Divergent Planning Blog

Buy What You Buy - Series Kickoff

The Buy What You Buy series is a personal experiment where Matt makes stock purchases based on personal purchases his family makes for everyday life.

Many people have heard the numbers. If you had invested the $399 you spent in October 2001 for the 5GB iPod in Apple stock it would be worth over $50,000 today¹. This has mad me start paying more attention to the things I use, buy and feel passionate about. What if we bought not only companies’ products we love but also bought their stock? If you are passionate about a company an what they do then shouldn’t you put your money where your mouth is? I don’t know the answer.

I have decided to do a little experiment over the coming weeks and months². I am going to formulate an equation based on how much I love a company’s product or service and how much money I give them for these services or products. The result of this equation will be a dollar figure of which I am going to invest in the stock of the company. For the record, I am hardly talking big money here. I am using "racehorse money”. This is not my core retirement money. Instead it is a portion carved out to take a little extra risk with. Here is what I will be looking at when considering purchasing stock

Products and services I am passionate about.³
Products and services I use regularly without many better alternatives.
Products and services my wife loves and buys

Peter Lynch, the long time fund manager at Fidelity, is considered one of the greatest investors. In his book, One Up On Wall Street, he says some of his best stock picks didn’t come out of hours of research and number crunching but rather from asking his wife what her and her friends talked about, saw and bought at stores. The approach I am taking with “Buy What You Buy” is similar. By the next post I plan to have the “equation” I am going to use in deciding what and how much to buy.

Matthew B. Brock, CFP® Senior Partner, Owner

Disclosure: None of the stocks or companies mentioned in my writing are recommendations to buy those particular investments. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities

Image: Stuart Miles

APPL was at about $8 per share in October 2001 and as of this writing the stock is around $550 per share ^
In reality we won’t know the true outcome for years maybe ^
Things I love telling others about ^

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Workhorse vs Racehorse

With the Facebook IPO looming we begin to get questions like “should we buy this” or statements like “I want some of that.” Well, first of all IPOs are not open to the public. The are usually for the underwriting bank to sell to its clients¹. More importantly, however, this brings up the discussion of holding individual stocks in a portfolio vs mutual funds or exchange traded funds (ETFs).

We don’t discourage clients from holding stocks. In fact, you can make a good amount of money investing in individual stocks. But, you can also lose a lot. The risk can be much greater. More importantly, however, is the increased volatility. The average person can not handle the wild swings individual stocks can have. For example, in the last 52 weeks Apple has fluctuated between around $300 to around $645 per share. You have to really understand the emotions involved with investing in stocks in order to do it effectively. Most people choose not to deal with such wild swings but they still want some individual stocks.

It may be stock in a company their mother or father worked at for years. It may be some other sentimental attachment to a company. Or it may be their hear exaggerated stories about a friend of a friend who made thousands day trading using some technique. However they come to the decision to do individual stocks we always recommend they take an approach we call Workhorse vs Racehorse. I honestly don’t know where we heard it called this for the first time but we didn’t name it. We do, however, like the philosophy.

Workhorse money is the portion of your long term assets used to get you to your ultimate goal. It may be retirement or some other goal but its whatever amount will get you there assuming a modest 8–9% growth over the long run². Part of going through financial planning will help determine this amount. Typically your workhorse money is invested in mutual funds, exchange traded funds (ETFs) or direct placement products (DPPs)³.

Racehorse money is a carved out piece of assets you can afford to lose. Will it sting if you lose it all? Yes. Would it put you out on the streets at age 65 if you lost it? Not even close. For some, it may only be a few thousand dollars to start. For others it may be more. It is still not a good idea to take your money and put it into penny stocks or other extremely risky investments. You want to pick stocks based on strategy you understand.

Another reason we like the Workhorse vs Racehorse strategy is because often clients will have completely different views on risk than their spouses. The more conservative spouse feels much more comfortable taking on risk (racehorse) if they know their is a plan for a large portion of their assets (workhorse).

Matthew B. Brock, CFP®

Senior Partner, Owner

typically their wealthiest clients ^
“long run” is typically at least 10 years ^
can be things like REITs, Limited Partnerships, etc. ^

Image: Tina Phillips / FreeDigitalPhotos.net

Divergent Planning Blog

Buy What You Buy - Series Kickoff

Products and services I am passionate about.3

Products and services I use regularly without many better alternatives.

Products and services my wife loves and buys

Market Update Conference Call

Workhorse vs Racehorse

Products and services I am passionate about.³