WWII 080: Buying Programs and Disciplines, Trading a Roth IRA, Investing vs Speculating, New Homes Sales Slow

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Main Topic: Buying Programs and Disciplines

This episode was inspired by a listener of the podcast named Yaokai who has been submitting great questions to me through the Ask JB function on the website.

Yaokai took the time to record this question on Vocaroo. To record your question, go to whatworksininvesting.com/askjb and hit the Record Now button. Once you are happy with the recording, you can save it, and email the link to recording to me.

First, thanks Yaokai for inspiring this episode of the podcast.

Some of the biggest investing mistakes I have personally made have started with loading up too soon in value ideas and not giving myself a chance to buy at lower prices. So having a buying program will help keep you from making a similar mistake.

Buying programs are part of the group of activities I consider Portfolio Management. These activities include:

· Capital allocation across ideas

· Position sizing

· Buying programs

· Sell Disciplines

· Correlation management

Before I give you my take on buying programs, I will quote from the master Warren Buffett, who in his Buffett partnership investor letter in 1957 said :

“Obviously during any acquisition period, our primary interest is to have the stock do nothing or decline rather than advance. Therefore, at any given time, a fair proportion of our portfolio may be in the sterile stage.” Sterile stage referring to stocks that have not shown gains yet."

In his 1958 Buffett Partnership letter, he adds”

“[In the 1957 letter] I pointed out that it was in our interest to have this stock decline or remain relatively steady, so that we could acquire an even larger position and that for this reason such a security would probably hold back our comparative performance in a bull market.”

In the same letter, in discussing a particular position, he said:

“Over a period of a year or so, we were successful in obtaining about 12% of the bank… ” and “It is obvious that we could still be sitting with a $50 stock patiently buying in dribs and drabs and I would be quite happy with such a program although our performance relative to the market last year would have looked poor.”

Buffett is giving us clues as to how he would take a position. He mentions the period of a year or so to give himself to take a large position. At least in his partnership days, Buffett wasn’t loading up quickly on positions. He would take one over a period of at least a year.

Why a year? One thing that was going on was Buffett was buying a decent amount of illiquid stocks. He mentions stocks that trade by appointment only, stocks that trade only every other month or so. That is one significant reason for his having to take a year or more to build a position.

A second point to make is that buy extending your buying over at least a year, you have the chance to buy during periods of falling prices. If you load up at the wrong time of year, for example in January – March, you may miss the opportunity to buy cheaper during season market softness such as October / November timeframe.

A third point I want to make is about opportunity cost. I shined some light on the topic of opportunity cost in investing in episode 32 of the podcast. You take advantage of opportunity cost over time by spreading out your buying over a year or more. Not just in market fluctuations, but in having many choices of which securities to buy. By keeping capital handy for a buying program over a year or more, you have dry powder and can allocate based on the relatively cheapness of different securities.

For this reason, my recommendation for retail investors and especially those just starting out, is to buy only once or twice a month and take a full twelve months to reach a full position in any one stock.

You will naturally feel an internal pressure to load up more on something you are buying if a stock is falling in price. Having a discipline of not buying more than twice a month, and taking twelve months to build a full position will give you parameters that should keep you from buying too much too soon.

No one can predict the direction of the stock market or an individual name. Just because a stock has fallen in price does not always mean that it will go back up to your original buy price. What if the stock continues to fall long after you have a full position from buying to early and too often? I shined some light on the topic of the anchoring and adjustment bias in episode 68 of the podcast. My buying program suggestions are designed to mitigate a number of different biases, including anchoring.

The actual size of the position you take will depend on your preference for concentrated investing versus diversified investing. For new investors, I would recommend not having fewer than twenty positions at full commitment, and for each of those positions to be in different industries. This accomplishes a few things.

· First, it will force you to do valuations on at least twenty companies before you can be fully invested.

· Second, it will force you to learn about at least twenty industries.

· Third, each position can only be 5% of your total portfolio, so if you make a mistake, it won’t destroy all your capital.

I also insist that new investors should consider 30% of their total capital be called “reserve cash” and is to be untouchable until a market correction. If a the market corrects 10% from its most recent high, 1/3 of the cash is invested in the best ideas based on opportunity cost. The second 1/3 of the reserve cash is invested if the market corrects 20% from its most recent high. The last 1/3 of reserve cash is invested if the market corrects 30% or more from its most recent high.

This means that of your twenty positions, initially, six will be in cash.

For the other fourteen positions, take twelve months (or more) to build them out.

To calculate how much you can spend each month, the math is pretty simple.

Here’s an example. You have total capital of $100,000. Your max position size is $100,000 x 5% or $5,000. Your monthly buy program would be $5,000 / 12 months or $417 per month per position.

If you are working with much smaller numbers, you can reduce the number of holdings to fifteen or ten, but not less than ten. This is so your monthly buy amount is not impacted by commissions.

The major caveat here is that you should be in the financial position to be an investor (listen to episode 6 of the podcast about your starting financial position) before your start with this kind of buying program.


If you follow this type of buying program, you short circuit some of the biases that lead to bad investing decisions and take advantage of opportunity cost.

Ask JB: Trading ROTH IRAs and Investing versus Speculation

Valky9000 1 point 56 minutes ago

My money is in a Roth ira, does that mean I can buy and sell without having to deal with capital gains tax?

Any disadvantages for selling short term vs long term? People said there is a fee for short term vs long term, does this apply to a Roth ira?

So far I have only bought with only trading fees in mind. Can I sell and buy as I see fit, without worrying about how many trades or is there a limit, like I have to be a day trader?

I trade with fidelity.

Thank you.

JB SAYS: In a Roth IRA, you won't have to pay capital gains tax or tax on dividends or interest.

There are different margin requirements for day traders versus non day traders. A "pattern day trader" is defined by FINRA as any customer who executes four or more "day trades (purchasing and selling or selling and purchasing the same security on the same day in a margin account" within five business days. Some broker-dealers use a broader definition for this. This definition only applies to margin accounts, so if your account is a cash account, it won't apply.

Some broker-dealers will not charge commissions to preferred clients unless they trade too actively. For example Merrill Edge will charge commissions on trades by preferred clients in excess of thirty trades per month. Up until then there are no commissions.

I'm not familiar with Fidelity's limits and rules. Hope this was somewhat helpful.

My friend and I are having a rather heated debate on investing vs speculation in the cryptocurrency market. I was always taught that the idea of investing involved ownership within a company share, property or asset. And speculation has to do with taking a trade in the essence of making a profit from the difference in movement.

He's arguing you can invest in a cryptocurrency such as Ethereum or bitcoin while I'm saying it's pure speculation. There's no ownership in anything if you buy an ethereum or bitcoin. If you invest in the company, they value shareholders while a currency can't provide the same relationship. I see cryptocurrency trading as a speculation just like trading the futures market in a commodity or currency. What do you guys think?

JB Says: My two cents is that the key difference between investing versus speculation is the concept of “intrinsic value.” For anything to be considered an investment, you must be able to determine the things intrinsic value. For most investments, intrinsic value is either the present value of future cash flows to the investor, or some form of replacement cost.

You can calculate the intrinsic value of a house by the replacement cost method. If you buy a house below its replacement cost, that is an investment. If you buy a house based on recent comparable sales, you are basing your decision on “market value” not on replacement value and one could argue you are speculating. Those who bought houses based on comps at the height of the real estate market suffered losses.

You can get the intrinsic value of a car or truck from Kelly Blue Book which does similar calculations. Vehicles are deprecating assets, but if you can buy a vehicle well below Blue Book than an argument could be made that you at least saved some money. Saving money on a purchase is a “return” of a different kind.

Can you calculate the intrinsic value of gold? No. Its price is based on the greater fool theory, not a calculation of intrinsic value. Like any commodity, the closest thing to intrinsic value for gold is the cost of production. If you buy below the cost of production, then maybe you will make a profit after the market rebalances supply and demand.

So I ask you, can you calculate present value of a Bitcoin’s cash flows to investors? Can you calculate the replacement cost of a Bitcoin? I know that the answer is “no” to the first question because Bitcoin does not produce dividends, interest, or rental income. I don’t know the answer to the second question however.

Do you have a burning question on investing you would like answered? Click the button below to send it to me and I will answer it on the podcast!

News: Housing market lack of supply leads to slow down in new homes purchased


Fed stress test results are on tap


DISCLOSURES: I /we are long BAC, WFC, and JPM

Thoughts on this podcast? Disagree with me on some point? Something I missed? Leave a comment!

About the Author

Jeremy Scott Bailey is an investor, author, entrepreneur and host of the "What Works In Investing?" podcast now available on iTunes. He is founder and Chief Investment Officer of Burgeón Group, Inc. an investment advisory firm that provides portfolio management services to families and individuals.

Leave a Reply 2 comments

Yaokai Jiang Reply

Hi JB,

I am fairly well informed about bitcoins, being a little involved in the market since 2012. Buying below replacement cost since then did indeed work pretty well.

The cost of bitcoin is the sum of electricity cost and the depreciation of the mining hardware.
On this day, the cost for 1 BTC in terms of electricity alone, assuming 0.15 USD per KWh, is about 1000 USD. Mining hardware that produces 1 BTC given the current difficulty in 8 months costs around 1000 USD as well.
Bitcoin production gets more expensive as more computation power enters the network, so typically that number will go up over time.
New mining hardware usually are more efficient, reducing unit electricity consumption, but as everyone adopts new mining hardware, this arms race usually just means that nobody has any edge.
From my experience, mining hardware usually retire after 1 year, and usually will produce only 1 BTC given the rising difficulty over time.
So replacement cost is around 2000 USD.
Of course, during a BTC crash, one can buy mining gear at a deep discount, and the difficulty of mining will rise more slowly, or even temporarily go down. So during a BTC price depression, the replacement cost also go down.

    jbadmin Reply

    Thanks for that great analysis of bitcoin mining costs! Have you mined any yourself? I have read about people with air-conditioned closets full of mining computers calculating away while they are at their day job. Do you think those days are over?

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