State of the Stock – February

This February we got quite a bit of money from our tax return. As discussed, I took that return and invested quite a bit of it. The idea was to minimize the commission fees, by investing hundreds at a time using the 3 Months to Profit formula. So I did. Granted, it’s a bit of a misnomer calling it that, because it doesn’t guarantee anything. As you can see here, stock prices fluctuated, and profits are all negatives.

Another reason why you’ll notice a change between INTC and INTC from January, is because I realized in doing my math that I was figuring the profit incorrectly. I had been “re-adding” the commission to the value of the profit field, but I re-added about 200% more commission than I needed to, thus initially creating a false profit. This is why I don’t pretend to be an expert, or that anything you see in my portfolio is solid gold advice.

That said, I also let it be known when I make a mistake, and when it’s fixed. So here are the updated numbers as of this morning. End of day values may change, but as of 11am these were accurate within a few pennies.

STOCK TOTAL PURCHASED TOTAL SOLD PROFIT
TEU 126.4225 65.0221 (-$5.98)
BAB 13.682 4.0772 (-$26.11)
INTC 3.0778 3.0778 (-$9.94)
O 11.6080 1.5408 (-$8.27)
PGH 40.7213 0 (-$10.95)

Automating Passive Income

In The Passive-preneure I talk a lot about automation, and you’d know that if you’d picked up your extremely inexpensive copy today. One of the ways I’ve gone about automating my own passive income streams is by using one to fund another, automatically. I’ve discussed ShareBuilder in the past, and how I utilize their automatic investing options to “set and forget” my investing plan. Well, I also utilize their direct deposit option to help this along.

In my Kindle Direct account I have directed all income to my ShareBuilder account VIA direct deposit. This lets me move all my money into investing, and never have to worry about accidentally spending it. Then, once the threshold is reached my automatic investments kick in. Then I’m able to keep track, and get my dividend reinvestments from these. Thus, one passive income stream (my eBooks) funds another passive income stream (my Dividend investing) which I’m also utilizing to build up the capital to purchase yet another passive income stream (my rental properties).

You can see from this that it’s a domino effect, and if you have multiple streams, such as eBooks and membership fees on a website, for instance, you can direct multiple streams into the same account, and build those streams faster. Turning them from a passive stream, to a passive river.

Pictured: Your income

Pictured: Your income

Expansion on 3 Months To Profit [With Formula]

So the other day I posted an article about having patience with your investing, in it I mentioned some math on how I minimize the commission fees. Now, this math, though not incorrect was incomplete. It did not take into account sales commissions, which can be much higher than purchase commissions, as well as it did not actually detail out the math used. So I decided to expand on this math a bit.

For this math I’ve added in variables for sales commissions, as well as a variable to allow you to define exactly how many months to profit is acceptable for you.

\lceil \lceil (CPT_B + CPT_S) \div DPS \rceil \div M \rceil \times CPS

Now, in this instance it might be a bit confusing. Let’s start by defining the variables:

CPT_B = Cost Per Trade (Buy) \newline CPT_S = Cost Per Trade (Sell) \newline DPS = Dividends Per Share (\$) \newline CPS = Cost Per Share \newline M = Months

Not that hard to understand the rest now. If you’ve never seen them before the \lceil \rceil signs can be confusing, but they just mean round the result up to the nearest integer (I.E. if you get 22.22 round to 23)  and use the result for the rest of the formula. The result of this formula is the amount of money that you need to invest into that particular trade to get your specific Months-To-Profit from the dividends. In this instance, DPS is normalized to Monthly, so if your particular stock pays out $0.04 per quarter, you’d take that and divide it by 3, the number of months in a quarter, resulting in $0.013.

You’ve also seen me lauding the benefits of compound dividends in the past, but this calculation doesn’t look at that at all. Now, obviously, you’ll see some of this if you get a true monthly dividend payer, in a 3 month time span, and see a larger profit, but that’s not what this is about. It’s simply a way to recover the commission fees before you sell. This way, you know if you’re actually going to profit.

Have a better method, or formula? Post it in the comments and let us know! This site is all about spreading the knowledge, and I don’t presume to be the all-knowing on these subjects. This is simply what I’m currently doing, so if you have improvements, or any information that can enhance the discussion, post it so we can all enjoy it!

Frequent Trading VS. Pre-planned Investing

Coming up is my 1 year anniversary with active investing. For the last year I’ve used a trading style of frequent trading. To this point, I have a total profit of (-$47.20). That’s a negative amount, because currently my portfolio is worth less than what I paid for it. This, obviously, is not a good thing. But it was expected. Frequent trading means frequent commissions, and as I’ve posted in the past, commissions kill you.

So today I’ve setup my next type of investment strategy. For the next year I am going to move away from frequent trading to pre-planned investing. I’ve setup my automatic investments, as well as my automatic dividend reinvesting, on Sharebuilder. I’m setting up automatic deposits each paycheck, and once my account has reached the threshold of $522, I will invest in my diversified collection of stocks–all monthly dividend payers. I have used my 3 months to profit calculation to figure out this $522 figure, based on the dividend amounts, and the current price for each share.

To be open, below I will list the results from my last year of trading. Included is a dividend payout which will not close until tomorrow, but will be a difference of pennies.

STOCK TOTAL PURCHASED TOTAL SOLD PROFIT
TEU 65.0221 65.0221 $6.84
BAB 4.0772 4.0772 (-$17.40)
INTC 3.0778 3.0778 $13.24
O 4.9326 1.5408 (-$49.89)

Patience, biding your time

When doing what I like to call “entry level” stock investing, it’s as important to bide your time as it is to know when to jump. By entry level, I mean when you want to do it, but only have a few dollars that you can spare towards it. Why is this? Commissions. Trading fees. I use ShareBuilder, which doesn’t cost anything to have an account, and only costs a low fee when I trade. It’s also run by Capital One, which I’ve had business with in the past and trust.

The thing is, with such a low ability to invest, if I traded whenever I had the money to buy a share, I’d drown under the comission fees. ShareBuilder’s trading accounts are FDIC insured for the cash balances. Meaning the money that’s just sitting there, waiting to be traded. Those balances also earn interest, just like a normal savings account. That said, what I tend to suggest is taking your time, transferring over what you can afford, and setting up their Auto Investment system to auto-invest once your account has reached a good threshold.

Now, this threshold will be different for everyone. I tend to figure in the potential dividend payouts with mine, and shoot for a 3 months-to-profit range.

What does that mean?

Well, it means this:

Say the shares cost me $36.83 each, and the auto investment system costs a $4 flat rate per trade. Now, if I wanted to limit my risk based solely on the desire to get that flat fee down to $0.01 per share, for the trade, I’d need to invest in 400 shares, which would cost $14,732, plus the $4 trading fee. That’s not exactly a small amount of money. But, it would mean if the market sneezed and the price of my stock went up 2 cents, I’d be profitable.

But, I’m looking at 3 months to profit. I’m also looking at dividend payouts.

Now, let’s say this same stock pays out a dividend monthly. Now let’s also assume that dividend is $0.18 per share. Just for the sake of the math we’ll assume that for every share that I own, I’m guaranteed that the price of the stock won’t fluctuate, and that I will always receive that dividend. Obviously this is not true for normal stock purchases, but that’s the risk we take. Like I said, I aim for 3 months to profit, but when the stock starts to decline, sometimes it can’t be avoided.

The first thing I need to do at this point is figure out exactly how many shares I need to purchase so that in 3 months I will be seeing a profit. And by profit here, I literally mean $0.01 or more. The first thing I need to do is figure out how I’ll go about breaking down the commission. Well, that $4 can now be divided by 3, because it’s going to be spread out over 3 months. That drops it to 133 shares. But this still has it at $0.01 per share, and it’s still a relatively high number. Due to the dividend payout of $0.18/share, I could actually drop the number of shares I need to purchase, by allowing the commission to stay higher. So I’ll make the commission break down to the same fee as the dividend, $0.18.

That allows for 22.22 shares, we’ll round up to 23. That’s a total cost of $847.09, which isn’t anywhere near the $14,000 range. But, we’re still looking for 3 months to profit, not 1 month. So, we’ll take the 23 and divide it by 3. That brings us to 7.6, which we’ll round to 8. 8 shares, at $36.83 per share, a total cost of $294.64, with a payout of $0.18/month.

To figure out if this will be our 3 month to profit mark, we can do a little more math. Each share pays out $0.18 each month, so a single month will bring in $1.44 in dividends. After 3 months, that is a total of $4.32 in dividend payouts. As you can see, that is a $0.32 profit.

Now obviously the market won’t stay the same for you like that. This isn’t about “profit” in the classic sense, so much as limiting the risk and damage of the trading fees. Dividend paying stocks are powerful tools that any investor should be using. Including them in your portfolio, especially strong monthly dividend payers, will allow you to trade more carefully, while at the same time reaping the benefits. 

If you have any suggestions or other methods for limiting the trading fees, leave them in the comments!

Limiting Your Risk

The stock market, to me, is the arena of the Capitalist Gods. It’s a place of financial battle that one might enter without risk of destroying anyone else for personal gain. Yes, I do understand that for each win, there is a subsequent loss. The thing about the stock market losses is that to earn a loss, one must gamble. I don’t feel it’s my duty to protect a gambler from losing. It’s up to him to decide not to gamble in the first place.

Now, for me, I don’t invest a lot. Whenever I hear people talk about investing in small amounts it’s $1,000 here, $5,000 there. I’m about 1/100th of that. I tend to invest about $50 at a time, which, I’m sure you can see, costs a lot in commissions. Now, I’ve come up with a few ways of covering these costs, and limiting my risk as I do so.

Invest In Dividend Stocks

This has been lauded for years as the best way for long term investors. I’ve found, though, that dividend paying stocks can help limit the risk of your entire portfolio. When I designed the spreadsheet for my portfolio, I designed it with many, many, different formulas. It breaks down the portfolio-wide profit / loss, but also on a stock-by-stock basis. Now, by using a dividend reinvestment plan through my broker, which is a $0 commission, I can limit not only the commission, but the stock price. I don’t consider dividend purchased shares as a cost so when I insert them into my portfolio, I give them a $0 price, and a $0 commission. This essentially lowers the average-price-per-share, as well as the average-commission-per-share price.

Diversification

Now, the dividend plan I detailed above works well for a single stock, but you really don’t see the benefits until you’ve added numerous stocks, different types of industries, both dividend paying and non-dividend paying, quarterly, monthly, you get the picture. The trick to the dividend plan is that should you lose in one stock, the dividends can help balance out the loss of the entire portfolio. For instance, currently I’ve purchased and sold two stocks. One, a small $5 dividend paying stock, of which I purchased 60+ shares over time. The other I owned just two shares of, at a cost of nearly $31 per share. The larger I sold at a loss. This loss was $10.45. Life events happen, and you cannot always wait for the market to correct. But, I had already sold my other stock for a profit of $13.79, giving my entire portfolio a profit of just over $3. Now, take into account that I sold both of these stocks for less than the price I paid for them. Yes, both stocks had lost value in the time I owned them, down below the original price I paid, but due to the dividends on the first, the entire portfolio had a profit.

Invest What You Can

Yes, I tend to invest about $50 at a time. That’s because that’s what I have to invest. I’m not rich, by any means, just ambitious and intelligent. That said, I’m not opposed to investing more when I have it. For instance, when selling off one stock, I will generally invest the profits in a single purchase, to limit the cost of my commission.

Know Your Options

In the broker I use there are many ways to invest. Knowing my options is the only way to limit my cost. For instance, I can make manual purchases, but I can also be patient and allow the auto-investment system to invest for me. Doing so lowers my commission by $2 per stock.