The Grumpstump

I couldn’t resist and picked up some GE shares yesterday, I just couldn’t resist. Here’e what made me pull the trigger:

• Ok, GE missed their earnings estimate last quarter due to a down quarter for financials. So did everyone else. GE still is one of 5(?) companies with the AAA credit rating. They aren’t going anywhere.
• They have  150 Billion dollars in gross revenue a year. To increase that by 10% they need to grow the company by roughly the same size as Iceland’s whole economy. And yet, GE still comes pretty close to doing it every year.
• They make 22 Billion in cash every year.
• They are yielding 4%!
• They are at the lowest the stock has been since 2004. When GE is at its lowest in a half a decade, it seems like a buy to me.

So, boring, foolhardy, or a good idea?

????????

This probably makes me a terrible person…. wait I’m not driving wasted and asleep into a group of bicyclists… okay I feel better now.

Disclaimer: Yes, I just make this stuff up based on my own experiences, what I have read, and conclusions I have drawn. If you think I’m wrong, please please please leave a comment and tell me how very wrong I am. If you think I’m right, don’t go build your investment portfolio around this or any other idea I have because of it. That would be dumb.

Ok a quick primer for those of you that don’t listen to Bloomberg as obsessively as I do (that’s a good thing):

Specific Stock Risk is risk that a stock will have a change in share price due to specific events that affect the company over any given period of time. When Pfizer invents a new drug it is specific stock risk that is affected (probably positively) but when the FDA changes how it approves drugs it is a risk that affects the entire market.

Market Timing Risk is based on the volitility in a stock’s price at any given moment in time due to market forces. It is generally considered that this type of risk is very difficult to isolate because then you could predict a stock’s price over any given time period.

So what has happened to the investment world since Market Timing Risk is ‘hard’ to define? Everyone attempts to reduce their overall risk profiles by lowering their  Specific Stock Risk.

From what I understand, this is the basis of a lot of portfolio theory (I could be way off here). Invest in lots of stocks (a ‘la mutual fund or ETF) and virtually eliminate the risk of any one stock tanking your portfolio.

Of course, you also eliminate any stock hitting a home run for you…

Why not go the other way around? Why not buy stocks that you know kick the willies out of their competitors over a long time period (There are too many examples of this to count, but JP Morgan is doing a pretty good job of kicking the willies out of other banks right now as an example..) and then just never plan on selling?

Sure, if you own 10-20 single stocks and you do a bad job picking, one or two might go out of business in your lifetime.

Holding them forever make you nervous? Fine. Set one day every 5 years when you allow yourself to sell holdings.

The rest of the time build positions in single stocks that have shown that they can kick the willies out of their peers over extended time periods.

Eventually, you have a group of dividend paying stocks (for the most part if companies destroy their competition they return some capital to their investors over time - Berkshire and Google being notable exceptions) that you don’t owe any fees on every year.

With mutual fund fees, you are basically paying for a little bit of the devil you know (fees) to avoid (theoretically) the devil you don’t (Specific stock risk).

I’m not saying that mutual funds are bad, I’m just not convinced they are the best way to go about it either..