BennyEast.Com/Blog The official blog of Kenny West

Stocking Up

Money.  It's a pain in the butt mostly.  Everyone is always like... "I wish I were rich!"

Yes, it's nice to have lots of money... but see...

It's not as simple as just "Being rich".  With money, comes responsibilities.  Tax issues.  Accounting issues.  Lawyers.  Setting things up so that you preserve the wealth.  Wealth management.  Setting things up so that people don't misuse your money, or try to take it.  Trusting people.  Are people only trying to be your friend because of the money?  Or are they genuine?

I'm not talking about just having a checking and saving account.  I'm talking about when you go beyond those limits.  When you have to start putting the money elsewhere because they only FDIC insure accounts up to a certain amount.  And then you have to worry about your dollars being eroded due to inflation... Or fees charged by financial professionals.

Seriously though.  Money is work!  Really it is.  A lot of people don't understand that.  And if you aren't doing the work... Someone else is and they are taking their fee or cut for it.

Either way when you have lots of money someone has to do the work involved.  Even if your money just sits in a bunch of dividend producing stocks... and you never buy or sell any additional shares, you'll have to file income on the dividends that you get on a quarterly basis coming in from those shares that you own.  And then when you eventually sell those shares you'll need to worry about capital gains, or losses.  Let's say something happens to you... Do you have a proper will setup?  Do you have a trust created and someone to manage it?  Lawyers, accountants, tax professionals, financial managers.

It's a lot to think about.

I mean, I've been really into stocks for a while now... I started trading in 2006.  So, I know more than most people.  I've done a TON of reading, hours and hours and hours in coffee shops.  I've just been funding my account with my work paychecks.  I'm actually pretty proud of the portfolio that I'm building/manage.  It's my baby.  I tend to it every day.  If I'm not actually making trades, I'm doing research for future trades.

Up until now I've been fine to just use a basic discount tax service.  But things are going to start getting complicated soon... I'm probably going to start having the need to have professional accountant services and tax services.

Right now I'm full on in about 40 different stocks.  I'd really like to get that up to 50 or so, or maybe 100 stocks.  I generally trade or rebalance about once or twice a week on average.  Sometimes more, sometimes less.  I also have a good amount of dividends coming in that I can then use to trade with those as well as they accumulate in my account.  Or I can just use them to buy fancy things.  I might use some of them to buy a new iPhone.  I'm thinking of going big and just going for the 128gb one.  I'm sick of having to choose which songs to put on my phone in my music library.  Might as well just buy the big one so I can just put them all on.

But yeah, I'm all about stocks.  I stay up on tons of news.  I track earnings reports.  I know a lot of the different tax rates/considerations for the various investments.  Dividends are taxed differently than capital gains, and you have long term and short term.  You also have qualified and non qualified divs, along with something called return of capital.  Then you have things like mergers or buy outs to deal with.

The IRS wants to know ALL about that stuff.  And you better be prepared to tell them.

But that kind of stuff can hurt returns.  So can too much trading.  I have super rigid rules for my trading.  I only buy specific types of assets.  I scour financials.  I want to know what that business does and exactly how they make money.  I want to know if their business model is sustainable and has growth in their future.

A lot of stocks are "valuations".  That means they are priced for a future event or return.  Biotech stocks are like this.  Miracle drugs are great, but... A lot of them are in clinical testing.  Not my bag.  That's a roll of the dice in my opinion.

I'm more interested in a company that has strong current and historical cashflows.  I'm more interested in something like a healthcare REIT (real estate investment trust) that owns property that healthcare offices pay money to every single month.  Or that shopping center down the street from you that you go to your local CVS to buy your prescriptions.  Or even CVS!  I'm actually most likely picking up some more CVS shares tomorrow.  It goes Ex-Dividend on Tuesday.  Really I should have picked some up on September 29th when it bottomed out, but oh well.

I only trade dividend stocks.  Netflix has had a great run, but it doesn't pay a dividend.  I'm also into share buybacks.  I like companies that buy back shares...  Not a big fan of debt unless it's being used to grow aggressively.  Although growth too fast can be bad too because it can cause scaling issues.

Everyone wants to make a million dollars overnight.  I'm just not concerned with that.  I'm more interested in runs batted in... not home runs.  I'm not a big fan of sports, but I love sports analogies.  I'd take a consistent hitter that gets on base and makes it all the way around the bases even if it's one base at a time, than the guy that hits a home run every once in a while.

Money that comes fast, goes fast.

As well it's hard to really predict what stock is going to be that one big home run.  Hindsight?  Easy.  But if you were to go back to the early 2000s and predict that Netflix would dominate the video streaming market?  I remember in 2005 I was a counselor and one of the guys was like... Hey let's sign up for Netflix and we'll split the fee and we can get DVDs mailed to watch on our nights off all summer.

Everyone was NOT all about it at all.  They didn't have something to really grab people.

Enter original programming.  Whoever sat around that office meeting boardroom table and pitched that idea?  I think that's when things really took off for them.  Orange is the New Black, House of Cards... Many other shows.  But my thing about Netflix is that it's still a highly competitive market... and someone could come up with the "next big thing" and sweep fast through everyones hearts to steal market share.

Plus Netflix is still trading at a HUGE P/E ratio... which means that the company is expected to grow a lot.  It's over 200 right now.  That's just WAY too high for what I prefer.

With CVS?  You kind of have to build physical stores.  Which, is not to say that someone else couldn't come along.  That's always a risk.  But I think in the real world, verses the digital world, change happens a bit slower.  Like a big giant ship being steered.

Since I could be wrong, I diversify.  Thus my 40 stocks... well actually 41 stocks.  I have had some stocks go south... but my gains have more than balanced those out.  The way I trade is mostly that I reinvest my capital gains after covering my losses to acquire more shares in more stocks and build my portfolio up.  Then I use my dividends to cash out and buy stuff.  I think of my dividends as a base salary.

Simply holding those shares gives me 4 paychecks a year per stock.  Today I had 4 different stocks pay all on one day.  It was only about 40 bucks, but that's 40 bucks I could use to buy groceries with or put gas in my tank!

I could talk forever about stocks and businesses and financial stuff.  But yeah I'm all about it more and more.  I know most people think it's super boring.  I try to talk to friends and family about it and they are like "What's an Ex-Dividend date?"

Ex-Dividend dates are when you hold the stock to get the dividend.  It will then be paid to you at a later date, usually a few weeks later.  Generally when I purchase stocks, I buy them a day before/a few days before that date.  If I'm right about my trade and it goes up a few days/weeks/months later, I sell.  I get a nice little capital gain, and I get a dividend.  Then I take that money and put it right back into a new trade.  If I'm wrong... I hold.  And then I just keep collecting quarterly dividend payments for being wrong.  My short term or swing-ish/dividend scoop trade just becomes a long term investment.  I call it "I meant to do that" trading.

One of my friends once said to me "Oh yeah?  How's that working out for you?"

It's working out pretty well actually.  Because even if I'm wrong, I still get to use my dividends to fix my "mistake" trade.  And I tend to trade stocks that increase their dividends every year.  Like ITW, or Illinois Tool Works that just increased their divided recently.  They just increased their dividend from 48 cents a share to 55.  And they have been increasing their dividends for 51 years now.  Since 1964!

That's like getting a raise at work every year for 51 years.  All you have to do it hold on to those shares.

If you trade by rules, you take out emotion.  You make decisions based on data and not gut.  Anyone that trades by gut is in for a terrible time and will ultimately lose money in the long run.  Trading should never be emotional.  It should be based on decisions and screens and financial information and analytical decisions.

Right now since I have my current strategy all set after about a couple years of really getting into it... I need to start accumulating data on my actual returns.  The idea is that you should beat the market.  The major indices and such.  But you need several years of data to really tell if you are doing super well.  And then you just modify the trading strategy if it's not working that well.

And regardless of the returns, it gives me something to check on a regular basis and things to read up about.  When you are invested in 40 some stocks, but follow hundreds on your watch list for potential new trades, you always have lots to read up about!

I really enjoy it.  I think it would be fun to have that as my full time job, then make music and write books on the side.

Some of my other rules include I won't put more than a fixed cap in any specific stock.  I have a number that I won't go higher than when placing a trade.  I also have a fixed number of stocks that I'll get into.  Right now it's 40 even though I'm actually in 41.  What I do is I trade one more than the stock cap.  As my cash starts to increase I'll then either increase the cap slightly or increase the number of stocks.  I think I really want 50 stocks... but like I said I might one day want 100.  Then once I reach that max cap, I'll start increasing how much I put in each stock slowly.

Sorry that was just kind of a big long ramble blog.  It probably doesn't make sense to most people...

But yeah.  Money isn't just something you can HAVE.  You have to work for it.  Literally... you do.  Even if you're not just working a job for a paycheck... and you HAVE money in the bank... You have to then do work for that money to keep it earning and growing and paying taxes on those earnings and making sure you don't lose it to inflation... or to people trying to dupe you out of money by selling you overpriced fake rolex watches.

That being said right now I'm small potatoes.  But I plan to work at it to build it up so that I can make it big potatoes one day.  I plan to keep funding my trading with my paychecks and use the dividends coming in to buy music recording gear.  Or other things that I really need to use on a daily basis to keep improving my life.  I just think it's all really neat stuff!