Lazy Man and Money

Dollar Cost Averaging is Still a Big Win

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I’m getting worse and worse at writing titles. My upcoming title ideas include, “Paint still dries” and “The Sun Also Rises.” I hope no one takes that last one, because I think it could be big someday.

When something is expected it doesn’t catch the eye. So while this may seem like a boring article on the surface, I’m going to go into detail about two times I went to (relative) extremes with dollar cost averaging. Did it work out? The title may give you a hint, but you’ll have to read on to find out.

This is a difficult for me to write. I have two conflicting thoughts when it comes to investing.

The first is that I want you to focus on what I think you should do, which is very, very different than the second… what I actually did.

So what you should do is read and follow this investing article: Investing is Boring. We’ve already established that the boring title of this article didn’t scare you away, so you shouldn’t have a problem with that article, which is quite entertaining. Go Curry Cracker has a one step plan for investing. You don’t need to do much or learn much and it’s the kind of thing I often wrote about when I created this website long ago:

You should be Lazy with your money.

Alas… sometimes I don’t do what I should do.

I live a boring enough life and sometimes I spice it up with nerdy, money, investing stuff. That means that I don’t do the boring investing stuff… at least not all the time.

I have a section of my portfolio that I trade in *gasp* individual stocks. This is all retirement money that we have no plans to touch for years. It’s just a section and the rest is in boring index funds. My wife is in all index funds.

With most of the individual stocks, I also do boring things like buying and holding big companies. For example, I have held onto Google, WalMart, and IBM for years now. I’ve recently gotten into GE and P&G.

However, today I’d like to tell you about a couple of stocks that aren’t like the others. They haven’t been boring at all.

In each of them, I lost half my money on the initial investment. In each of them, I “doubled down” and bought a lot more and more as they hit lower and lower prices.

And while dollar cost averaging may be about buying more on a consistent basis, it amounted to about the same thing.

Stock 1: United States Oil (Ticker: USO)

I bought this before I knew of oil futures, backwardation, or contango. (It turns out that contango isn’t when you ask someone to do a ballroom dance in Spanish. Who knew?) I didn’t even know that the US was making a lot of oil through shale.

I wasn’t very informed and didn’t make a smart decision. However, over time, I learned about these things and while it gets complex, I became convinced of two things:

  • Oil isn’t going away (just yet.) We aren’t quite there with self driving electric cars, solar, and other things. Maybe in 10-20 years, I’ll think differently
  • Oil got extremely cheap. There was just so much supply from the shale and the world wasn’t using it enough. I think there was concern that it would cost more to store than it was worth. It crashed below $27 a barrel two years ago.

I first started buying USO stock at $21. I subsequently bought it 11 more times as the price moved down and down. Eight of those times I bought under $15, and three times I bought significant amounts under $10. When all was said and done, my average price was $12.69 a share.

That looked terrible when oil was trading at $8.82. However, on Friday it traded a little above $15. I could sell the whole batch, and end up with a nice little gain. Perhaps I should have. Maybe I’m getting greedy.

Instead I have sold off bits and pieces while I was in the black. I sold some on Friday at that $15 price. If it continues to go up, I’ll just keep selling shares and taking profits. If it goes down, I may want to wait a little longer.

Stock 2: Twitter (Ticker: TWTR)

I’ve always been a big believer in Twitter as a company. (Read what I wrote about the IPO in 2013.) It’s got so many celebrities using it for free! It’s got television hashtags so people can talk along. It’s completely changed the way I watch football and as my wife can tell you, that’s nearly impossible.

And that was just the Twitter stuff that was happening back when I started buying it a couple of years ago. There’s politics and equality movements going on. I’ve even learned that there are personal finance bloggers who are willing to share their stories and opinions about MLM scams. I feel like I found my community. (That may seem weird because Twitter is also known for making it easy for others to bully and just spout out lies to change perception.)

I bought Twitter stock for the first time at $47 a share. I then bought some more in the $30s range. I then bought a little more in the $20s range. Overall, I bought 11 times. Fortunately, 4 of those 11 where around $16-17. My dollars went a lot further buying down there than did at $47 a share.

By the time I was done, my average price was around $23 a share. Like oil above, it looks terrible when the stock is still trading at $17 a share.

On Friday, Twitter stock was trading above $43. It has recently been as high as $48.

It’s not an understatement to call it the turnaround stock of the year… and some of that goes back to last year. Like with oil, I’m starting to sell a little of it at various milestones. However, I still believe that Twitter could be one of the next tech giants, which could give it legs to double or triple even from its already relative high level. I don’t see oil tripling to top $200 a barrel soon.

Conclusions

These two stocks had something in common… I didn’t see them going away. They were too big to fail. (You could say that Twitter could have failed, but they had the cash to run for 412 years.) And while there is a saying that the market can be irrational longer than anyone can stay solvent, I was okay with waiting a decade or two on them.

They had something else in common, I ended up owning much more of them than I had wanted to. However, I didn’t feel that the business of them fundamentally changed (well maybe I did with oil due to the shale stuff). Still, both holdings were getting to be such large parts of this “play” section of my portfolio that it dwarfed anything else.

As I sell off shares of them now, I’m able to lock in some gains. For now most of the money is staying in cash or bonds because I’m a fearful of how expensive the market has gotten in terms of it’s Shiller P/E.

One could make a case that Twitter and USO were “cherry picked.” I’m still waiting for IBM’s day to shine. It’s at its low and I’m thinking about buying more, but it’s still only down around 10% for me and it’s paid very good dividends over that time. It feels like a different story as it didn’t drop in half and I haven’t bought in nearly a dozen times.

Also, there’s the case that sometimes a company doesn’t go back up. More than a decade ago my shares of Palm, Lucent, and Worldcom didn’t recover. (Actually I’m not sure what happened with Lucent.) It’s looking like my GE investment is going to be where it is for quite some time as they restructure their businesses. That’s the risk I suppose

Finally, one could look at this whole thing and realize that while my money was tied up in oil and Twitter, the mix of my boring US and International stocks had been going up all along. I haven’t looked back to see what the 3-year returns on Twitter and oil, but I’m guessing through the highs and the lows a boring portfolio of index funds did about as well as they did combined.

What Do I Do About My Oil Investment?

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Sorry for the short hiatus. I went on a vacation where I thought I’d have some time to write. It was one of those vacations that was supposed to be relaxing. Unfortunately, every little thing went wrong and just seemed to cause more stress. Even if I had the time, the hotel’s wifi didn’t reach my room.

I’m chalking the experience up to learning an important travel lesson, but that’s an article for tomorrow.

Today, I want to write about oil. (I write about oil every every couple of years).

Just me and my oil investment
Just me and my oil investment

When I got back, I decided to check in on my stocks. I noticed that my oil ETF (NYSE: USO) was hitting a new 52-week low of $9.24. I have been buying USO for awhile. In fact, I have dollar cost averaged it down from an initial purchase a little under 20 in December 2014 (if memory serves).

TD Ameritrade now lists my cost-basis (i.e. my break-even price) at $13.82. I need USO to rise 33% just to break-even. That’s bad… very bad.

I made a fundamental mistake of investing. I didn’t know what I didn’t know.

I knew that oil markets trade very differently than stocks. It’s a supply and demand commodity. I had figured that demand for oil would keep rising in the short term. What I didn’t know is that the U.S. was producing so much shale oil that there’s more oil than people need. There almost seems to be no limit to how much supply we can produce. OPEC can’t control prices if the US can supply so much of its own oil.

As I was going through my mail, I found a related article in my inbox: This is How Big Oil Will Die. (It’s a few weeks old now, so it wasn’t a trigger for this collapse.)

The article is a great read. It essentially makes the same case I did last year with my Uber gPod article. Autonomous, on-demand, electric cars are coming and they’ll be so efficient that oil may not power cars as soon as 2025. (I was predicting 2030 in my article.) I took it a step further and suggested that the electric cars would charge from solar panels. While oil will still be necessary for other things, the economics seem to dictate that the demand for oil is going to drop significantly. That’s not going to do my investment in oil any favors.

The only question seems to be when this “oilmageddon” will happen. Of course, those estimates are nearly 10 to 15 years away. Many people consider those estimates extremely aggressive.

I’m considering dollar cost averaging some more at these low $9.20-ish prices. I’m fighting some psychological investing issues:

  1. They say never fall in love with a stock. Since oil is a commodity, I don’t whether this applies.
  2. The other thing I’m wondering is “Where else does a value investor put his/her money nowadays?” As I recently wrote, stocks are really expensive now. This is perhaps the only thing that seems “cheap.”

What do you think? Anyone know where oil is going? Let me know in the comments.

Is it Finally Time to Invest in Oil?

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Back in December I asked , “Time to Start Buying Oil?” I followed that up by investing in oil, specifically this oil ETF: USO at around $19. I proceed to watch the price of oil plummet to $7.67. Yikes!

I’ve been dollar cost averaging they whole way down. I have bought shares 10 times in total, with the most recent being in January when it was trading at $8.79. As I write this today, the oil ETF is up to $10.20. I just need it to get to around $13.75 before I break even. It’s sad to think that I need it to write another 30%, but it was once at $120 and spent years around $40. At $10, it still looks like a relative bargain.

This CNN Money article makes the argument that oil prices might have reached a bottom and things are may be going up from here. That’s not a particularly hot take as oil would have to drop 33% to get its lows.

There are a number of other ways to capitalize on the oil’s price recovery. They might be safer than betting on the oil ETF directly. For example, you could purchase Chevron (ticker:CVX) or ExxonMobil (ticker:XOM). Another option would be this Oil like financial placement.

I wish I could tell you were oil prices are heading. Even if I could, I think it is clear, based on my record, that you shouldn’t listen to me. I’m the same person who invested in such wonderfully performing stocks as Twitter and IBM last year. Unlike those stocks, I’m invested in oil for the long haul. I have no problem holding it for 20 years.

My only fear is that solar or another alternative energy will make oil less important. Maybe at some point the demand for oil drops off completely and it doesn’t rebound. This is not a very big fear for me though. It seems to me that oil is a huge part of the global economy and many countries rely on it. I can’t imagine what might happen to them if oil prices stayed down for the long term.

Where do you think the price of oil is heading?

Use Your Gas Savings to Save and Invest

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Yesterday, I was running an errand and I noticed something different about the local gas station. The prices they were advertising no longer started with a crooked number. Gas was $1.999 (I’m going to acknowledge that weird 9/10 of cent they sneak in there.)

In much of the country this is old news. And in other parts of the country the price still starts with a crooked number.

The point is that it was a catalyst for me to think about how low gas prices have gotten. If you work in the energy industry, this is a bad thing. I’m sorry for you. I feel a little of your pain as I’ve been buying oil stocks (ticker: USO) when it was more than twice the price it is today.

For everyone else, low gas prices probably mean you have some extra money left over each week. You could use this money to support the local economy (a nice meal out perhaps), but I’m going to suggest something different and very predictable:

Save and Invest it.

If you have a brokerage account already set up, you can probably automate $50, $75, $100 a month into it. Personally, I like to use My Dobot account as I can text “save $50” and be done with it. With the way Dobot works, it’s already saving money. To read more how Dobot works read my review.

It might not make sense to buy a stock with $50 as commissions can eat up a large chunk of that. You can set up an automatic deposit with a lot of mutual fund companies to avoid this.

You might be thinking that $50 or $100 a month isn’t going to add up to much. (Quick math: that’s $600 or $1200 a year.) Depending on your current financial state it may not mean much. It’s all relative right? Bill Gates is certainly not going to care too much.

However, it may mean more than you think.

The stock market has been moving down since the start of the year. This means that you can buy some stocks on sale. (Full disclosure, I’m pimping out the IBM stock that I own. It’s trading at 2008 prices with a P/E under 9… and it pays a great dividend).

It’s a perfect match. You have extra cash from the low gas prices and the stock market is low so your money buys more shares.

If you want to double dip, you can do some of what I’m doing and buy oil stocks with your savings. I’m not sure you should be investing in USO like I am (I’m starting to think I shouldn’t be investing in it), but some of the big gas companies like Exxon and Chevron could be safe bets. The beauty of this idea is that if gas prices recover and you can no longer put that extra money into those companies, you’ll be happy to see their stocks have very likely increased as well. It’s easier to pay more at the pump if you know that you are getting it back in your brokerage account, right?

What are you doing with your extra gas money? Let me know in the comments.

Kiplinger’s Gets Investing in Oil/Commodities Wrong?

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I love getting Money Magazine and Kiplinger’s Magazine each month. I get so much other information from the internet that it is refreshing to see what the experts think is important enough to include in the limited “dead-tree” media format.

It’s also nice not to stare at a computer screen for a little bit.

I was reading this month’s (well May 2015, because magazines live in the future) Kiplinger’s and came across this James Glassman article about investing in cheaper oil. This immediately caught my attention, because I’ve been investing in oil for months now.

I think it is a great idea, so I eagerly read the article hoping for better investing tips or validation. I came away with neither.

By now we know that oil prices have dropped… everyone can see it at the gas station. There’s a surplus of oil and it looks like it is going to be that way for some time. It seems it got so valuable that many countries (most notably the United States) invested in infrastructure to extract as efficiently as possible and demand has not risen to match as expected.

As the Kiplinger’s article correctly points out, we don’t know how long oil will stay at these prices. They seem low to us, because they’ve been high for a long time, but it was cheap through the 80s and 90s. It’s anyone’s guess.

Then the article seemed to stop making sense. I’ll give you some quotes:

“I have written many times that individual investors should avoid direct purchases of commodities; they are just too volatile and unpredictable. But what about stocks of companies in the oil and gas business? When you buy their shares, aren’t you also betting on a commodity’s price? Certainly. But the exposure of those firms to oil and gas prices varies.”

“Your best option now is big integrated energy companies like Chevron and Exxon, which have both market clout and solid balance sheets.”

“Oil prices will go back up; they always do.”

Do you see what I see?

I’m reading this article and thinking, “So I want to invest in cheap oil… and the idea is not to invest in cheap oil. Instead, I should invest in a single company that could have some hidden bookkeeping issues (Enron), a corporate affair (HP’s firing of Mark Hurd), or simple mismanagement?”

That doesn’t seem right. Typically if you want to own an asset that is volatile and unpredictable, you buy a small amount of that asset so that it doesn’t overrun your entire portfolio. For example, I’m not going to put 50% of my money in oil, but instead look into whether 5% makes sense. I can deal with a small amount of volatility and unpredictability when I have a vast majority of the money in a well-balanced mix of domestic and international companies.

Plus if “oil prices will go back up; they always do”, I may not care about volatility. I keep most of my investing in tax-advantaged retirement accounts, so I can wait it out 30 years. If I’m buying something cheap and volatile now, I’m fairly convinced it will, at some point due to the volatility, be “not as cheap” within that time frame.

I think the lesson is to not over-think investing too much. If you want to invest in something and you understand the risks to make it work in your overall portfolio, go for it. I think it is better to invest directly in what you want rather than taking on a bunch of businesses that dilute your objective.

I was reading the whole article through this lens. It lead me to miss this small, but important sentence hidden near the very end.

“The history of oil drilling has seen constant improvements in efficiency, and I would expect the trend to continue, allowing companies to make more profits from oil selling for $50 to $60 a barrel.”

Hey, now that’s a reason to invest in Exxon and Chevron! I should be the very last person to criticize writing style, but I wish this was the main point from the beginning and not that commodities aren’t worth investing in.

I’m still going to stick with my small investment in USO, an United States oil fund. I’m going to hope that Glassman is right about oil prices going up. I’ll combine that with a long time to wait for the volatility to work in my favor.

The future has a month or two of an oil crisis in it, doesn’t it?