Frequently Asked Questions

Investing

Why invest in stocks?

If not stocks what then? Cash loses its purchasing power with time. Bitcoin – and gold for that matter - are speculative in nature (James Grant would argue differently). 

But investing in stocks is not necessarily a receipe for success in business or in life for that matter. I know many, successful real estate entrepreneurs who did not spend a dime - nor a minute of their time - in the stock market.

What makes a good stock purchase?

There is no single formula but an evolving list of criteria. For example: a management that is personally invested in the company and does not dilute shareholders; an adeuqate return on capital invested; little or no leverage; free cash flow after capital expenditures; strong historical records; and a product with a competitive advantage. 

Should I buy stocks?

Just as a personal trainer will not know how to correctly answer the question whether you should exercise or not, I do not know you and cannot advise you to buy stocks. I do know this: if you either (1) depend on the outcome of your stock portfolio to fund your day to day expenses or (2) have a less than two-year investment horizon, you should not invest stocks at all - but save more. 

Should I borrow against my stock portfolio?

No. For two reasons. First, it is tough to get ahead in life when you owe somebody 8 to 12 percent. Second, the market value of your stock portfolio will widely fluctuate in a somewhat random fashion. As a result, If you leverage your stock portfolio, you may be forced to sell stocks at possibly the worst time.

How should I think about market prices?

You should care little whether the stock you bought a week ago now trades more or less than what you paid for it. I would prefer if stock exchanges halted for a few years after I make a stock purchase. 

Irrational market prices are useful because they signal whether you should buy or sell a position.

Any suggestions about books?

Start with Margin of Safety by Seth Klarman, followed by The Intelligent Investor by Benjamin Graham. And if you have a basic understanding of accounting, I would suggest that you read Security Analysis by the same author.

Pen&Paper

Which brokerage accounts do you use?

In Investing is More Than Just Trading Costs, I explained why I use Charles Schwab as my main brokerage account. Most of my funds are in that Charles Schwab account and some, less than 10% of the portfolio, are held at a TD Ameritrade account. In 2019, I opened an account with Interactive Brokers. I would recommend either brokerage firms.

What is your typical market capitalization?

I typically invest in companies with less than $500 million in market capitalization. While I don't pay much attention to the size of the market capitalization, I do end up purchasing and writing about stocks that are often ignored by Wall Street because of their relative small size. 

And so, 8 of the 15 stocks I currently hold have a market capitalization less than $1 billion.

What is your typical hold time?

As a rule of thumb I will hold a stock for at least five years. This time period allows to test the original investing idea. In practice though, my hold time is about 24 to 36 months. Click here to visit my track record.  

What is the idea behind Pen & Paper?

It is my personal journey in stock investing, where I shares real stories from the companies I invested in. 

The goal behind the website is educational; that is, to share experience, knowledge and insight on stock investing. 

What are some of the tools you use?

I screen for stocks using free tools such as the 52-week low list found at Gurufocus. I also subscribed to Morningstar so that I can quickly glance over 10-years of operating financials. My two brokerage account are with Charles Schwab and Ameritrade. I use HP12C. That's about it. 

How do you know when to sell a stock?

I wish there one, simple rule. There are considerations: when the intrinsic value equals stock price is one consideration; another is when the fundamentals of the business had materially changed; When management is acting irresponsibly by diluting shareholders; When I found other stocks to invest in; Or due to tax considerations.

Do you invest in international stocks?

Rarely. Stock investing is challenging enough without adding foreign currency exposure, sovereign government risk exposure and uncertainty related to stock exchanges and regulations in foreign markets which I am unfamiliar with. 

As of January 2019, the only international stock I owned was Caesarstone, A Quartz-manufacturer headquartered in Israel.

Do you invest in bonds?

No. But I am carefully watching the fixed income industry. As the interest rate environment continues to rise, I expect there will be more opportunities in the bond markets. And besides, studying bond prices is a fascinating art that I would love to write about in the future.

Principles & Concepts

Which is a better : a growth- or a value-oriented approach to stocking investing?

The best investment strategy is a loss aversion one. I do not want to lose money whether I purchase a stock because I expect earnings growth. Nor will I feel fine if I lost money because I thought the price was substantially below value. My focus is to not lose money which is predominately a loss prevention strategy. 

What is value investing?

Seth Klarman said it best: "Value investing is the discipline of buying securities at a significant discount from their currency underlying values and holding them until more of their value is realized. The element of bargain is the key to the process."

What is the concept of margin of safety?

Investing in stock is filled with assumptions and predictions about the future. More often than not, I will be wrong. And the only way to reduce the amount of uncertainty is to purchase stocks at substantially below their value. 

Simply put, if you a buy a dollar in value for 50 cents, on average, you are lowering the chances of losing money.

Selling only after two years?

By selling a stock only after two years passed since I bought it, I am forcing myself to make better decisions. This is because of the fact that if I made a rush, haste decision, I will have to stare at it for two years. Besides, it takes at least a few years for business decisions to take effect. (Which is why I bought the stock in the first place.) 

Is it risky to invest in stocks?

One way to look at risk is to ask how likely will you lose money. And since the option of losing money will always exist in stock investing, by definition, stocking investing is risky. A better question to ask is how to reduce this level of risk. Here, the answer is to increase knowledge; to invest in what you understand; and to focus on downside risk.

Noam

Do you write trade in financial derivatives such as options or futures contracts?

I do not. While options and futures trading are an exciting field to specialize in, it is not a simple one. I don't think there is anything wrong - or unAmerican, for that matter - in investing in these esoteric asset classes. It's just not for me.

Do you short stocks?

No. Last time I shorted a stock was in March 2016. And since it's been over two years now, it is safe to say that I got rid of that vice. By shorting you implicitly assume you know when the capital markets will lower the price of stock. To me, investing in stocks is challenging enough without having to gamble on the timing.

Are you a registered financial adviser?

I am not a registered financial adviser because I do not manage other people's money. I also have no desire to become one. I do know financial advisers and can provide you their contact informatoin. They focus on retirement and estate planning. Write to me if you would like to know more.

Miscellaneous

What is on your book shelf?

I am reading The Emperor of all Maladies: A biography of Cancer by Siddhartha Mukherjee and The Gene: An Intimate History by the same author. I finished reading Future Tense by Rabbi Jonathan Sacks and Homo Deus: A Brief History of Tomorrow by Professor Yuval Noah Harari. On my reading list is Deep Value by Tobias Carlisle and The Human Condition by Hannah Arendt.

What does it take to be a great stock investor?

It requires the same qualities as those required by a professional athlete. You need self-discipline, work ethics, ample amount of time to practice, some talent (less important than you may think), a feedback mechanism that tells whether you are in the right track or not. And a desire to be successful. 

To be rationale is key.

How can I improve my education in investment management?

By far, the best resource to improve your understanding in financial markets - and to become an investment management professional - is by participating in the CFA program. It is a graduate-level, intensive study of the world of investment management. 

While the goal behind the program is not necessarily to make you a superb stock investor, you will gain an exceptional perspective of the investment management profession as a whole.