There was an article in the Post a few Sunday’s ago about the advantages of retirees having more stocks in their investment portfolio – this is contrary to the standard rationale of minimizing equity (stock) allocation as we retire.

This may be sound advice or perhaps not if you talk to a retiree that was heavily invested in stocks in March of 2000.

I offer no opinion other than to say everything is easier with the  benefit of hindsight.   Though the study utilized thousands of simulations, what is missing from simulations, that is ALWAYS present with investing, is human emotion.  The simulation is not able to project how an individual investor would handle declines or gains of a certain percent.  Would they prematurely vacate a position etc.  In fairness, that is not the point of the research

The Advice I do offer is, if you are going to increase Stock exposure, handle your portfolio yourself or make certain you’ve hired a very good Financial Adviser.


Investing on Margin

I remember in the mid 2000s meeting with a very bright gentlemen (I’m guessing in his late 50s), that was well versed in a number of subjects.  Eventually, the discussion turned to investing.   He had a Financial Adviser that had given him some stock advice on fairly speculative companies and went so far as to encourage him to invest on Margin.*

*Investing on Margin in Simple Terms:

When you have a Margin account your Broker will loan you money to purchase additional shares.  Example, 

  •  If you open an account with a $10,000 Cash Investment your true buying power could be as much as  $20,000. 
  • The additional $10,000 made available to you from your Broker can be loaned to you with interest

Never EVER answer a Margin Call!!

If you are invested on Margin and the stock drops significantly, the Broker will demand that  you put more money in your  account (this is the Margin Call) to cover the loss or they have the right to sell the stock to protect their loan.

If you have received a margin call, it means your investment has gone to hell and you should just sell the stock yourself.  By no means should you answer the call by putting more funds into your account to support the loss.  Read this sentence twice if it did not sink in. 

From $1,000,000 to a Margin Call!

Back to our story,  the gentleman told me, with the benefit of margin, his investment was approaching a $1,000,000 – the amount he determined that he would sell the stock.

This was his first mistake – a stock doesn’t care what price you want to sell, (e.g. how much profit you want to make, or in a losing position, if you just want it to get back to break even).  It’s going to do what it’s going to do regardless of your plans.

He said “It wasn’t like I was being greedy or anything and going to hold until it  hit $2,000,000, I was just going to sell at a Million”

I asked what happened and he said he got a Margin Call!  He was complaining something about Clinton having something to do with it – but I wasn’t  wasn't able to process what he was saying -  the only thing I could think was, “From a Million Dollars to Margin Call – Holy &^%#!!”

I said “So you sold?”

He said “No, my Stock Broker said it’s going to bounce back, just put some more money in.”

Me: “You answered a Margin Call?!”

The Gentleman: “Yes”

Thinking in my head: “Oh my God, I can't believe what I am hearing!”

He went on to tell me he also answered a 2nd Margin Call!  I was speechless at this point.  Sadly I learned a few years later that he had lost his home.  

The Late 90s

If I haven’t bored you by this point and you are still reading you probably know that from late 1998 to April 2000 there was a monster upward move in the stock market.  At the end of 1999 when you reviewed performance of the tops stocks, there were scads of stocks that appreciated in the 100s of percent over the year and in some cases 1000% or better.  

You could’ve given your money to the 7 year old next door, who doesn’t have the sense to look in the street before he bikes out his driveway and still had a positive return on investment.

I remember seeing a K-Swiss commercial on TV and using such sophisticated analysis and logic as “hey, they must be doing well, I’ll buy some shares when I get to work.”  Then the stock is up 40% in less than a month.  Or thinking a stock was a slow mover because it took 3 months to show a 50% return.  

It was great, I only wish I’d had some real money at the time and understood charts like I do (and anybody can) now. 

I also hope we all live to see another market like that!

“You can use your monthly return on investment to pay your Mortgage.”  “Wait, what?!!”

I knew a gentlemen that inherited a bit of money and then decided to move into a home outside of his means.  He  came to the conclusion that this was doable since his Stock Broker told him  “Just use your monthly return on investment to make your mortgage payment.”

Can you imagine that?! I don’t need to finish this story, it ends how you think.


The downfall of Krispy Kreme

Remember when Krispy Kreme Doughnuts (KKD) was on nearly every corner?   The chain was hugely successful.   If memory serves, I thought I had read that the average store had annual revenue in excess of $2,000,000.  Can you imagine that  - from doughnuts?

Obviously locations  are a bit hard to come by now – in fact I heard a German Concern was going to purchase the company.

Again working on memory, I believe Corporate told the Franchisees, if approved you will have to open multiple locations (I don’t remember the number but it wasn’t like 2 or 3 – it may have been something like 6-8). 

This led to cannibalization of sales on a per location basis, since even if you strategically set your locations up a reasonable distance from each, some other franchisee could open their shop in what should be your territory and significantly affect your sales. 

The point of this is another story about an individual I knew that was invested in KKD.  His broker told him to hold even as all of this was coming to light with KKD and the stock was falling apart.  She told him it was going to recover.  

I remember asking, “You didn’t listen right?”  Unfortunately, he did listen and had a significant loss and still was continuing to hold, waiting for a recovery. 

This is story is not dramatic since he was young and it wasn’t a huge position – so damage was not real bad.

Do it yourself or....

The point with all 3 of these stories is make certain you choose your Broker Carefully. 

I do not refer Financial Advisers, it’s too personal and if the Advisor #*^%s  up with your money, I  don’t want to be remembered as the person that referred him/her to you.

I am a huge advocate of taking the time to understand stock charts.  With 2 of the 3 stories above I do not know what their holdings were.  But I guarantee you that the charts of all of the stocks gave very clear signs that it was time to cut bait.

You might throw back at me, like I said way above, “Everything is clear with Hindsight.”  But Charts give real time clues as to what may happen – and some signs are so obvious it’s like they are screaming – “It’s time to Get Out!”  You don’t need hindsight, even with just a very basic understanding of charts. 

An Absolutely Brilliant Post!

Finishing a beer and a proof read of this post, it has become clear that it developed into a tremendous resource for anybody having trouble sleeping.  Perceived effectiveness has me awash with a strong sense of entitlement.  Accordingly, other than the “Win Stuff” posts, I believe I’ll be checked out for the duration of summer. I know this is sad for many as summer plans were likely strongly tied to continued posts – I do apologize.

To all Hebbeln clients, Have a Wonderful Summer!!  We truly, truly appreciate all of you!!!


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Posted 11:57 PM

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