A few days ago Hanno wrote me to ask how to stockpile or consume good businesses in this market if you have $1000 or $3000 to invest. Let's start by reviewing the difference between trading a stock and stockpiling a business for someone with very little money:
Trading a stock using tools requires very little capital. Read Rule #1 and go to it. You can certainly do it with $1000, although with that small amount to invest you'll incur trading costs that chew up a lot of your profits. You move in with the Big Guys, you move out with the Big Guys.
The problem with trading in this market, as some people learned in 2008, is that when you are trading against the trend you keep getting in just as the stock price turns and drops. An unrelenting down trend will cause you to have many slightly losing trades - I call it "the death of a thousand cuts" in Rule #1.
Trading in a market like this can be deadly depending on whether you are correctly determining the overall trend of your target stock. In my next book, PAYBACK TIME (coming out September 2009), I show you how to find the points in time when the trend is changing. It will help you trade better.
And stockpiling stocks? PAYBACK TIME teaches how to stockpile, to consume. We very rarely get an opportunity to simply load up the truck and forget about it. No trading required. We are in one of those opportunities right now. You can pick McDonalds, GE, Burlington Northern and many more, figure out the payback time for your investment, and buy in for the long term hold.
But stockpiling takes some kind of cash flow and that's the rub for Hanno. What to do if you don't have any?
When I started investing in 1980, it just happened to be the bottom of a really bad market that had been bad for 15 years - ever since 1965. We were starting to experience massive interest rates - the 30 year Treasury Bond eventually got priced at 14% or so. The Dow was at 750 after peaking in 1965 at 1000. That's a 15 year loss of 25%.
No one thought you could make money in stocks, and in a few years everyone who was all about "no money down" real estate was out of the business. And guess what? It was the absolute best opportunity to invest in either one.
And there I was with this amazing opportunity and zip to invest. I was Hanno.
So what to do?
Well, you do the only thing that makes sense. You work hard. You work extra. You look for something to do that will put more cash in your hands.
You cut expenses. You do what you have to to take advantage of your situation.
You become like a guerilla fighter who makes use of every opportunity and squanders nothing. You move in with mom and dad. You share an apartment with a like-minded investor. You quit playing the game of keeping up with the Joneses. You sell the new car and buy a cheap one. You shop at Salvation Army. You tell your family the facts of life. If it's a problem for them to not be wearing $100 jeans and sneakers, you move to place where families and children have better values. Try Iowa or Idaho. YOU DO WHAT YOU HAVE TO DO to load up your investing account.
If you are in a house with an upside down mortgage, go to the bank and ask to swap your house for a smaller one they have foreclosed on. They do that sort of thing. They end up with one foreclosure instead of two and you have a house you can afford. The point is you get out and get doing stuff. Something. Anything.
But here's what you do first: You decide where you want to be financially in 5 years. You make yourself a promise that you'll get there, come hell or high water. You put that promise on a card and put it in your pocket and you look at it every day. You keep that promise at the forefront of your thinking. You push out every thought that says anything but YES to that promise.
So, Hanno, you do what you can and you save every penny, because what you invest now will pay off 1000:1 in twenty years.
Now go play.
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