The mechanics of investing in a mutual can be simple. Say you decide on particular mutual fund, you sign onto your online brokerage account and purchase. Oh wait. This is where the not so simple part comes. There a couple of type of Mutual Funds. The first and most important is what is called a No-load Mutual Fund. Load stands for Load of crap or commissions. A No-Load Mutual Fund doesn’t charge commissions. There is no advantage to loaded Mutual Funds (pun intended). The take can be as high 5% or in the case of a level load fund, be an ongoing tax on your returns. There is no advantage to paying the commission in terms of investment returns, since mutual funds with loads don’t outperform no load funds as a group over time.

Mutual funds are like stock investments in that  they are not guaranteed to hold their value by any governmental agency like the FDIC does for bank accounts.

I use the word sheep earlier to describe investors in mutual funds. That is not quite fair. Warren Buffett has famously said that for an investor who does not have the time understand equities investments a good index fund is a good place to invest your money. The problem is that the majority of index funds under-perform the market over time. Even when a mutual fund out performs the general market, most individual investors still do worse than the market as a whole. They tend to buy right after a manager has had a great year or two and sell when the manager has had a bad year or two. In other words they buy at the top and sell at the bottom. In general, you can expect to under-perform the market by the amount of fees and expenses the mutual fund charges. This varies. Zecco, one of the discount online brokers I use, charges $10 for a no-load mutual fund purchased on line. TradeKing charges $9.95, this compares to $4.95 for a stock trade.

And don’t forget the tax ramifications. If you buy an active fund, every time they sell for a gain (assuming the holding period is less than a year) the fund will pass along the capital gains to you. This takes away the control of when you want to have capital gains or losses. This may be fine with you. It isn’t for me. If you are interested in someone else managing your money.

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In many ways you must start with life goals to evaluate your investment goals. What kind of life do you want to lead? Are you an alternative lifestyle enthusiast or buttoned down American Dreamer? There is no right answer. But start with who you are and what you want out of life before turning to your investing goals.

IF you are young, the most important thing you can have as your goal is to set aside some money to invest for the future. You may be interested in capital appreciation.  The principle of compounding can often do more than the work of a good fund manager over the long haul. If you are older, you may be more concerned with capital preservation. You don’t want to lose a third of your nest egg if another down turn comes if retirement is on your horizon.

Depending on your life style, you may need to factor in other investing ideas. If you believe, that over the long term the US dollar will lose value vs a large number of other currencies either through inflation, or defacto currency devaluation, you should also consider what this means if you part of your future goals is international travel. How will that effect your investing. There are a lot of what if’s. If we spend all our time trying to make a killing we will miss achieving our real goals, which may, on reflection be easier to achieve that we originally considered.

This is a post without answers, because only you can decide what you want. Please share either some life goals and how investing will help, or investing goals and why they are important?

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The Value Investing Congress West was more than a month ago. It is a value investing conference worth attending. If you want a great set of notes go to Ben’s Inoculated Investor to get them. I took notes too, but his are better than mine. I am at heart a contrarian, not just in investing but much of life. So the lesson’s I learn are often different than other persons. The most important things I learned were not the actionable investing ideas, which there were several. No, I walked away with simple conceptual ideas, some of which I already knew, some I learned for the first time.

Value Investing Lessons

The first lesson was an idea from the Charlie Munger oevre that Rhaul Saraogi of Atyant Capital spoke about. The idea is to always invert the problem. I took it as always invert. Always. Don’t assume anything. If someone tells you an investment is great, ask why it wouldn’t be. There was a speaker that was  young and energetic, obviously bright, and his investment thesis was about a real estate company in Canada. Many people were very impressed. Initially, so was I. His “story” was great. Until I asked one simple question of his proposal (which was not answered at the conference) When the real estate market tanks in Canada, what then? There have been soaring real estate prices in parts of Canada (I am most familiar with Vancouver), which looks suspiciously like a bubble to me. What if there is a correction. Then the company could implode. “Invert, invert.” The story was compelling, the analysis seemed not to allow for the obvious downside risk. This is not a criticism of the Value Investing Congress, which I found to be extremely valuable, but of our process. We want to believe. We don’t want to invert.

Through June 29th you can save $2100 off the fall Value Investing Congress in New York, which is in October 17& 18th. It promises to be truly kick ass. Joel Greenblatt, Bill Ackman and Jim Chanos are just a few of the high profile speakers they will be have. It is sort of like a rock concert for investors. If you are interested in getting the Chroma Investing discount click here.

If you would like more information about this Value Investing Conference or any other, please go to my Conference page which has the most up to date information on Value Investing Conferences.

Disclaimer: I am a media sponsor of the Value Investing Congress.

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Peter Schiff, one of the co-authors, is at least, by the evidence of this book and his podcasts, an attention seeking, ego maniac. The first surprising thing for me was,  there is actually some thoughtful information contained in the book. The second surprise is that I am writing this review at all. I mean, it is hard to get through listening to how great and prescient Mr. Schiff was about the recent financial crisis. I mean, I really, really wanted to hate everything about this book, because the author is constantly praising himself, hyping his brokerage company or services.  He is also not above political theater, spreading libertarian politics and unsupported ideas.

But when I read a book about the potential coming crisis he discusses, it peaked my interest in what I call worse case scenario investing. When looking at worse case scenario’s in an investing context,  I look for ideas that are persuasive. I am not really interested if everything they write is true, just that part of that writing forces me to reconsider my biases that may hinder me from making informed investment decisions. I am hoping that the difference in their views will help reveal my blind spots. So, while I am unconvinced on Mr Schiff’s ideas on gold, his other points should be considered.

Mr. Schiff asserts that the recent financial crisis is not the “big” one, but a prelude to a much bigger crisis to come. After breaking this imminent crisis down into possible scenarios, of inflation, stagflation or hyper inflation, which are all, I think realistic scenarios, he turns to solutions. His investment advice breaks down to three items. Buy foreign dividend paying stocks in foreign currencies, hold sufficient cash, and buy gold.

His ideas on Gold are polemic and narrow. His analysis of gold’s “intrinsic” value is is at best unsubstantiated. From a traditional Graham value perspective Gold has no intrinsic value. Klarman has also spoken about this. This has not stopped some value oriented hedge fund managers like David Einhorn from loading up on gold. Schiff’s initial assumption is that gold is “real money” and has “intrinsic value”. This is a value investing blog, so I will not spend too much time on debating gold’s merits. While in times of crisis Gold may, be able to preserve wealth in comparison to various currencies, it’s long term historic return has not been great. To use an Austrian falsification argument against the intrinsic value assetion one need only go to the Spanish conquest of the new world when the influx in gold was ultimately responsible for rampent inflation and a sovereign debt crisis in Spain. So much for intrinsic value.

I found his arguments on the potential economic crisis in the US and for the dollar, rather compelling. It is perhaps his Austrian school arguments that persuade me. To Schiff we have not yet seen the real crisis. Just a preamble. In Schiff’s theory the United States has an unsustainable economic future because we don’t “produce” anything any more. That most of our manufacturing jobs have fled to low cost centers around the world. While I am not quite convinced that manufacturing is the only “true” source of wealth creation. Our current national course of unsustainable debts, Quantitative Easing, anemic economic growth prospects and high unemployment make the prospects of the United States and thus the dollar dim in the long term.

The notion of buying foreign stocks, denominated in foreign currencies, is his most interesting idea. I frankly, had not considered it before reading Crash Proof 2.0.  It would in essence allow an investor not to be trapped in a low growth environment of the United States. It is somewhat difficult to implement for several reasons. First, identifying currencies to have your investments in, may be as difficult a task as picking the market peaks and valleys. Because ultimately all currency trades are pair trades and in this case that another currency will appreciate against the dollar. What currencies would that be? Not the yen or Euro. And then screening and finding companies in the chosen currency, is well beyond the scope of small or beginning investors. Most online brokerage companies don’t allow much international investing, and finding screeners and other international investing information sites is really tough. But, every time I have a spare moment, I keep looking down this road. It is an intriguing path and should be considered. If I find more. I will send up the signal flares.

I usually have high cash holdings, because unless everything is a screaming deal, it is better to have some cash on hand to take advantage of an opportunistic investment, so I don’t need to be convinced of this.

In the end check out a copy of the Crash Proof 2.0 from the library. It is worth perusing, but may not be worth an investment.

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We all have some advantages over other investors. Are you a good at analyzing financial records? Are you patient? Do you have intimate knowledge of the biotech industry? You get the idea. These are all advantages that one person could have over another investor.

Before we turn to Klarman’s next point, let me point out some great investor’s “edges.”

-Monish Pabrai has reminded me that checklists aren’t just good for surgeons and airline pilots. I am still developing a comprehensive checklist.

-Warren Buffett- Mental discipline. “Be greedy when other are fearful,” is easy to say, much harder to live when you are uncertain. Think March 2009 when most investor’s were soiling themselves.

-Joel Greenblatt- Probably has two edges. Mechanical Investing ( such as Magic Formula Investing) probably has some merit. Figuring out which criteria are currently important is your edge. He also reminds us about the importance of special situations, especially spin-offs and the oddities involved in mergers (although not Merger Arbitrage).

-Benjamin Graham- cigar butt stocks. Despite the ongoing positive investing results from Net Net stocks, some people can not invest in such “Ugly” companies. That has often been my edge. Apparently, I like warts when I invest.

-Seth Klarman- Complexity. He is a master investor because he and his team analyze the difficult to analyze and discover where the market has mis-priced something, usually significantly. If you can master the detail and complexity you are in good company. Everyone thinks they can do this, I am not one of them.

-George Soros – reminds us that investors behavior affects other investors decisions in ways that affect price. That brings us to Klarman’s next point in his 2010 letter.

“There is a second element in designing a sound investment approach: you must consider the competitive landscape and the behavior of other market participants.” So, it is not enough for you to have an edge to be a successful investor, according to Klarman, you must see how others are behaving in the markets. Not everyone  will be like us, value investors, some will be speculators, others Technical Traders. The point is if you aren’t clear what the rest of the people investing against you are doing, you can be hurt by them. Klarman uses a football analogy. If your opposition is defending against the run: Pass. Even if you have great running back. This may seem obvious. But as humans we tend to be seduced by the herd, the trend, the momentum. Whatever you want to call it. Value Investors are ultimately contrarians with a refined attitude. We need to remember, if too many people are afraid of something, it is worth a look. And if everyone you know loves something, tread with caution.

“When observing your competitors, your focus should be on their approach and process, not their results.” This could have been said by James Montier. Klarman says we shouldn’t replicate other investors portfolios, but “looking for opportunities where they are not.” Is it in housing debt or Greek equities. Talk about fearful places to look. There are opportunities in investing that you have to search out. Here a few investment ideas that Klarman alludes to, and you ignore Klarman at your own peril.

-Bond prices don’t just fall when they fall below BBB- High grade bond funds are often forced to sell in that situation- possible buying opportunity.

-A mortgage security will be downgraded when it can’t return par to bondholders. This will cause a rash of selling. Forced sellers are at a disadvantage to you. Know your edge.

-When a stock suspends dividend, some  funds must sell. Look at the fundamentals. Perhaps their is opportunity.

-Does the value of a stock change when it is deleted from an index? To index funds, that stock must be sold, even though the value may not change. Obvious. Yes. Opportunity, if you don’t have to sell. Also yes.

-Finally a significant drop in a stock price can be enough to make investors bolt for the door. Momentum and Technical traders can lose their edge here. Don’t assume the market knows better.

If Klarman is pointing out anything, it is the inefficiencies that can benefit someone with an investing edge that the seller of that investment doesn’t have.

If you liked this post, please go the share button, and share it with your friends. Or comment.

If you want to read a long excerpt of the 2010 Klarman letter I have referred, to which only briefly touches on the them I have discussed, please follow the link to My Investing Notebook. The letter is worth reading in its entirety.

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The other problem with share buy backs is that they are often an effort to conceal share dilution in granting management options. In this case it is not a case of increasing the EPS, but an effort to maintain the status quo. This is almost always done regardless of share price and is anti shareholder value. As much as I hear investor’s speak positively about share buy backs, I say show me the money, first. If management consistently buys back share only when they are a value and refrains when share price is high, that would be a rare, but positive indicator. Do you know of a company like that, that is currently a good value. I would love to hear about it. Otherwise, be wary of share buy backs.

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I think the normal response for most value investors to the shorting question is “No.” But is that really true? And if this question is not true then the title question becomes more important to answer in a value investing context. Whitney Tilson of T2 partners and co-founder of the Value Investing Congress, a value investing conference, uses shorting as a part of his investment tool set. I don’t think anyone would call Tilson a “speculator,” which is the usual label associated with shorting. He uses the value investing techniques of examining the financial statements of companies and setting a value on the company. He currently is shorting a basket of homebuilders. And in his latest letter to investors he discusses his best short position, recently, which is Inter Oil (IOC). The excellent blog Valuehuntr has also taken a short position in the same company. Valuehuntr’s position is based on the premise that IOC may be engaging in fraudulent behavior. If this is true then this could be another company that drops to the floor.  Both Tilson and Valuehuntr’s logic and analysis seem sound. But I am still not going to short. Why?

Because I am risk averse. There are aspects of shorting that concern me. First, what is shorting? The idea of shorting is that sometimes it makes sense to take a negative position in a company. Shorting is where you “borrow” the shares of a company from someone else, say your broker, and then you sell the shares in the market.  The proceeds are deposited to your account. A profit is made when you buy back the same shares at a lower price and return the shares to the entity that lent them to you.

So what are the risks of Short selling?

The first is the potential for extreme losses. The ordinary potential loss when buying the stock of a company is the amount you invested. If you invest $1000 buying 100 shares of XYZ company.  All you can lose is $1000 plus commissions. But when you short a company and the stock price goes up you can keep losing money until you exit the position. It is often referred to as the potential for unlimited losses. It isn’t of course. No company’s stock price continues to rise forever. But the losses can be extreme.

A risk related to this is the risk of margin call. That is when the stock price rises you will be asked to post additional collateral in your account to cover the loses. I never want to be a position for someone else to decide when it is a good time for me to invest more capital into a position. If the price move up is swift you may not have any choice.

The counter argument, of course, is that you can use stops to help prevent just such a scenario. This is true, sort of, but my experience is that stops work poorly in volatile markets like now. If there is an extreme price movement your stop may be triggered but the next price up could we much worse price for you than you would like.  Moreover, the stop could be triggered and then the share price retreats, but you have already covered your short and thus you have baked in your loss.

It is clear to me that short selling can play a role in a value investing strategy. After all no one expects every company to always go up. But is shorting the only way? Or are there better alternatives? In the next installment of this I will explore the world of options. While I have not yet fully developed a shorting strategy using options I will discuss some of the possibilities in the second part of this article.

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The first order of business will be to find a good discount online broker. The good news is that a few of the big name brokers have lowered their fees or commissions recently, making them more competitive, and enlarging the pool of potential brokers. The bad news is that it is a cumbersome process to wade through all the detail of a broker’s website to discover if they have hidden fees or surcharges. I have created a comparison chart called Best Online Broker for Small Investors and Penny stocks, which you can download or see below. This is not a comprehensive list of all brokers. Any company with a commission of greater than $10/trade was eliminated.

In the spirit of Buffett, who is said to look at the risk of an investment first,  I want to mention, briefly, the notion of capital risk because a brokerage companies goes bankrupt or pulls a Madoff. We all know that in a traditional bank account the Federal Deposit Insurance Corporation (FDIC) insures our accounts up to $250,000 per depositor, per bank.  This is not a permanent state of affairs, and is set to reset to $100,000 per depositor per bank in 2014. As the FDIC says on their website,  the “FDIC insurance is backed by the full faith and credit of the United States government. Since the FDIC began operation in 1934, no depositor has ever lost a penny of FDIC-insured deposits.” Of course, those in Nassim Taleb camp might argue, the FDIC does not make bank deposits risk free, but the guarantee does minimize the risk. The situation with securities is not quite as clear cut.

For stocks, the Securities Investor Protection Corporation (SIPC) is in charge. They have a brochure which you can download called SIPC English 2009. I suggest you read this or go to their website to truly understand what your capital risk is with regard to a broker failing.  The high school student version of it is this: the SIPC doesn’t insure an investor against loss. This should be self evident. If you are investing in the stock market you know that you could lose your money, that you have an expectation of risk. The SIPC doesn’t help you avoid the risk. If your stocks decline in value, you will not get a check from the SIPC. But here is what the SIPC does say, “…(the) SIPC replaces missing stocks and other securities where it is possible to do so … even when the investments have increased in value.

SIPC does not cover individuals who are sold worthless stocks and other securities. SIPC helps individuals whose money, stocks and other securities are stolen by a broker or put at risk when a brokerage fails for other reasons.” The SIPC guarantees up to $500,000 per customer, including $100,000 in cash. But the broker MUST be a SIPC member for the investor to be protected. For the small investor we are covered for the time being. But this raises concerns for person’s nearing retirement with large IRA’s. The viability of a firm is vital. As with diversifing bank deposits with different banks to mitigate risk, this suggests that over the long term one should have more than one retirement account if possible and at different brokerage firms. This is a subject for a future post. As of this posting I have confirmed that all brokers listed are members of SIPC. Before you open an account you should check and ensure they still are.

Let me spell out my criteria for best online broker. This will differ, perhaps significantly, from other blogs or websites. What may be right for you, if you have a larger portfolio  or if you eschew penny stocks, could look completely different. This is by no means a definitive list, but it should suffice for the Chroma Investing Small Investor Portfolio. You will note that I go into some detail here, because the brokers are quite adept at hiding some fees behind a cute little asterisk. Also, commissions and fees change often. I was surprised how different some companies are since last year at this time when I went through a similar process. My apologies in advance if I missed your favorite broker. Some I eliminated for price, others for minimum deposit requirements.

1) I looked primarily for value in stock trading commissions. The intention is to have little or no mutual funds, ETF’s or bonds traded in this portfolio. That does not mean they are not worth investing, simply that that is not the focus of this investing account. Consequently, factors that effect those type of investments have been  ignored.

2) The total brokerage costs including commission & fees will need to be low, under $10/trade especially for Penny Stocks. There will need to be no or additional charges for buying penny  or OTC stocks. There are lots of companies with value hiding in 99 cent store of investing, I would hate to miss them because my broker charged too much to trade them.

3) No inactivity or maintenance fees.

4) unlimited shares in a trade without additional fees. This is another way that brokers attempt to limit penny stock  purchases. A stock trading at .25/share will require 4000 shares to invest $1000.

5) I will not include a comparison of margin account rates because I intend not to employ leverage of any kind.  This means  I will also not factor in options or contract prices.

6) I am assuming we will be placing all our orders online directly, with no broker assisted trades.

7) Since short term interest rates are effectively zero, I will not bother comparing interest rates, if any, that cash earns in a sweep account (although I may reconsider and update later, if this factor changes)

You may also want to include a No-IRA fee in your criteria. For the purposes of this blog I will not. But for me personally, in my IRA’s I include this as important screen to minimize expenses.

I will discuss size of positions in another post. But one of the tricks in investing with a small portfolio is not getting killed by the fees. If you expect to have a total of 3-4 positions in the portfolio, at least in the beginning, each $500 invested will have a 1% purchase fee with a $5.00 commission and 1% exit fee. The result is that you must make 2% just to break even. That is not an onerous hurdle. Let’s say we changed that to just $10/trade. Our total is then 4% to buy and sell a stock. That is, I think in the new normal era, perhaps too high a price to saddle yourself with. Of course, we have to balance commissions with other fees, particularly extra charges for Penny  or OTC stocks.

So let’s jump in and evaluate. First, I will screen out companies for various criteria, then discuss all that passing companies. Later I will give a quick comment on each company.

From this chart I can eliminate a few companies right away simply based on price. E*Trade, TD Ameritrade, & ThinkorSwim all charge $9.95. Think or swim had other negative  factors which I detail below.

OptionsHouse, Scott Trade, SogoTrade & Tradeking (my favorite broker) are eliminated because they have Penny stock charges.

That leaves Charles Schwab, Choice Trade, Fidelity, Just2Trade, TradeMonster & Zecco. Fidelity and Just2Trade have too large a minimum balance requirement, so they are out. For investors, starting with larger sum in their investment portfolio, this arbitrary cut off may not apply. Of the remaining four companies two had IRA fees, Choice Trade, and Zecco, so if that is an important factor to you. Think twice. For the Chroma Investing Small Investor Portfolio it is not.

On an absolute price perspective you would have to narrow the choice down to ChoiceTrade or Zecco, at $5.00 and $4.50 per trade respectively. But finding the best broker isn’t only about price.

O.k. so what I haven’t mentioned, because it is so hard to judge, is what is offered for this price and how customer service is when things don’t work out as expected. This is qualitative area where stats don’t tell the whole story. Before I decide between these two brokers, I would like to hear from you. Do you have any experience with either ChoiceTrade or Zecco? Tomorrow I will call both and get a sense of their customer service. Then I will make a decision. I will post soon where I decide to open the account. Maybe I will open accounts at both and see what the process is like, before I fund the account.

Below are my thoughts on the companies on the  comparison chart.

Charles Schwab- The original discount broker. In recent years their prices have not been competitive with other online discount brokers, that seems to have changed this year. They are a surprise late addition, because they have recently (Jan. 2010) lowered their per trade fee form$12.95, eliminated the number of shares that would be allowed per trade without additional fees. Schwab has banking options, including checking accounts.

Choice Trade- I had not heard of them until I started my research on discount brokers.  Two things intrigued me. First, their overall good price and Second, they are offering a $50 bonus if you add a margin account and open your account for $2000. That is a quick 2.5% gain on my money.  They are not a good choice if this was an IRA account because of the IRA fee.

E*Trade- I was surprised they made the initial cut, that is under $10. But ultimately they would be to costly for our tiny trading account.

Fidelity- Last year trades cost over $10. This is perhaps the biggest surprise. I have read about some complaints with their trading tools, but are supposed to have a lot of free research available on more than 4500 corporations.

Just2Trade- Their low, low per commission rate would be partially offset by their IRA fee for some investors. Their reputation, however, sucks. The longest complaint I read on any forum about any broker was about Just2Trade. If you believe that poster, they could not get anything right. Two things concerned me most. First, their customer service is not great. Second their cash balances are often inaccurate.

OptionsHouse- Another low priced commission house, seemed initially promising with their $2.95 commission, but their Penny stock surcharge begins below $2.00 and is $0.005/share. Moreover, anything over 50,000 share requires a separate over and brokerage commission.

Scott Trade- I have spoken to several investors who have been happy with Scott Trade and their moderately price $7.00 trade. Their commercials at least garner attention. But Scott Trade is a terrible choice for Penny stock investors. They charge 0.5% of the value of the purchase for Penny stocks. Even on a $500 investment that adds $2.50 and makes them uncompetitive.

Sogotrade- I heard negative things about Sogotrade even before I decided to include them in the comparison. But their price of $2.95 begged inclusion. Unfortunately, they also have 0.5% charge on Penny stocks, and frequent complaints about their their online trading platform.

TDAmeritrade- Another large brokerage company that recently dropped their commission to $9.95/trade. Much better deal are possible with you are frequent trader. Eliminated for price.

Think or Swim – I have used Thinkorswim for more than a year. They are eliminated for two reasons, First they limit their $9.95/trade fixed rate to 5000 shares, above that you pay a per share fee, and Second, I hate their web based interface. It is the least intuitive I have seen. It is shocking to me anyone likes it. I feel like I am transported back to the days of early DOS, where nothing made sense.

TradeKing – A solid company, with great customer service and good reasonable $4.95 commission. Unfortunately, for the purposes of the small investor portfolio the Penny Stock Charges forces their elimination.

TradeMonster- The most promising of all the brokers I never heard of. While their $7.50 commission is higher than I like, it has no Penny stock charges, shifting the balance in its favor. The interface allows all tools to be used in Paper Trading, making this a very interesting choice for a small investor who is also a beginner. The ideal Chroma Investing reader.

Zecco – The price you can’t deny. $4.50/trade. If you are a frequent trader or have $25,000 in assets you get 10 free trades/month. On the plus side Zecco has virtual trading and FOREX trading. On the negative side they have a yearly IRA fee and on some forums some complaints about customer service. Perhaps the service is getting better.

Disclosure: Some of the information in this post has changed since I first wrote it. I will post an updated article. I currently have accounts with Schwab, ChoiceTrade, Zecco, TradeKing and ThinkorSwim.  I have an affiliate relationship with TradeKing and Zecco, but these are based on my satisfaction with their services and not because I am making money  with them (so far, not so much).

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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.

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I think he gets investment risk better than any one. I will quote two passages, the first lays it out, “Modern risk management is a farce; it is pseudoscience of the worst kind. The idea that the risk of an investment, or indeed, a portfolio of investments can be reduced to a single number is utter madness. In essence, the problem with risk management is that is assumes that volatility equals risk. Nothing could be further from the truth.”

The second is where he talks about his trinty of risk which I would like to devote a whole post to in the near future, “…I don’t think of risk as a number, but rather as a permanent impairment of capital (as Ben Graham put it). Now that permanent impairment can be generated by three potential sources (which aren’t mutually exclusive). Firstly, there is valuation risk – you can simply overpay for an asset. Secondly, there is fundamental or business risk – something goes wrong with the underlying economics of the asset. Thirdly, financing risk or leverage (which no matter how hard you try can’t make a bad investment good, but can make a good investment bad).

I’m not sure that any of them is easier or trickier to monitor. I think you to consider all three aspects in order to gain a holistic view.”

Enjoy the first part of the interview.

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• Mutual Funds – Beginning Value Investor Terms
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• Chroma Investing Links July 2011
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