Getting Started In Stocks

It’s common for newcomers to the market to think that they better get going right away or they’re going to miss the current opportunity.

That’s almost never the case. Remember that the market has been doing more or less the same thing for over 200 years: fluctuating. A good way to get discouraged right out of the starting gate is to buy into a strong rally and then see it reverse and your seed money shrink by 20%. Some people swear off stocks forever after that.

Recent Kelly Letter subscriber Jeff in New York captures this common sentiment with these questions:

“If a person has only $7-10k to invest now, what would be the best strategy? Invest in one stock? Two? More? Which stock? Many of the open ones in your portfolio are now much more expensive than when you got in; is it too late to jump now on any one of them? Would you recommend using it for your Dow One, Double The Dow, or Maximum Midcap strategies instead? Should one wait for the individual stocks you’re watching to come down into your buy zone? How would you recommend someone best use their limited resources with the recommendations currently on your [subscriber] site?”

For anything less than $10k, I suggest waiting for a pullback in the market and then starting my Maximum Midcap strategy. It’s perfect for a rebound because its purpose is to return twice what the medium-sized company index returns and, in my research, I’ve found that medium-sized companies bring more potential than large companies, but less volatility than small companies. Mid-caps are the market’s sweet spot, not too big but not too small. They’re just right.

You can see how extremely well Maximum Midcap has done over the years on my Strategy Page. As of last Friday, it’s up 28.5% so far this year.

It’s far more effective than almost all professionally run portfolios, but is simple enough to be managed on your own between work and family responsibilities.

It’s volatile, by design, and that’s what most critics point to when attacking it. What they miss is that almost nobody invests a lump sum of money and then just leaves it for 30 years. The vast majority of people start with a modest sum, and contribute to it monthly or quarterly as it grows.

This tactic of regularly contributing new money is called dollar-cost averaging, and it works best when used with a volatile investment, like my Double The Dow and Maximum Midcap strategies. Why? Because when the price of the investment goes down, your new money invested buys at the cheaper price. That way, you take advantage of the volatility rather than getting scared by it.

Plus, my permanent portfolios use the Dow and S&P; MidCap 400 indexes, so you’re not betting on one company. Critics scoff at the volatility, but nobody I’ve approached for a shoot-out with one of the portfolios over a time period longer than one year has ever accepted. They’re wise to walk away — like Fortune magazine, they’d lose.

You won’t, however, when you put these powerful doubling strategies to work for your money. Save your cash, wait for a significant pullback, and then get going with one of my permanent portfolios.

That’s part one.

Part two for subscribers is waiting for an active order from me. If I’m not saying to buy more shares of a company at a certain price, then I don’t advocate doing anything at the moment. There’s a lot of watching and waiting with my approach, and that’s fine. It gives newcomers time to see how this business really works.

Forget the ads. Forget the split-second pressure that so many trading services push. Forget almost everything you’ve ever been told about the market. This whole business is about watching companies that you think have a bright future, studying their stock’s price history compared to its earnings history, thinking about what’s going to drive its earnings in the future, and then calculating a fair price to pay from all that. Once you have the fair price target, you wait for the stock to get down to it or for the company’s prospects to change.

None of that requires a stressful life filled with cell-phone alerts telling you to buy GOOG at 9:47 and then sell it at 10:12. Give me a break. That doesn’t work, it’s expensive, and the companies pushing that approach profit from your activity, not your success.

For both the stocks I’m watching and the stocks I already own, I send active order alerts to subscribers that almost never require immediate action. I usually alert subscribers to an active order in a weekend note, giving everybody plenty of time to get the order on the books and then wait to see if and when it executes.

I don’t like stress and assume that you don’t either, so I strive to minimize it.

Tomorrow: SiCKO and feedback on the U.S. health care system, whether or not Starbucks is a buy, and further thoughts on the iPhone.

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