Security Musings

Security Musings

Market Investment Strategies for Busy People

I have been investing for over 41 years, so at least I know a few things not to do. With this series I'd like to share my thoughts on market investment strategies, and I would welcome hearing about your personal investment experiences, so please write to

Other Related Articles in Market Investment Strategies for Busy People

The Search for Core Holdings

By Stephen Northcutt

The Search for Core Holdings


We've now set up our methodology by following the action items in A Fundamental Strategy for Investing. Let's look at them as necessary steps, even call it a Prerequisite Checklist:

___ I have already read the Fundamental Strategy for Investing
___ I have an investment notebook with a table of contents for ETFs
___ I have already picked up several broad based index based ETFs with no commission fee
___ I picked up at least one of my ETFs with a limit order
___ I have a portfolio set up on Google or my favorite finance website

If these five things are not true before jumping into action based on the material below, the odds of your losing money in the stock market go way up. Why do I say that? If we do not have a disciplined methodology, we are going to make those traders on Wall Street just a bit richer.

So, once you can check off on all the five prerequisites, we will add some individual equity ideas to our notebook and start a new Google Finance portfolio for prospective individual equities.

Why buy stocks at all?

I haven't checked the APY interest rate of my investor checking account, but I would hazard a guess they are paying interest at something to the tune of one tenth of one percent. I have purchased a 5 yr CD in early 2011, got a very good deal under current conditions, it was 4% APY. I purchased several municipal bonds in the same early 2011 timeframe and the coupon rate was hovering around 5%, but as you know, the middle man takes his share, so the actual return on these five year bonds is closer to 3.5%. UPDATE January 12, 2012, I redid the math last night and a five year municipal bond on the secondary market's true return is closer to 1%. This is because the stock market has been challenging for the past year and people want to park their money in a safer, or at least less stressful place. Should be market bounce back, you will probably see better deals with municipals again. However, you usually have to invest in five thousand dollar increments, or even more if they are trading at a premium. The great thing is that all of these investments are (supposedly) safe. And 4% is a whale of a lot better than one tenth of one percent. But, stocks in innovative, well run companies can return even more than 5%. Of course, it is a balance of risk vs. reward. I had a stock once called UUNET and they were bought by Worldcom and I watched as my stock lost more and more value. And if a company goes bankrupt, holders are common stock are the last in line, you might get a penny for every share you own, but I doubt it. ETFs are believed to be safer because they are generally a basket of equities.

I mentioned this in the Fundamental Strategy for Investing document, but when I am up 20% in equities, I commonly engage in profit taking and move some of that money to a safer investment like a CD or a bond. Who cares if the CD is at 4% if you bought it with money that increased 20%?

What are core holdings?

Do ETFs first and build a solid base of several asset classes, commodities, consumer, technology etc. But eventually you will probably want to buy individual equities. Core holdings are stocks that you have done your research on. You hold them for years. You know the company and track its performance. If you read fundamentals of investing you know that I have watched Ford and Wal-Mart for years. Ford just has too much debt for me to hold that stock in any great measure, but every time I see a Mustang or an F150 truck on the road I salivate. At one point, Wal-Mart was a core holding for me; then I started reducing my position several years ago as established stores started selling less every year and in August 2011, started adding to that position again. UPDATE January 12, 2012, WMT is still not a core holding ( one of the 8 - 12 equities I am making the biggest bets on, but I have increased my position twice since I first wrote this). I like some of the changes they are making in order to compete. Speaking of compete, Costco is also a core holding for me. IBM is a core holding for me, in fact I am probably overweight, but I love almost everything about the IBM company. Preferably most of your core holdings are dividend stocks and I would suggest you reinvest the dividends until you retire and need the dividends to live on. Many online trading sites make it easy to reinvest dividends, it is often a checkbox on the form to purchase stock. Each time you reinvest dividends you own just a bit more of the stock.

Also, try to find a system that will allow you to add to your investment commission-free, usually with a Dividend Reinvestment Plan (DRIP). The goal is to follow a few different companies that are in sectors that will be in demand, have healthy balance sheets and use these to comprise the core of your equity investment. My suggestion is to try to find at least eight equity sectors for diversity and find the solid companies that are likely to be around for a long time. Then, set Google Alerts for those companies. Do business with them, do whatever you can to know a little more about the companies you pick than the average Wall Street trader. When there are dips in the market, buy more of the companies you have grown to understand. Let me try to make this plain for you. Maybe you have heard Apple is a great stock and it has served many investors and investment clubs well. January 2011 - January 2012 it is up 22.35% and you have the iPhone 5 and iPad 3 still to come, so 2012 should be a good year for Apple. However, if you have a Windows PC, an Android phone and don't own an iPad, this is probably not a stock you want to own as a core holding. Without Steve Jobs, things may start to change and if you do not have your finger on the pulse, you may miss the change.

The watch list concept

When I was a boy, I used to take the Sunday paper and read the stock tables. I kept a paper portfolio. This is a watch list. Even before you have the money to invest, start trying to find the companies you want to partner with. Read about them, do business with them. If you have more disposable income, you can open up a small position and watch them rise and fall. Core holdings are stocks you want to hold for a very long time. One of these for me is Google (GOOG). I think Google has a moat. They do not just do search, they have the Android phone, they have Gmail, they have a tremendous amount of marketing information with location services and DoubleClick. If Google suddenly drops a lot, I am not going to panic, instead, I will look at my finances and see if I can add to my holdings. Of course things can change, but right now it looks like I will be holding Google a decade from now.

How to get started?

After getting your initial stake in the equity world with index ETFs, think about choosing some individual stocks to put more emphasis on companies and sectors that you believe will outperform the market indexes. Unless you have thousands of dollars to play with doing this, the best way may be to join Better Investing, that is what Kathy and I did when we were first married. They had a list of equities that we bought commission free and they also have investment clubs. After you bought the equity you could add to your holdings commission free with participating companies through DRIPs and other fractional ownership programs. Let me explain why this is so important. When you place a stock trade on most online brokerages there is a commission; usually about seven dollars. If you are buying a hundred shares, the commission is in the noise, but if you are buying one or two shares, this overhead severely reduces the amount of money available to trade.

Example: You want to buy one share of Alaska Airlines (ALK). Your neighbor in Seattle works for Alaska and he gives you great intel on the company. You fly Alaska since Seattle is a hub, so you have personal experience. You invested the time to read Character and Characters, the story of Alaska Airlines, you have reason to be optimistic that you know a reasonable percent of what Wall Street knows.. Your thesis is that energy will become ever more important and drilling in Alaska will increase and there are a lot of areas in Alaska that can only be served by air. The stock price today is 54.57, the beta is .54 so the odds of a wild swing are low. Using the five day (5d) view on Google Finance, you know it traded between 58 and 52, so you set a limit buy for 52 which, as long as the market does not explode up next week, has a good chance of executing, and if the market drops it is a sure thing. Your trade executes, congratulations, so your account is out 52.00 for the equity and 8.99 for the trade; 60.99 is removed from the funds in your account. That means you are not making a profit on the equity even if it goes up, till it passes 60.99. Now, if you look at Alaska over the past few years, it is definitely rising, but the 52 week high is 70.61, the overall market has been on a long increase and may well bounce around in the coming weeks. It may take you a very long time to get to 60.99. Now of course if you had the money to buy four shares and split the commission fee over all four you have a much more tenable position. However, if you can get your commission to a point it is free, or small, then you can use your money more efficiently.

Better Investing has innovated a lot since Kathy and I first were trading with them thirty years ago and now as I understand it, they use I don't trade with Better Investing anymore, sorry about that, but it really helped us get started. The other advantage of Better Investing is that they have a huge amount of educational and investment advice and tools. I am going to show you how to screen a sector manually, but it sure is nice to be able to test a thesis with a tool. If you feel you do not need the education and tools, (there is a lot of free information on the Internet), I believe you can sign up for for a small fee. There are other low cost brokerage companies I have not used, such as Just2Trade where a trade is $2.50.

If you can spare the time, think about joining a Better Investing investment club. That way, you get the benefit of other people's research and ideas. At the very least, pay attention to the so-called Better Investing 100, the most popular stocks from the Better Investing Community. I would suggest the majority of your core holdings should be on the better investment 100 list. For any that are not on the Better Investing 100 list, you need to have knowledge about that company that the Better Investing community does not. If you have a bit of money to invest there is a unique fractional opportunity called Folio Investing. One of the Folio investment opportunities is based on the Better Investing 100 and it is a fairly conservative "Steady Eddie" investment. I love the concept behind Folio, but I have personally found the company very hard to work with or I would have more invested using their strategies. However, when there is a major dip in the market, you can bet this is going to be one of the first places I invest new money in despite the fact I seem to be Folio challenged.

It comes down to time and money

We are talking real money here and a certain amount of time as well especially in the beginning. Think about goals and the level of investment you want to make. With the Index ETF project I was able to help you get in the game with minimal time and money. Individual equities will require both time and money.


The good news is that if you keep orderly records for your research, you will be able to recycle your research next year and the year after, just adding to it. In our next lesson, I will share some analysis of three sectors, Tech (what I know best), Energy, and Healthcare. I have done this to model my process not so much to find the best stock, but to avoid the second rate choices. What you cannot tell from the table is that real losers aren't even in the table. The majority of those equities, bought at the right prices (try to USE A LIMIT), have a better than even chance of helping you earn more than 5%. This is an example of purchasing on a Limit Order:

Even if you choose a different company you can rank your choice against these. But it takes time. The three analyses in lesson 3 took me four hours. I have access to tools called screeners that can automate the process, but then I do not think about each company, I just pick the winner and by doing that may miss out on a big story. When you do this every year something wonderful happens, you really begin to understand the space.

Also, there is more than just research time, there is the operational time needed to place the trades, especially if some are limit orders. It is wise to determine in advance how much time you want to invest in investing in a year. We will balance that with the amount of money we are willing to invest in a minute.


As I said earlier, this is real money. We work hard for it, we want it to grow at something greater than 5% across a number of years. We want the performance of our individual equities to be better than the average performance of the ETFs we bought, both when the market goes up and when it goes down as well. Or at least when we get to eight individual equities, we want that average to exceed the index fund ETF average. After all, we know these companies, we researched these companies, we did all this work to outperform an efficient market. So how much money do we need to match to how much time. Well it is obvious we have to put more time in at the beginning. But then if we carefully document our research and write it down in a way we can follow what we were thinking in 2005 when the year is 2012, we start to gain an advantage.

Let's say we make $40.00 an hour. We have an investment goal of beating our index (the average of our index ETFs' performance). On a year where the indexes on average are up 20%, if we could meet our goal with a time investment of ten hours of research and operations such as placing trades and filing taxes, ten hours of time is neutral appropriate for an investment of $2000.00. Ten hours in a year is not so bad. And every year you follow a particular stock you can invest less time because you know a lot about that company. And this is the reason I say "when the markets are up, everyone is smart and happy." Now, say the market is down twenty percent. People are nervous and jump off buildings, claim the world is ending, and so forth. But not you! You know now is the time to buy, because when the markets go up we hold equities of great companies at a cheaper entry price. We need to invest 15 hours to be neutral appropriate for investment of $2000.00 because we lost $200 in the market. Let me cut to the chase, I have been profitable in down markets, but it requires more time, energy and research and a lot more trades. A down market is where having that research notebook and experience in shorting stocks and options is worth a lot.

Sizing up a stock

We have said that one of the characteristics of our choices of core equities is that we know the company. But be careful. Make sure you invest with your head, not your heart. The idea behind the thesis is to put a package together that over time, gives us information that the Wall Street models may not have. But we ALWAYS consider the balance sheet of the company first and these fun facts second. Here are three examples:


Let's say you like Ford Motor Company. You have a Racer Red Mustang GT 5.0 and from the first time you drove it, you became conscious of just how many Mustangs are on the road. Add that observation to the number of F150 trucks and from what you read, their smaller cars are selling well. This must be a successful equity right? Wrong! This is a very dangerous play. As we discussed in A Fundamental Strategy for Investing, unless we pick up Ford at an amazing drop from its current price, we will get hurt. UPDATE January 12, 2012, if I had Ford, I would be down 35% for the year. UPDATE April 28, 2012 I would be down 25% for a 12 month period. They do continue to innovate in terms of cars, but still too risky for me.

Bank of America

When it was at 5.00 and the world was not ending I snapped some up. Usually I am a buy and hold guy (within the 20% rule, if it increases by 20% I start thinking about profit taking and buying something safe with the proceeds), but not this time, it hit 7, I did profit taking, cap gains and all. What about buying it? Bank of America's stock (BAC) is still trading at what looks like a discount. However, I am not going to buy it. For starters they hold a lot of debt also, they are all over the map, you would need those Wall Street supercomputers to have a chance. The debt probably will not be a problem in 2012 while interest rates are low, but if the economy starts humming it could become one. Also there are my personal experiences. Last night I was checking on my Visa credit card through them and there were several obviously fraudulent charges including Victoria's Secret, Game stop and the Apple Store, but they were pending. So I called the number of the back of the card and the lady said she could not do anything and the fraud department was closed until 8:00 A.M. An hour later it hit me that a huge bank would not close their fraud department. So I called again. All of the fraudulent charges were gone except Victoria's Secret which had now posted. This lady said not to worry about it, it was probably my wife. I told her that we were on travel together that day and I was the only one with that credit card. She told me not to worry and ask my wife in the morning if she had bought at Victoria's Secret.

This morning I checked again and all the fraudulent charges had posted. This lady seemed to have a clue and said she was very surprised, apparently the first two ladies were supposed to ask me about Game Stop. She said she would cancel the card and send a new one to my address on record. I went my Bank of America account to pay off all but the fraudulent cards and couldn't, when they close the account apparently that includes paying it off.

Ten minutes ago I got a satisfaction survey from Bank of America. On screen 12 after I had entered some text it froze, so I couldn't even tell them about my experience.

Now don't get me wrong, there are things I like about BAC. I travel a lot and it is nice to know there will probably be a branch in almost any city I visit. And I am going on a trip in about a week and was able to get the foreign currency in advance. They want you to do it online, but their website is broken, however, I managed to get transferred to the currency department after five or six tries and the nice lady was able to help me. And since I had tried three times online I knew all the answers including exactly how many dollars to translate into the amount of currency I needed and to order a mix of large and small bills.

And I do not blame Bank of America because a crook is misusing my credit card. In fact a couple of months ago my Chase Visa had to change the number, but when you are on the road all the time and you have recurring bills paid on a credit card this is a hassle. Please DO NOT get me wrong. You must NOT let anecdotal experiences be the primary driver in your buying and selling decisions. Look at the numbers, read analyst reports, in April 2012 Credit Suisse rates BAC an outperform, Charles Schwab gives it a B. However, most everyone else is a hold or sell.


Starbucks is another heartbreaker historically. You like Starbucks coffee, every time you go to a Starbucks there is a line. Starbucks must be the next triple bagger right? Wrong until recently. And what is really scary about Starbucks is that their balance sheet does not look so bad. With Ford, at least you can see the equity screams debt, debt, debt. With Starbucks, what is wrong is more subtle, harder to find. My thesis is that they haven't gotten the food right. I have spent a lot of time watching the Starbucks line in the United terminal of LAX airport and they sell more coffee than food. If they can get at least every other person in the line to buy coffee and food, and the food is priced right, they can improve their net profit margin. In the mean time when you are in airports and crowded places, try to be sensitive to the number of people that have McCafe cups versus Starbucks. I do not like McDonalds food particularly, but they have a very established brand, a bit more debt than I would like to see, but the markups on coffee are incredible, about five times cost. McDonalds is already more profitable than Starbucks, if they win even ten percent of the coffee marketshare, Starbucks will be hurting. UPDATE: October 5, 2011. Looks like I called this one wrong, Starbucks has been on an uptrend and I am going to open a small position tonight. My new thesis is that returning CEO Howard Schultz really deserves some credit. However, I hope this illustrates the value of writing down your research and thesis and revisiting it at least annually. UPDATE January 12, 2012 for a 12 months period SBUX is up 47.42% according to Google, I do hold a position, but because of all the years of poor earnings, it is smaller than it could have been, it is not a core equity for me and will not be until and unless they start selling considerably more food which would increase same store sales. Update: April 28, 2012, SBUX dropped 5% on Friday. I am going to try to add to my position with a limit @55.00 in the Ck basket.

In the chart below, I have put some boxes around some of the technical fundamentals to consider when looking at a stock using our old friend Wal-Mart. This is just the tip of the iceberg, but it can be enough to start weeding out the weakest stocks in a given sector. If you do not understand what each of the items inside the blue box means, it is not yet time to buy an equity.

When we deal with individual equities we need to understand that the highs and the lows may very well be higher than the highs and the lows of our market index. We will make mistakes and market conditions will change. A winner now may become a loser two years from now and we may need to sell, but try to hold your equities at least a year, especially if they go up, to avoid capital gains taxation.

Second Opinions

If you have an online stock trading account, they probably have market research available; use it. I like to read Internet sites like the Motley Fool and Seeking Alpha. Do not ever make your trading decision based on what they say. If you are not going to do the research and create your own thesis, you are far better off sticking with index ETFs. Just look at the titles of some of the articles, "Junk Bond ETFs Over Equities In 2012", "Is Sirius XM's Next Stop $3?"; remember, this is real money we are talking about, invest like it took you time, toil and sweat to earn that money because it did. However, sometimes these analysts come up with a verifiable fact that you can add to your thesis and research. Though in just a tiny way, that helps you close the gap with Wall Street and the efficient market.

Action Plan and Budget

___ Consider joining Better Investing and an investment club. If you do not want to do that, at least research the Better Investing 100
___ Figure out your budget for both time and money. If you can't invest fifteen minutes Sunday - Thursday, you may be better off with an all ETF or Folio strategy. If you have the funds to make investments of at least $1000 at a time, you can do well with an online broker. If you already have an online broker account that can be fine. If you have closer to $100 to invest at a time, it is imperative to get the lowest possible brokerage commission. At least look at, you can invest for as little as $.99 according to their web page.
___ Select somewhere around eight to twelve equities to watch. Put them in your trading notebook. Give them at least four pages each, you are going to be watching some of these for a long time. Look for candidates to add to the list. Realize some companies are going to falter and have to be removed from the list before they fail. Netflix might be a great example, in January 2012 because of some mistakes in 2011, they are down 51%. I held their stock in 2011, (not as a core equity, but as a candidate), and was a customer. When I received the email from the CEO that they were raising my monthly price and splitting the postal mail DVDs and streaming movie business, I sold immediately and then canceled my subscription. I realize this may sound like a contradiction to invest with your head, not your heart. However, we live in an age where people are more connected than ever and a PR misstep can be disastrous. Selling fast helped me avoid the loss.
___ Create a portfolio using Google Finance to track the equities you are watching. Many online brokerages can let you set triggers to send email when a stock is at a certain price or sales volume.
___ Compare the performance of your individual equities against your index.
___ Whether $100 or $1,000, this is real money; only invest money you can afford to leave in the market for five years, and try to watch the equities for at least two weeks before you make your first investment. Try a limit order.
___ DO NOT put all your eggs in one basket. The goal is to eventually fund eight to twelve equities that are well chosen; you seek to find the right stocks and buy them at the right price.
___ Be patient. You have the rest of your life to improve your portfolio. Don't spend all your money at one time using market orders. If you find yourself wanting to do that, your mind is playing tricks on you and you are setting yourself up to lose money.
___ When the market goes down, and it will, that can be the best time to buy. From time to time, put some money on the sidelines, I keep it right in the account, when the right moment comes, I can trade immediately.
___ While you are waiting for the right time to invest, keep doing your research. Have a plan! If the market drops 5% tomorrow, what are you going to pick up? If you have created your Google Finance portfolio in advance, you will be able to see in an instant which equities you own and which equities you have been considering dropped the most. Be ready at all times to pick up a great equity at a great price. Even then, stay patient, use a market order for the very best deals, opportunities that drop below your buy around price, so they are a sure thing. Be wise and patient, though, and make some of those trades with limit orders; you have my word, the market will drop again some day!

Looking ahead

In our next lesson, Introduction to Methodology and Sector Analysis, we will dig into the question of how to select a great equity, or at least how to look at a sector and try to avoid the losers.