Tips from a master investor and taking stock of General Electric.
Ask the Fool
Stop or go?
Q: I’ve set some stop orders on stocks I bought at around 15 to 20 percent below the current price.
This has resulted in some promising stocks getting sold before they have a chance to perform.
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What am I doing wrong?
A: Stop orders are placed with brokers to automatically sell shares if they drop to a certain level.
They’re meant to protect you if a stock suddenly plunges. But they’ll also kick you out of stocks that drop briefly.
If you’re planning to hang on to a stock for years, you might want to just expect some volatility and avoid stop orders.
Or set your stops at 25 or 30 percent.
Learn from a master
Smart investors keep learning, and who better to learn from than the world’s great investors?
Meet Philip Carret, who invested for 70 years and beat the market soundly. (He died in 1998 at the age of 101.)
Carret started Pioneer, the third-oldest U.S. mutual fund, in 1928.
His average annual return, calculated from 1928 to 1974, is estimated to be 14 percent.
That’s impressive, considering that the stock market in general averages roughly a 10 percent annual return.
Here are some of Carret’s investing principles:
• “Never borrow money for speculation in stocks. When you do borrow, do so sparingly, and only when rates are low or falling and business is depressed.”
• “Never hold fewer than 10 stocks covering five different fields of business.”
• “More fortunes are made by sitting on securities for years at a time than by active trading.”
• “Reappraise every holding at least every six months.”
• “Be quick to take losses, reluctant to take profits.”
• “Avoid inside information as you would the plague.”
• “Diligently seek facts; advice, never.”
• “Keep at least half (your investment portfolio) in income-producing securities.” “Never put more than 25 percent of (your investment portfolio) into securities about which detailed information is not readily and regularly available.”
Other lessons can be gleaned from Carret’s life. It wasn’t one spent with eyes glued to the stock ticker.
He made time for things he enjoyed and was generous with and loyal to friends.
When he prepared his housekeeper’s tax return for her, he quietly paid the taxes due, as well.
He was a man of principle, too: When a social club at Harvard agreed to accept him on the condition that he “lose his Jewish roommate,” Carret told the club to take a hike.
Carret’s example shows how high performance and high principles can go hand in hand.
The Motley Fool take
GE for the long run
Looking for a long-term stock for your portfolio? Consider General Electric.
Yes, it was damaged by the recent financial meltdown, lost its coveted AAA debt rating and slashed its dividend during that disastrous period.
But it has done a lot for itself and its shareholders since then.
It reinstated its dividend, and has been upping it, too. Its yield was recently a solid 3.6 percent.
While it’s true that General Electric’s debt is no longer AAA worthy, it does still sport a AA+ debt rating, just one notch below that rarefied level.
It’s also executing a strong, future-oriented business strategy.
Whether nuclear, natural gas, solar or wind (or “all of the above”) will be key to the world’s future energy needs, General Electric’s power-generation systems are poised to lead.
And as energy efficiency remains at least as important as new generation, its Ecomagination initiative provides a strong foundation there, for business lines ranging from light bulbs to locomotives.
Shareholder-friendly dividends. World-class balance sheet strength. A focus on the future that will keep it relevant for a long time to come. Yes, it’s always a leap of faith to buy a stock with the intention of holding it for the long run. But when it comes to General Electric, it’s a leap with a strong tail wind supporting it.