FAQ about SINLetter

FAQ by investors who are just starting out

What is your approach to investing?

I am a long-term value investor who tends to hold positions for 2 to 5 years and sometimes even longer. I usually look for deep value stocks in the small to mid cap areas but will occasionally purchase companies that offer growth at a reasonable price (GARP). I also use options from time to time to hedge the overall portfolio. Finding exceptional investments requires a lot of hard work and I prefer to hold on to my positions until their full potential is realized or something more attractive comes along.

Why is SINLetter free ?

I originally created SINLetter to disseminate information about stocks I was researching for my personal portfolios, to friends and family. The blog and newsletters also act as a sounding board for my ideas and have helped me connect with a number of brilliant retail and institutional investors. Putting down an investment idea on paper while keeping in mind that it will be read by thousands of subscribers forces me to analyze every opportunity in great detail and helps crystallize the investment process for me. Most of my personal portfolio consists of stocks that are currently in the SINLetter model portfolio or have been featured on SINLetter in the past. These benefits combined with the fact that some of my free subscribers decide to sign up for the Special Reports paid subscription service are the reasons why SINLetter remains a free newsletter.

How are the Special Reports different from the free investment newsletters?

The Special Reports represents my highest conviction ideas presented with detailed research once a quarter.

How do I start investing ?

Financial advisors usually suggest that before you start investing, you should have at least 3 to 6 months of living expenses in cash. This is excellent advice and depending upon your situation, the number of months may vary. This amount of money will hopefully help you weather events such as the loss of a job or an unforeseen emergency without having to liquidate your investments at short notice. To make this emergency fund grow, parking it in an online bank such as ING Direct that pays a high rate of interest is a good idea.

Once you have this emergency fund in place, start by learning about investing from books and online websites (there are many links in the SINLetter resources page). The best website that covers the basics of investing and helps you understand the concepts is SmartMoney Investing 101. After you are done with the SmartMoney Investing 101 website, check out the book One Up on Wall Street by Peter Lynch. Finally identify stocks that you think you would like to purchase and put them in a “simulated online portfolio” to see how they perform over the next few months. SmartMoney.com has a good tool to do this. Yahoo and a bunch of other websites will let you maintain an online portfolio as well.

Isn’t investing in individual stocks like gambling ?

When have you seen a gambling bet pay a dividend or split into two bets? How often have you seen someone hold on to a gambling bet for over 30 years and hand it over to his or her heirs? Yes, it is entirely possible to trade stocks frequently without any fundamental or technical analysis and that could be comparable to gambling. But investing for the long term after doing due diligence is essential for both wealth preservation (against the forces of inflation) and to grow your net worth towards the goals of financial freedom or retirement.

Lets suppose you wanted to start your own business. Since only one in 5 new businesses survive or in other words 80% of new businesses fail, wouldn’t it be better to invest your money in a business that has already proven that it can survive and can generate free cash flow. Allowing your money to grow with a growing company can be a much safer strategy than attempting to start your own business. Understandably, if your business were to succeed, it will be personally and financially more satisfying than investing in a public company.

Which broker should I use ?

Most people start out by using an online “discount” broker such as Ameritrade or Scottrade. Ideally starting out with investments in stocks and Exchange Traded Funds (ETFs) would be a good idea. If the Federal Reserve (often called “the fed”) is no longer raising interest rates (interest rates are flat) or if interest rates are falling, diversifying into bonds is also a great idea.

Is there a minimum amount I should start with ?

Various brokers have various minimum requirements. I would suggest starting with a minimum of at least $2,000 so that trading fees do not have a very big impact on your returns. Many brokers provide free trades to clients who open new accounts and that could help keep your trading costs low. If possible, try to invest money periodically (every month or quarter). If the amount you can save every month or quarter is very small then you can wait until the end of the year to invest your savings for the entire year. Please make sure that you have an emergency fund setup and retain some part of your overall savings in cash or other liquid investments.

What should I know before I start investing ?

It is very important to identify your goals and objectives. It is also important to make an honest assessment about the amount of risk you can afford to take. To figure that out, try to answer the following two questions.

  • How long of an investment horizon do you have? 10 years, 20 years, 30 years ?
  • Will you have any big expenses in the near future such as buying a house, getting married or having a child?

Risk and reward go hand in hand and if you have a long investment horizon, then you could afford to take greater risk, as you will have more time to recover in case something goes wrong.

DOs & DON’Ts

These dos and don’ts are meant for long-term investors and some of them may not apply to all investors.

  • Try to be patient and avoid trading very often.
  • Low dollar value stocks are not necessarily cheap. Sometimes a $100 stock could be much cheaper than a $1 stock. Valuation is determined not by price, but by earnings, underlying assets and the number of outstanding shares. Investors who are just starting out often find it very hard to grasp this concept.
  • Keep taxation issues in mind when you buy or sell stocks. Short-term and long-term capital gains and losses are taxed differently. Specifically watch out for the wash sale rule.
  • Establish a goal and lay out a strategy to help you reach this goal. Then stick by your strategy.
  • Do not use margin to purchase stocks. Margin could do wonders for your portfolio in a bull market (a market where stock prices are rising) but can be totally disastrous during a bear market (a market where stock prices are heading lower). It is extremely hard to time the market and liquidate margin positions before a bear market starts. I have seen too many individual investors get wiped out completely because they used margin.
  • Unless you are a professional trader, try to filter out the “daily noise”. According to me “daily noise” refers to the coverage about the financial markets by various media outlets. Watching the Nightly Business Report every night on PBS (or other public TV stations) will give you an unbiased and comprehensive yet concise overview of the financial markets.

For additional information about things you should NOT do as an investor, check out my blog post 10 Worst Investor Mistakes.