This is really the second in the series of Investing 101 that I previously started.

It is my intention to start an investing account with just $2000. The reason for this is that it is an amount of money that one could save in a year with less than $200/month. I will add $200/month to the account to mirror what a small investor might be able to do. $2000 is also an amount that you may have on hand, saved from not buying a Starbucks latte every day for a couple of years. O.k., lets not get that extreme. Like all the investments detailed on this website, all trades will be real money, so all gains or losses will be actual and reported on this blog. I will call this the Chroma Investing Small Investor Portfolio.

An account of this size will allow you to hold 3 or 4 equity positions and thus to have a focused value oriented portfolio. Starting with a small amount will also force a certain amount of discipline in buying. Knowing in advance that you will initially only be able to hold 3-4 positions will focus our attention on the quality of the investments to make sure that we are making only the best investment decisions.

The investing philosophy will be straight forward: value investing with an emphasis on NCAV and other deeply discounted asset plays, special situation investments, or other empirically supported value investing approaches, all with an emphasis on maintaining a margin of safety and keeping an eye on understanding the investment risks inherent to each company. I will concentrate on small and micro cap companies, where the smallness of our portfolio is actually an advantage over big money investors. I will look for the best value, and not shy away from Penny Stocks, if that is where the value leads. My intention is to avoid leverage, and any investment involving margins, including options and futures. It is possible in the future that I will develop a value approach that looks at investing against the market or an individual company if I can satisfy myself that such a strategy can be made in a beneficial risk/reward scenario. As with every other investment on this blog, the research will be self directed and no investment will be made with out checking the financials and analysis myself. You should do no less with your investments.

I do not intend to invest in mutual funds, ETF’s or bonds. Nor will their be any speculation on commodities, currency or other other bets outside of my ken.

Tomorrow I will begin the search for the best online broker for this account.

8 Responses to “The Chroma Investing Small Investor Portfolio”

1. haralambi
   March 13th, 2010 @ 9:00 pm

   Can you please go to full RSS feeds? Having truncated feeds defeats the purpose of having a product like Reader. You can still place ads in the feeds as well just like on a site. You can read more about the overwhelming preference for full feeds at Felix Salmon and Barry Ritholtz’s blogs. Thanks.

2. chroma
   March 13th, 2010 @ 11:10 pm

   Thanks for voicing an opinion on something about which I know nothing. I was unaware that I have truncated RSS feeds. While I was able to see that their was quite a conversation about full RSS vs. truncated at one of the blogs you suggested, I do not know how to change this in WordPress. Please point me in the right direction!

3. Steve Anders
   March 14th, 2010 @ 10:32 am

   Brokers. This is something I am really interested in. I have been trading stocks since 1995 and all that time I have been at TD Waterhouse, now TD Ameritrade. They have been one of the leaders and I would say until recently I was satisfied with the cost at 9.99 (very satisfied with service).

   But then a funny thing has happened. Obviously, the cost of trading platforms is getting cheaper and cheaper due to technology.

   I see that you use Traderking with 4.95 per trade. About the same time I saw where Fidelity and Schwab lowered their rates to 7.99 and 8.99. Schwab took a hit on earnings due to the change. Scottrade’s spots certainly have been hilarious and with their $7 rate again another data point. Quick research reveals Trade King, Zecco, Sogo, Marsco and I am sure more with free trades and rates as low as $3.

   Starting in 2008 I have tried to make a living as a trader. So I am a little more active and have some capital from my 401ks and some gains over the years. I put away living expenses from my controller days and walked into the biggest roller coaster you could ever get into. Its been the worst of times and the best. That is another story.

   I generally scale into positions, frequently shave, use stops in many cases where stock is not a net-net or deep asset play, when I sense market trend reversal and when I scale out of positions. But only until recently seeing that Ameritrade was now the highest price discounter I did the analysis. Oh, by the way they dont make it easy. There isnt a simple report that says you made x trades at this price over this period of time. I had to go down my list of confirmations and add it up.

   I quite easily make 50 trades in an average week(fortunately in an IRA account). Lets do some quick math. 50 trades x 52 weeks at 10.00 (to keep it simple)=$26,000. I almost fell off my chair when I saw that number.

   So finally I called Ameritrade and asked if they were going to match Schwab or Fidelity. Finally, after a couple of weeks they gave me the same rate as Ameritrade or $7 a trade and threw in 10 free trades (I asked for a 100 since I felt I had been overcharged to date in 2010). Its actually a better rate then Scotstrade because its for any trade even if the stock is under a $1 which is higher through Ameritrade. So for a phone call I just saved at my current rate $7,800 and if I switch to Traderking we are talking $13,000. Holy crap, Batman!

   So I guess the first thing I would say is if you are a new investor never overlook commissions especially since you have so many options. If you always start with that perspective, you wont forget it like I did. I was so worried about the big picture I just happened to forget about my biggest operating cost.

   However, let me throw out a few questions as I take a pause and try to figure out my next step. I see Schwab now offering 150 free trades. I know Traderking is out there.

   Are these small discounters safe? I mean we just went through the Federal government bailing out banks but what happens if a Traderking goes out of business? What happens to your securities? Your cash especially if its over FDIC limits? Saving money on commissions isnt going to help me if I lose my capital or stocks. What happened to Lehman Brothers accounts? I havent been able to find an answer to this and I would say until I am sure I understand all the ramifications bigger is safer.

   I have fifteen years of history stored at Ameritrade? Its all online. I switch and now I lose that convenience? Do I lose access to all that info eventually if I move?

   Obviously, you have to be satisfied with these low cost sites. Do they have good trading platforms, gain/loss reporting for taxes, good customer service, what research do they have available, is the site secure?

   Should I just call Ameritrade and see if they will give me the $5 rate? Of course I will but I get the feeling I am going to have to have paperwork from another site in my hand to force the issue. Should I ask for free trades, well of course I will. Again, if I am really wanting to force this I am going to have to be prepared to move. I am also going to have to get a manager as the “higher authority” negotiating ploy was used on me. The good thing is Ameritrade has local offices which is the person I called for the rate discussions. He also invited me over to get some hands on with their new Think or Swim platform which looks good but I dont want to pay for it unless I can really be shown its value. Right now I couldn’t even navigate the site when I pulled it up.

   So please keep commission costs in mind. I would appreciate any input you have on Trader King or my other comments. I love your site. How does one get something like that started?

4. chroma
   March 14th, 2010 @ 11:44 am

   Thanks for your in depth comment. I have been working on a post about online brokers for a week. You rightly point out some of the complexities. It is not all about price, although that has to be part of the equation. I think you have an advantage over the small investor portfolio I am setting up, namely trading volume. I have found that if you are trading in sufficient volume the brokers will work with you on price. Low volume, they are not so flexible. My analysis, which I hope to publish today, will probably not be suitable for someone like you who has a larger amount of capital to invest and greater trading volume.

   That said you raise some important questions about the viability of the brokers. I have been happy with TradeKing, except for two items. They charge a fee for Penny stocks, which ultimately makes them uncompetitive for me in that arena, and forces me to use a different broker for trading penny stocks. And they do not have very good reporting for tax purposes. I had to walk my accountant through the trades to get her to the end result. I hate Thinkorswim and can’t understand how its trading platform has gotten such good reviews. Part of the reason I have been researching brokers again, is that situation with them has changed since I set up my TradeKing account a few years ago. Time to reevaluate. I will certainly close my small rollover IRA account at Thinkorswim and move it to another broker.

   For this site the way is more open. Thanks again for coming by.

5. Jae Jun
   March 14th, 2010 @ 4:21 pm

   I’ve got a similar thing going on. I started with $1000 and have only deposited $600 since last year. I don’t plan to deposit frequently as I need to use the funds for other projects but my ultimate goal would be to go from $1000 to $1,000,000 lol

   But it can be achieved with two 10 baggers

6. chroma
   March 14th, 2010 @ 5:03 pm

   I am interested in, hopefully demonstrating the power of compounding, and that contributions over time do matter. I am guessing I will do it with projection, rather than wait twenty years. LOL! But, as you know, concrete examples are very helpful to internalize a concept.

   I toyed with a smaller amount for this portfolio, but it seemed too hard to have any kind of diversity in holdings, unless you have quite small positions and then the commissions would eat away at every thing. Jae how did you get around this problem?

7. Jae Jun
   March 16th, 2010 @ 12:31 am

   I only have $2000 but I consider the amount to be part of my total portfolio so even though I only have 1 holding in my tradeking account, I just think of it as an extension to my other account. This way I am perfectly fine with going all in.

   Very unsuitable for new investors though.

8. chroma
   March 16th, 2010 @ 6:39 am

   Yes that makes sense. As much as I like a focused portfolio I agree putting all your eggs in one basket would not be wise for a new investor.

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