be cautious and try to be thoughtful about it, but there’s also a lot of great things that can happen in the stock market too. I really, I have a lot of reasons to believe that we still have a lot of prosperity left ahead of us. And that goes for whether you’re in the US you’re in the UK like Christian is here. I just think that businesses are at such a great point right now. And there’s still so many innovations and so much growth happening. And a lot of people can get wealthy if they put the time and effort into it. But that’s not to say it’s easy and, you know, easy come easy, go.
Andrew (27:39 ):
So try, try to try to be wise about it. I think, establish the right habits and then try to find what fits your personality. I think most people who listen to our show just in general, kind of act that way. Anyways, it’s the kind of question we seem to get. It seems to indicate that most people are doing that anyway. So that’s what I would suggest as far as being in the UK and, and whether investing in us stocks is a good idea or not. We might cover that next episode, that spoiler alert we might have a special guest with us, or we might not, but, you know, each country is different. So whether you are in the UK, in Germany, China, Japan, or Canada, and you’re trying to invest in the US, keep in mind that tax laws are different. And so sometimes there can be double taxation where your home country could tax you. The US can also tax you but there’s also a tax advantage account too. So it depends on your situation. But there’s a lot of benefit to investing in us stocks depending on which company or industry you’re looking in.
Dave (28:58 ):
So I think it’s worth looking into, but I can’t give you a blanket statement on whether it’s worth it for you or not. You know, I can’t, I don’t know enough about markets outside of the United States how all the ins and outs of that would work. So I’m probably not a good resource for that, but yeah, I think next week we might have some answers for you. So just hang tight on that idea until next week.
Dave (29:24 ):
All right, folks, we’ll that is going I wanted to thank Tim Dan and Christian for taking the time to write us. They’re fantastic questions. This is a lot of fun and Andrew, and I enjoy taking some time to try to answer your guys’ questions on the air, and hopefully, you guys find good suggestions and good ideas from the things that we’re talking about. So without any further ado, I’m going to go ahead and sign us off. You guys go out there and invest with a margin of safety emphasis on the safety. Have a great week, and we’ll talk to you all next week.
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