Guiding Principles

This is chapter two of a guide
to REIT stocks. Begin here.

Time frame

It would be a mistake to invest with me if you need dividends or capital appreciation to fund your day-to-day expenses. Markets swing high and low and so will the market price of this stock portfolio. I don't attempt to predict the vicissitudes of the market. You must have a minimum 3-to 5-year investment time horizon.

Stocks are investments in businesses. And just as I would not open a restaurant with the intent of selling it within six months, when I buy a stock, I hold it for a few years.

Circle of competence

There are areas of investing that are beyond my level of competence. So, you will not find stocks in Fintech or Biotech. I also rarely invest outside of the U.S. My focus is on smaller companies, with micro- to small-market capitalization of less than $2 billion.  

My focus is on stocks domiciled in the U.S. because the SEC requires that U.S. companies disclose more than any other regulatory agencies. The focus on micro-cap stocks is because these companies are often simpler and easier to understand.

Micro-cap stocks are hardly followed by large brokerage firms which provides a greater opportunity to find wide gaps in market price and value.

Return objective

My goal is to achieve an average of 15% to 25% rate of return over a five-year period. Put differently, if you start with $10,000 in marketable securities in 2019, then my goal is that your portfolio will be anywhere from $20,000 - $25,000 in 2024.

My investing results will not beat a performance benchmark each quarter. Because of my investing style, which I describe in the paragraph below, there will be many quarters in which my return will be lower than the market.

Investing style

I shop for bargains. What Benjamin Graham called "nets nets;” what Marty Whitman later refined as companies that trade no higher than 70% of the Net Asset Value. I don't look for a specific catalyst, such as a merger announcement or a spin off. To me, a cheap stock price is a catalyst in itself. It may trigger competitors to buy for the firm or for the management to buy back stock.

This is distressed investing. The stock market is likely to penalize the price of the stock I buy because of a gloomy outlook for the industry.

Portfolio allocation

You should allocate no more than 2% of your portfolio for each stock, and I would suggest that you leave at least 40% in cash. In numbers: If you start with $10,000, tomorrow you will get an email from me with 12 stock recommendations. Since you will be investing only $6,000 and leaving $4,000 for future purchases, you would buy no more than $500 in each of the companies suggested.

By October of 2019, I hope to buy another 8 - 10 companies, which translates to an additional $4,000 - $5,000 in cash that you will need at your disposable.

If I have a greater sense of confidence, or the stock prices become cheaper than my cost basis, I may buy more shares in a portfolio company. Generally, no more than 10 companies will represent more than 40% of the portfolio value.

On selling

Unless the business or industry fundamentals change (think Amazon and brick and mortar retail), I will not sell my stock position in a business for at least 2 years. This rule of thumb requires me to carefully think before I invest in a company. I will sell a stock if I feel it reached its intrinsic value glossary, for tax loss harvesting or if I find a much better capital allocation opportunity.

I eat what I cook

Perhaps more importantly than any of the preceding guiding principles is my promise to you that I will not write to you about trade ideas in which I do not personally invest.

My stock portfolio is worth $468,845. It consists of the exact same stocks I write about and represents more than 90% of my net worth. I eat what I cook.

My assumptions about you

I assume that you are an intelligent person, who would like some exposure to the stock market and who has saved enough that you can part with capital for a few years and it will not affect your life style or decisions in life.

It may be helpful for you to view your Pen & Paper investments as an alternative asset class. Financial advisors often allocate a certain percentage of the investable portfolio for high-risk-high-reward asset classes; say, 5% - 15% of the portfolio.

And so, you may want to allocate 80% - 90% of your portfolio to traditional investing routes, such as ETFs or mutual funds, and leave 10% - 20% of the capital to trade here.

If you have questions about the subscription service, write to me. I typically respond in less than 24 hours.