My Investing Strategy

"Diversification - Investing" by 401(K) 2013 is licensed under CC BY-SA 2.0

Recently, I checked my aggregate returns on my investment accounts. And it's 25.1% since I started investing in late 2016. It's actually not as good as I thought since that's about a 6-7% return compounded annually, But most of my deposits were made in late 2020 and early 2021 so I guess that figure makes sense.

I want to take this time to explain my investing strategy and what I did to achieve a 25.1% return in a little over 4 years.

First thing first. I understand that most people are afraid of investing in the stock market. And I think I know why. It's because we were never taught in school on how to invest in stocks or learn about investments in general. I even went to business school and earned a master of science in finance, but in all of my formal education I was never taught about investing. This just shows that schools are factories to make obedient workers, not investors. Because if they produced enough investors then no one will work, then the society will crumble. So people think.

Second, people don't invest because they want to keep up with the Joneses so they buy luxury goods. It's only later that the things they bought ended up owning them. I was fortunate enough to realize this early on and I was never attracted to expensive cars or large houses, yet I have been living comfortably my entire life.

So here's my rule number one: Live within your means. Whatever that is. Don't let the pay raise fool you. Don't watch commercials. Do the things you enjoy. Experience life rather than collect things. This is more of a rule for life than a rule for investing, but it's a prerequisite.

Rule number two: Buy low, sell high. Most of the time this rule applies, but it's hard to judge when to buy low and when to sell high. The real trick is to figure out a strategy for investing. So with these two rules in place I'm going to explain my strategy for trading.

I apply only two strategies for investments: diversification and specialization.

Warren Buffett always tell people to diversify your investments with stocks in multiple industries and different companies. With ETFs (electronic traded funds), diversification is made easy by just buying one ETF. An ETF that tracks an index, such as the S&P 500, is a good ETF to buy since the S&P 500 returns about 7% annually after inflation. I'm immediately diversified when I buy an ETF. The ones I bought are VGT (Vanguard's IT ETF) and MGK (Vanguard's large cap growth fund). Both have double digit returns since their inception. 

With specialization, I focus on buy stocks in a few specific sectors. I picked technology as the main one since that sector gives the greatest returns. Just imagine how much money I'd have if I had bought tech stocks at their IPO price back in the day. Think Google, Amazon, Apple, Facebook, etc.

Now, you might say that picking specific tech stocks is not a guarantee that you'll return 4000% in five years. That's true. That's why I only buy stocks with the money that I'm comfortable losing. With more stocks I buy it's impossible to lose all of my money. I also buy some stocks in risky companies that I know are gambles. That's because I can afford to lose money in those companies if they don't perform. But if they do perform well then I'm set to gain a lot. So in addition to most tech stocks I have a couple of stocks in the marijuana industry and a Bitcoin trust, GBTC.

So far, my stock picking skills have outperformed the return on my ETFs. One reason is that I only started buying ETFs in the last year or so. But how do I pick stocks? The answer is: I guess.

I've read enough investment books to realize that there's no one way to pick stocks and value companies. Every one of the strategies I read was a guess. No one knows what the stock prices will be tomorrow. So when I pick a stock of a company to buy I ask myself: "Will this company be influential in society in the next ten to twenty years?" If my guess is that the company will not last ten years, then I don't buy the stock. But if my guess is that the company will be a leader in its industry, then I buy the stock. I go by my feelings and my intuition.

However, there are times when I'm wrong or I didn't follow my rules. That's when I lose money. Like the time when I sold Corning and Charles Schwab stocks when I should have kept them. I sold them on par so I didn't gain or lose money, but I didn't get any returns. Now their prices are higher. I lost about 50% of the money when I sold Under Armour, when I didn't follow my buy low sell high rule. The stock now has rebounded. This just shows that an investor can't win all the time.

How much should you invest in the stock market? To me, the answer is two folds. First, have no debts. Pay off the student loans, car loans, etc. Then save an emergency fund that can cover at least six months of living expenses. Lastly, and only then, with any money left over from your earnings after paying off your monthly expenses, invest in the stock market.

Someone once told me that you should not have more than 10% of your savings in the stock market. Now I think about it, that's completely wrong. What are you going to do with the other 90% of your savings if you don't invest? You'll just spend it on useless things and will only increase your net worth by a few percentage a year.

There is another issue I want to mention, and that is work. Working to me is like collecting seeds. Every paycheck is a seed. Are you going to collect seeds all your life or are you going to use them to plant trees that will give you more seeds? I suppose some people just want to work hard and collect as many seeds as possible. To me, the smarter way is to collect some seeds, then plant trees through compound interest so that more seeds will appear. Without work, there will not be any seeds to plant. So some work in the beginning is necessary.

"I wish I started earlier." That's the most common mistake that people say they made when investing. The best time to invest is now. Consistently put extra money in your investments, also known as dollar cost averaging, is the best way to grow your wealth. There are always opportunities out there and the next great company is just waiting for you to buy its stock.

Read about investments and other strategies so you can come up with your own. Take my advice as a consideration. If it makes sense then apply it. If not, no one is harmed.

Work, save, invest. Repeat. Until you feel like you have enough.