Overall Strategy

An overall strategy for long term investing, based on the analysis of basic investing principles, is presented here.

Usually, your first investment should be a home.

When homes are rationally priced, your active management in maintaining a home and the tax advantages of owning a home make this active investment more attractive than any passive investment. After buying a home, you can begin to invest in the stock market to diversify away from real estate.

Buy individual stocks, not fund shares.

Buying individual stocks increases ability to declare tax losses, provides opportunities to select stocks that will outperform the market in the short term, and gives abstract thinkers a chance to pick stocks that will outperform the market in the long term.

You might be an abstract thinker if you have an unusual lifestlyle or people say that you are weird. Abstract thinkers should not attempt to pick stocks using traditional fundamental analysis, because the market efficiently discounts all numerical data. Instead, they should think about the future and try to relate it to the present.

Maintain a watch list of stocks to be acquired.

If you are putting the emphasis on diversification, maintain a list of stocks that are in different industries, serve markets in different countries, and vary widely in capitalization size.

If you are attempting to outperform the market, maintain a list of stocks that maintain some diversification while concentrating on the industries, countries, and capitalization sizes that you feel are the most promising.

Cost average when possible.

To avoid investing heavily before a substantial decline, invest periodically instead of all at once. Usually, this means investing over the years from a steady income.

The time frame compresses when you have windfall income. To avoid tying up the income in cash equivalents, exhaust the income in a few months by increasing the tranche size or the frequency of purchase.

Go with the trend of a stock

When you have enough money for a stock purchase, buy the stock in your watch list with the strongest uptrend. Do not buy into a downtrend in an attempt to find a bargain, because the downtrend is likely to continue. When you sell, do not sell a stock in an uptrend unless your portfolio does not have a stock with a downtrend and you need the money for an emergency.

For most stocks, a trend of 10 percent is actionable. Some stocks, such as Phelps Dodge and Inco Ltd, are so noisy that action should not be taken until the trend reaches 20 percent. Because I use price logarithms to provide uptrend and downtrend symmetry, my actionable percentages are slightly different.

Sell when necessary or prudent.

You can sell stock because you need the money for an emergency. You can sell stock at a loss to offset income or capital gains on your current tax return or future tax returns. And if you are trying to outperform the market, you can sell if you have lost confidence in a stock.

One of the advantages of owning stocks is that they are more liquid than real estate. You can sell stocks and have the money in hand in a few days. This is not generally possible with real estate, although in some circumstances it is possible to obtain money quickly with a home equity loan.

If you own many stocks, probably some of them will have paper losses. You can convert these paper losses to realized losses and then declare them on your income tax return. Capital losses from the sale of stocks can be used to reduce your net income by up to $3,000 per year, or $1,500 per year if married filing separately. Losses exceeding these amounts can be carried forward to offset future income.

A good formula for selecting a stock to sell for a tax loss is that it should be in a downtrend, should have a significant dollar loss, and should have a significant percentage loss. For example a minimum downtrend of 10 percent and minimum losses of $1,000 and 10 percent would assure that you are not fighting the trend, the dollar loss is large enough to provide an attractive income offset, and the percentage loss is large enough to filter out minor movements in a large holding.

You can buy a different stock immediately if you don't need the money. If you want to buy the same stock, you must wait at least three months or it will be deemed a wash sale by the Internal Revenue Service. A wash sale does not qualify as a loss producing transaction, so does not reduce income taxes.

Balance your real estate holdings and stock market portfolio.

Diversification should encompass all of your investments, not just your stock market portfolio. If you own your home, you should not acquire any more real estate until you have stock market holdings that exceed the value of your home.

Actively manage your real estate investments.

You can increase the profitability of your real estate investments by actively managing them. You could buy fixer-uppers, improve them to neighborhood standards, and resell them.

Or you could do what I have done, which is buy houses on acreage, gain approvals for subdivisions, and then resell to a developer. Gaining the necessary approvals from all the municipalities involved is a slow, painful process, but very profitable.

Leonard Azar, 309 Oxford Street, Brookings, OR 97415 -- (541) 469-2429 -- e-mail