Buy On The Upside
Chapter 7: The Fox and the Hedgehog

Sir Isaiah Berlin17 popularized the fable of the fox and hedgehog by applying it to politicians. He contrasted foxes, who know many tricks and strategies, with the hedgehogs, who have one big idea. He tended to think hedgehogs came out ahead when their idea was right, and disastrously badly when it was wrong, but on the whole, better than foxes, who wasted time on trivia. We think that to be successful in investing, you need to be both hedgehog and fox. Your big idea is why you are investing, your large life goals and your specific objectives. Your foxiness is your employment of a variety of strategies and concepts to achieve your goals, and your flexibility in fitting in with the stock market behavior that your investing life overlaps. Here we present a checklist based on the principles in chapter 6 for your investment program, which is as close to a recipe as we think it is wise to come, given the great variation in investors and goals. The Checklist The Big Picture: Where do you want to go in life, and how much time and money do you have to help you get there? Do you have or can you develop an attitude that will enable you to be a serious investor? If you are of ordinary financial means, you probably will have to favor making money over living large to be one.

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Most successful retail investors are capable of holding rigorously to a budget so that they can divert some income for investment capital (see the next section). Your investment working capital should be separate from, and come after, an assured place to live, money to cover truly fixed expenses, and cash savings equal to what you would need to live for at least six months if your income dropped suddenly. And remember, this book is just about stocks. There are many other ways to invest.

Assess your resources: What do you own, what are your fixed and discretionary expenses, and what is your income? What size initial investment capital fund can you create? Net worth is the sum of what you own, in total (cash, stocks, bonds, real estate, livestock, everything) minus what you owe (credit card debt, mortgages, car loans, everything you must repay). Your net worth is a useful number and concept, but it doesn’t tell you much about what you can or should invest in stocks. For example, you may have a paid-off house worth, say, five hundred thousand dollars, and no other debts. Nevertheless, we would not recommend taking out a mortgage to free money to invest in stocks. Your investment working capital comes after, and is separate from, an assured place to live. You create your capital fund from current income, whether from a job, an inheritance, a tax refund, or other current source. If a tax-sheltered way to accumulate current income for investment is available to you (and it is to most) use it. A regular diversion of current income into an investment fund is the surest way to build it. You can build your investment capital fund and invest at the same time. In any case, it is imperative to first recognize a separate portion of your total resources to use to invest in stocks, and to build and track it systematically.

Set specific objectives for your investment capital fund, for both input and output. The input objectives are usually the sources and amounts of current income you put in the fund monthly or as an initial lump sum or both. The output objectives should be both long and short term. Retirement income is a frequent output goal. How much will you need from your investment capital fund to assure a comfortable retirement in your own terms? Are you building the fund for the education of children or grandchildren, to buy a home, second home, boat, or farm? The key is to estimate how much money you will need and when you will need it. The most empowering thing about creating and recognizing your investment capital fund is the realization that it is yours, your money, and it is there to do your bidding.

The plan you make should be completely explicit. That means that it doesn’t include wishful thinking and hand waving. Earlier we described several investing styles. Obviously, this is really a continuum, and you should carefully place yourself on it. If you mostly don’t want to be bothered by stock investment decisions but still want the advantages of stock ownership, you could put your investment capital into an index fund or its equivalent in ETFs. Almost every plan should include systematic acquisition of stocks that take advantage of dividend reinvestment. This is a good place to use dollar-cost averaging.

Your decision support system includes all sources of data and advice that support your plan. Your broker and/or stock account is a key component of your system, as is your access to online data. We think that with these two sources of support, you can manage toward almost any set of goals, with almost any size investment capital fund. Expensive newsletters, newspapers, and magazines are sometimes helpful but not necessary, and add to your expenses.

Monitoring against your goals is the most important and most neglected item on this list. At least once a month, check the performance of each component of your portfolio with respect to your specific objectives, and record it. Look at the overall performance of your portfolio as well. If it isn’t satisfactory, use your decision support system to find out why.

Supplement the checklist above with frequent visits to buyupside.com and begin now to become a truly independent investor.

TOC Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6

Posted May 16, 2008.

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