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djshagggyd (70.72)

Can you help me decide if this is a foolish diversification strategy? (EPI, VEU, IIF)

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March 28, 2010 – Comments (15) | RELATED TICKERS: EPI , VEU , IIF

I picked up "the Intelligent Investor" yesterday and I'm about 20 pages in. It's a tough read for me because I am not familiar with many common financial terms and strategies. I find that I have to stop and cross-reference a lot of the concepts and ideas in order to understand them... none-the-less, I am thoroughly enjoying it so far. And I'm excited to finally get a better understanding of the nebulous beast known as the market.

I've decided that until I finish "the Intelligent Investor", I want to avoid picking (or buying) any more stocks. I've benefited from an exceptional amount of beginners luck in my first year and a half of investing. I know it won't last forever, and I know I'm going to need an ample amount of skill to fill the void left by my luck once it runs out.

But before I stop picking... I need to decide what to do with the 28% cash which is sitting in my portfolio unused. I definitely don't want to use all of it... and I definitely don't want to leave all of it sitting there while I finish this (HUGEMUNGUS) book. (I have a feeling it will take me 3 to 6 months to finish reading Mr. Graham's text).

So here is what I was thinking of doing...

I've been wanting to diversify into emerging foreign markets... but it has come to my attention that I lack the skill to properly do this on my own.

So I was thinking about ETFs. What about putting 9% in EPI and 9% in VEU  (I was also considering IIF).

Either way, I'd like to end up with 10% cash left (which to me, seems much more reasonable than 28%).

I've never much liked the idea of ETFs and Mutual funds... but I think in my current position, it may be best to let someone else be "in the drivers seat". That way I can continue to make some money while focusing my attention on learning and polishing my skills.

Being that I am a new fool... I would very much like to know how you feel about this strategy. Thank you very much for reading and have a great weekend.

~djshagggyd

 

p.s.- For more on EPI check out Cato's blog and the excellent commentary within.

 

15 Comments – Post Your Own

#1) On March 28, 2010 at 5:29 PM, truthisntstupid (93.59) wrote:

djshagggayd

Many people recommend reading chapters 8 & 20  first.  The whole book is good, but a lot of people really feel those 2 chapters are the most valuable.  Also, if your edition has it, there's Buffet's tale of  The Superinvestors Of Graham-and-Dodsville in the appendix.  That's a fascinating read, too.  I never stopped appreciating The Intelligent Investor even though value investing is no longer my favorite approach for reasons you already know.

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#2) On March 28, 2010 at 6:36 PM, djshagggyd (70.72) wrote:

Hey thanks Truth! Do you feel that reading chapters 8 and 20 first would be less confusing for someone like me who is just getting started? (then I would go back and read the whole thing in order after that)...

As always, thanks for the advice!

~djshagggyd

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#3) On March 28, 2010 at 8:17 PM, Teacherman1 (29.02) wrote:

dishagggyd- Can't offer any advice on funds since I don't use them but later in the week I will be posting a couple of blogs.

One will be about what I found when I "culled" the list of Chinese stocks that were so graciously provided by CAPS members when I posted a request for recommendations. 

The second will be about the difference in what the market is like now, as compared to 2009, and the different investment style that might be utilized today compared to then.

By the way, what kind of instruments do you play? Do you make your living at it?

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#4) On March 28, 2010 at 9:28 PM, djshagggyd (70.72) wrote:

Teacherman-

Thanks for reading... I'm really looking forward to checkin out your blogs later this week. It'll be great to read your thoughts on those Chinese stocks.

2009 vs 2010 investment styles sounds really interesting too!

My main thing in life is music... I only make about 20% of my income from it, but each year that percentage has been increasing. Maybe one day I can make it up to 100%... but if not, that's okay. I do it because I love it.

I primarily sing and play guitar... though I "tinker" with just about everything. If you're curious, our latest track is streaming at facingwinter.com

Thanks again Teacherman... have a great week!

~djshagggyd

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#5) On March 28, 2010 at 10:30 PM, truthisntstupid (93.59) wrote:

djshagggyd

To the best of my recollection, chapters 8 & 20 should be pretty easy to read.  Chapter 8 is titled "The Investor And Market Fluctuations,"   and chapter 20 is titled "Margin Of Safety"  As The Central Concept Of Investment." 

Chapter 8 will help to fortify your resolve to resist the herd mentality during periods of market volatility.  From my point of view this is very important.  I do not want to be part of the herd.

Chapter 20 covers the margin of safety concept, which I also think we should all have, although my idea of a margin of safety is probably very different from a value investor.  Since I read the book long ago, I've come to realize that, in my opinion, there can be many kinds of margins of safety.  Some seek a margin of safety in what some others view as excessive diversification, with the hope that perhaps that will compensate for lack of time to do proper research or their lack of confidence in their ability.  Some seek a margin of safety in the presence of what they believe to be a durable competitive advantage and count on time as an ally.  Some seek a margin of safety in assuring themselves of solid financial health, moderate debt, and a low dividend payout ratio, leaving a significant payout margin of safety.  Some people seek a margin of safety in multiple margins of safety.  Think about some of the things I've written with that in mind.

We all have to arrive at our own unique perspectives.  I'd rather not depend on capital appreciation any more myself, for reasons I've already written about in blogs.  But the value of this classic book can't be confined to just one style of investing.  My hardback copy has a preface written by Warren Buffet.  Since it contains in the appendix Buffet's classic tale of The Superinvestors Of Graham And Doddsville, which was a tale told by Buffet in a talk given at Columbia University in 1984, I guess I haven't owned it for thirty years after all.  But almost that long.  Even Buffet himself stresses chapters 8 and 20 in the preface he wrote.

Whether you decide to pursue value investing or dividend investing, what this book will help you forge is the correct mindset to be an investor - not a speculator.  There's a world of difference. 

We're all wired differently.  20 years ago, I thought much differently than I do now.  I evolved from someone that wanted to find undervalued stocks that I could hold until the rest of the crowd recognized their value to someone who prefers an approach I think offers a very high return in the long run with much less of a speculative component.  But I'm 52.  You pobably aren't.  You have to find what you like best.  And whatever that is, you'll benefit from having read The Intelligent Investor.

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#6) On March 28, 2010 at 10:40 PM, Option1307 (30.27) wrote:

Emerging markets are definitely something you should look into going forward; however I'm not necessarily a fan of them personally, especially at these levels.

Although they do present a good opportunity going forward and for the long haul as their economies will likely continue to outpace the US.

It's up to you to decide if buying into India right now is a good idea, but I know I certainly would wait for at lest a decent pullback before starting a new position. Just my opinion though.

 

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#7) On March 29, 2010 at 3:24 AM, cashback79 (82.12) wrote:

I am interested in what China is doing personally, think that the infrastructure they are putting up is all part of a plan that will link up with the infrastructure here in US (oversimplified big time) but keep it in mind...the RRs in the US per person emit equivalent emissions as a SUV and are losing money and the DOT is something crazy billions of dollars losing money...China, well their rail systems are a little bit more advanced I'd say...as for ----

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#8) On March 29, 2010 at 3:26 AM, cashback79 (82.12) wrote:

Luck, well, luck can run out...thankfully, skill lasts a lifetime and only gets better with age :>  SO, sounds like a sound plan to me

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#9) On March 30, 2010 at 8:35 AM, arisktaker (63.50) wrote:

See comment 7 on on you Chinese Stocks... CHNG vs. the Industry blog

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#10) On March 30, 2010 at 12:37 PM, djshagggyd (70.72) wrote:

Thanks Risk Taker,

Yeah, it's going to be real tricky trying to keep my return up at 26%... I don't expect that I will be able to do it forever... but I'm certainly going to try!

I bought my first stocks in May of 2008... by the end of that year I was at a 50% loss. I got extremely frustrated... and I almost gave up. But instead I started visiting Fool.com everyday. It helped me be patient and made me feel a lot less isolated.

I was determined how to learn how to make that money back... and (with the aid of you fools, and a lot of luck) I did. By May of 2009 I was no longer at a loss... and by 2010 I was somehow all the way back up to a 26% return on my initial investment. It all feels very ridiculous... but I'm certainly not complaining! 

I need to learn how to replace that luck with actual skill. Otherwise I know I will get burned.

I took a peak at JAOSX and I really like the looks of it. But I have very limited knowledge of mutual fund investing... because I've been spending most of my time learning about stocks.

I noticed that there appears to be a $2500 minimum initial investment on JAOSX... is this true of most mutual funds? At the moment, I don't have that much money free... which is part of the reason I thought ETFs might be a better route for me to go.

I am still watching EPI, VEU , and IIF (all ETFs)... but I've decided not to make a move until I feel confident about an entry plan and start price.

I must say... it's hard to be patient because I want my CAPS score back REALLY bad damnit!! Haha... It was nice feeling like an "all-star" even though I'm a newbie

(though, I know I don't deserve that feeling).

Hope you have a great day Risk Taker... thanks again for all the insight and advice.

~djshagggyd

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#11) On March 30, 2010 at 1:08 PM, djshagggyd (70.72) wrote:

Truth-

As per your suggestion I have skipped ahead and begun reading Chapter 8. I can't thank you enough for suggesting it... it's PERFECT timing, because right now I am in need of extra patience. 

Before I got to Chapter 8 I read the preface by Buffet, a foward by Jason Zweig, the Introduction, and then the commentary on the introduction (by Jason Zweig). Like I said before... it's a slow read for me because I am so new at this... but none-the-less, I do feel as if I am understanding it. And I'm enjoying it too. 

Once I get through Chapter 8, I will move onto Chapter 20 like you suggested. Then I will start the whole thing over and read it straight through from the beginning. 

Then I will allow myself to start buying stocks again.

Until that point... I think I will stick to ETFs, mutual funds, or nothing at all.

Thanks again Truth! Hope you're havin a good week,

~djshagggyd

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#12) On March 30, 2010 at 1:11 PM, djshagggyd (70.72) wrote:

Cashback-

Thanks for the thoughts... I hadn't really considered the idea of transportation stocks in China or other emerging markets... but it seems like a pretty good idea.

Thanks for reading... have a good week,

~djshagggyd

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#13) On March 30, 2010 at 1:25 PM, djshagggyd (70.72) wrote:

Option-

Thanks for the advice. I agree with you... I think it would probably be best to wait for the market to come back down a little bit before I make any new purchases. 

It's still pretty tough for me to come up with entry plans, but I think "the Intelligent Investor" should help a lot.

Thank you for helping me to be patient!

Have a great week,

~djshagggyd

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#14) On March 31, 2010 at 9:15 AM, arisktaker (63.50) wrote:

My view of any kind of investment that spreads risk by owning various things is they are best for investors that don't want to do, or feel comfortable doing, the research into individual stocks.  You are paying "experts" a fee to do it for you.  Your job, before you invest, needs to be into the fund and the experts that manage it.  

As I see it,  this is the primary reason that nearly all company and government sponsored retirement plans only provide "funds" as an option for their employees.  The exception is that companies will normally allow their employees to invest in the company stock.

I feel very comfortable with US and Canadian stocks and their stock markets.  I don't feel comfortable outside those two so I use a mutual fund to invest in the other countries.  I would think that most beginning investors would start with mutual funds and then graduate to individual stocks once they built up their knowledge of how things work.  That said, I started like you, only I did it when you had to use a full service broker (unbelievable fees), with no internet or other research outside going to the library and no CAPS advice.

Most mutual funds have a minimum, however, it can be as low as $100 and as high a $1,000,000 or more.  You really need to look at the fund's actual return after expenses, since expenses can vary wildly. Some trading platforms have agreements with groups of mutual funds to wave the minimum investment.  I haven't done much research into this because I only have money in a couple of funds.

P. S. I went to the band's website and listened for a while.  I enjoyed the music but I don’t think I am in the demographic you want to reach. 

 

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#15) On April 01, 2010 at 4:49 PM, djshagggyd (70.72) wrote:

Risk Taker-

Thanks for the input... very helpful!

I realized that I think I am getting a little ahead of myself...

I think I need to put 25% towards the purchase of a bond before I buy into anymore stocks, ETF's, or Mutual Funds. This is a concept I got out of "the Intelligent Investor" earlier this week.

I came up with the 25% based off the deciding factors they list in the book (being single, no kids, etc...).

Do you agree that I should probably take care of that first before I buy any more stocks?

And wow! Thanks so much for taking the time to listen to my band. It makes my day to know you enjoyed the music.

Just so you know, you are the EXACT demographic we are trying to reach.  What we do is art for art's sake... it's for everyone and anyone who appreciates passion and creativity. 

Thank you so much for your time and advice. Have a great day friend,

~djshagggyd

p.s.-I posted a new blog with some questions about bonds... if you have time, I'd love to here what you think... here's the blog

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