Choosing Retirement Investments: “We can make money somewhere else” (Part 2)

You met siblings Paul, Bob and Diane in a previous post.  They started their investment club, the K-Club, back in 1997 and it is stronger than ever today.  The practices they’ve put in place and the discipline they apply are excellent standards for all investors.  Read on for a look at how they organize, analyze, research and decide which stocks to buy and when to sell. For them, it’s about choosing retirement investments and more.

A Good Foundation to Get Going

Anyone can use this same approach (or one similar) before choosing retirement investments.  Use it whether you are buying a mutual fund, an individual stock or any other investment.  We’ve all read and heard how we’re supposed to “rebalance” our portfolio or make sure we aren’t over-weighted or under-weighted in a particular sector.  We’re supposed to review our investment strategy at least once each year.  Well, what exactly does that mean to us “regular folks”?  Are we just looking at statements a few times a year or checking retirement balances online?  Should we be doing something other than confirming that contributions have been deposited and that the balance is either up or down since the last check-in?  What if you are a buy-and-hold investor – is there something you need to be doing in your various accounts?

Thanks to the approach the K-Club shared with me―the brass tacks of how to evaluate what you own and how to decide to keep it or sell it― some light is shed on the mysterious world of what it means to be an investor.

First and foremost, they live by the rule, “We can make money somewhere else.”

This means if a company they are researching is too complicated or if a company they own is starting to lose value, it’s not the investment for them.  There are somewhere around 5,000 stocks in the US equity market.   If you want to have a basket of 15 stocks (this is the K-Club’s recommendation so you can more easily stay on top of the research and results), you can just imagine that with so many options out there, you could find some that are increasing in value at any given time.  Too often we fall in love with the companies we work for and load up on company stock in our 401(k)s.  Sometimes we feel that we have a history with a particular company like “my grandfather worked there and they treated him so well”.  Rarely is loving a company a rational and logical reason to hold its stock!

Set the Sell Trigger

The K-Club is ruthless in their investment approach.  There is no emotion involved.  The goal is to make money with their money.  It’s that simple.  If a company is increasing in value and the stock price is rising, they are making money.  If not, they “set the sell trigger” and out it goes from their portfolio.  After all, if a stock is dropping in price, it’s Paul, Bob and Diane who are losing their money.

Keep Emotion Out of Investing

In a nutshell, here’s how the K-Club takes the emotion out of investing:  they monitor what they own and they keep a few new investments in the wings.

1 – They track and monitor the stocks they own every month:

• Keep detailed excel spreadsheets for each investment by month, by quarter and by year and a summary to keep the monthly discussions focused directly on the numbers.
• Track four specific performance metrics:  Earnings per Share, Sales, Annual Earnings and Return of Equity.
• Set specific targets for each of the performance metrics.  For example, they are looking for a minimum of 18% earnings per share on each stock.  Recognizing that there will be significant fluctuation in earnings, they watch performance for several quarters, but if it dips below their acceptable range, the stock is sold and they get out before losing too much.
• Set a price trigger point at minus 10% of the current price.  During the monthly meetings, they review price movement.  When the price goes up, they move the trigger price up as well. If the price starts to drop, they review it carefully each month.  And then, if it continues to drop, and reaches a 10% decrease, it’s time to sell.  There is no holding out hope that the stock will rebound (sometimes it might, but they are unwilling to lose more than 10%).  There is no crystal ball and they can’t foretell the future.  So, they cut their losses and move a new stock from the watch list into the portfolio.

Here’s an Example

Let’s say a stock is trading at $30 on 5/31.  The trigger point to sell is set that month at $27. If the price drops to $28 on 6/30 – a 7% drop, they are ok with that, but the trigger remains at $27.   By 7/31, the stock is selling for $26.50 – more than the 10% drop.  The trigger will automatically fire at $27.00, and they sell the stock. 

On the other hand, if the price is rising from $30 to $33, that is great.  They reset the trigger from $27 to $29.70.

2 – They are always prepared to buy an up-and-coming investment. 

The group stays on the lookout for new companies that interest them.  They put three to five companies on the “watch list”:

• Any of the three can suggest a company to add to the portfolio.  It goes on the watch list and they track and monitor results over time.
• No new company can be added to the portfolio of 15 stocks unless one of the existing is sold.
• Once that trigger to sell is hit and they need to sell an existing investment, they are also ready to buy a new investment.

The K-Club’s success stems from having a clear vision of what investing is and how to make it work for them.  They do not believe in chasing market returns or timing the market.  They simply don’t want to lose.

Some Welcome Inspiration for Choosing Retirement Investments

It was inspiring to see how staying focused and within the investment guardrails can result in investment success and growth of a portfolio.  This logical, unemotional approach to investing for growth is actually pretty easy to do.  The discipline to stick to the rules is what makes personal investing so challenging for many.  Having others involved keeps everyone following the rules.  So, find a couple of friends or a few relatives and start your own investment club.  In a few years, you may be very happy (and a lot wealthier) that you did!