Introduction

Hello, and welcome to Plan 5 Picks!

This newsletter started out as a chronicle of one adventure in investing. I’d been researching the stock market on and off for about ten years when I hit upon a combination of ideas that looked especially promising. I put together a simple plan and a computer algorithm based on these ideas to help guide my own investing. Back testing looked good for this approach, but as they say, “past results are no guarantee of future performance.” So I’ve been trying it out over the past couple of years, and lately I’ve also kept a public record of my results on this blog. So far, the returns are looking good. This investing approach is an experiment — in simple, stress-free growth investing. Each month I publish a new list of stock picks generated by my algorithm, the same list of companies that I invest in myself. If Plan 5 appeals to you, you’re invited to come along for the adventure!

Plan 5 is a straightforward approach to investing that just takes (at most) a few minutes every month. At the beginning of each month I’ll post the results for the previous month, and the stock picks for the new month. If you’d like to invest along with me, you can follow along with Plan 5 yourself, using the instructions below. That’s pretty much all there is to it!

What is Plan 5?

Plan 5 is more than a bunch of stock picks — it’s a method, a strategy. There are two different versions of Plan 5 to choose from: Monthly and Quarterly. Let’s say you are investing according to Plan 5 Monthly, and you are starting with $5000 to invest. A plan 5 investor owns shares of exactly 5 stocks at one time. Each month I’ll be posting that month’s 5 picks. At the beginning of your first month, you would divide your $5000 into five equal portions (of $1000 each). You would invest $1000 (or as near as you can get, given the prices of individual shares) in each of that month’s 5 picks. Then you forget about it for a while. At the beginning of the next month, you sell all of your shares in all 5 companies. Some may have gone up over the course of the month, some may have gone down. Say that on average, they went up 4%. Then, your total amount of money to invest would now be $5200. You would then divide your new total into five portions, this time of $1040 each, and invest (as near as you can get to) that $1040 in each of the new month’s five picks. That’s it! Simple, right?

Two important strengths of this approach are:

No Need to Sweat the Timing. It removes the emotional stress (and resulting bad decision making) from the process. You don’t have to worry about figuring out just the right time to buy and sell; just do it at the beginning of the month. Plan 5 doesn’t depend on precise timing. If you’re a few hours or a couple days past the opening bell on the first trading day of a new month, no problem — on average it won’t make a huge difference. And because the timing is arbitrary, we won’t be in competition with the thousands of Wall Street professionals and day traders who are always trying to outdo one another’s market timing. Instead, we’ll be relying on the tendency of promising companies to, on average, grow substantially over time.

Balancing. Your investments will regularly be rebalanced. Balancing is an important part of any investment strategy, to make sure you don’t end up with a portfolio too heavily weighted with investments that have grown (and may now be overvalued), and too light on investments that have fallen (and may now be undervalued).

Why 5 stocks? Well, the fewer stocks you invest in, the less diversification you have, and so the greater the risk. But the more stocks you invest in, the higher the transaction costs. By running many computer simulations, I’ve found 5 to be a good compromise to mitigate risk while maintaining high returns and keeping transaction costs from getting out of control.

Of course, the success of Plan 5 comes down largely to whether the monthly picks are any good. Each month I’ll publish both the latest set of picks and a review of how the previous month’s picks have performed, so you’ll always have an open record of how well Plan 5 is doing (and of how well you’re doing, if you’re investing along with Plan 5).

You may be wondering how I approach coming up with stock picks every month. There are several different factors involved, starting with expert analysis to build a large pool of quality companies with good potential for growth. I then run that list of companies through my own proprietary computer algorithm, which looks for particular statistical patterns that, in my back testing computer models, have on average tended to predict stocks that are more likely to rise in the near term than to fall. The algorithm spits out the top five choices.

As I mentioned above, for any investment method to be successful it’s got to keep trading costs low. Every dollar paid to a stock broker is one less dollar available for investment. Minimizing trading costs is one of the reasons that this is Plan 5, rather than plan 6 or 8. There are three more important ways to minimize trading costs:

The Quarterly Plan. Again, there are two versions of Plan 5: Monthly and Quarterly. With the monthly plan, you would buy and sell your 5 stocks at the beginning of each month. With the quarterly plan, you would buy and sell your 5 stocks at the beginning of every third month. Each month I will post the Plan 5 Monthly list of picks, and every third month (February, May, August and November), I will also post the separate Plan 5 Quarterly list of picks. If you want to invest using Plan 5, it’s up to you whether to follow the Monthly or Quarterly plan. The monthly plan has performed a little better over the last few years, according to back testing. The quarterly plan requires one-third the number of trades (and so one-third the trading cost), as well as less of your time and attention. Unless you have a good deal of money to invest with Plan 5 (on the order of tens of thousands of dollars), I would recommend starting with the Quarterly plan, to minimize trading costs.

Broker Fees. Another important part of reducing trading costs is choosing a low cost stock broker. A popular online broker, E*Trade, is fairly expensive at $9.99 per stock trade. If you don’t yet have an account with an online broker or are willing to open a new account, good choices include TradeKing and OptionsHouse. They charge less than $5 per trade, and get good reviews for their features and service. The difference between high and low fees can mean a savings of several hundred dollars per year in transaction fees with Plan 5 Monthly, or of at least $100 per year in fees with Plan 5 Quarterly.

Repeat Picks. There are five picks every month (or every quarter), but that doesn’t necessarily mean 10 transactions (5 sells and 5 buys). This is because there will usually be some picks in common between one period and the next. Say there is one stock in common between last month’s picks and the new month’s picks. You don’t need to sell that stock and then re-buy a different amount of it; you only need to sell or buy shares of it, in order to rebalance your investment in that stock so that it is roughly equal to your investments in the other four, new picks. That will save one transaction for each stock that is a repeat pick. Some months there may be no repeats, but most months tend to have two or three repeats. This technique is a bit more complicated, but the savings add up.

While we’re talking about brokers, another decision you’ll need to make is what type of account to do your Plan 5 investing in. You can do it in a normal investment account, so that the money is always available for your use whenever you’d like to withdraw it. But you might want to consider using a retirement account (such as an IRA, 401k or SEP account) instead. With a retirement account, you won’t need to pay capital gains taxes each year, which will help your principal to (hopefully) grow faster and will save you a lot of record keeping come tax time. If you choose an IRA, you also have the choice between a regular IRA, where you pay taxes only when you eventually withdraw the money, or a Roth IRA, where you pay taxes the year you earn the money. If you’re planning to be in a higher income bracket when you’re retired than you’re in now, you might want to consider the Roth option.

Plan 5 may seem to be all about money, but for me it’s actually motivated by a desire not to have to think about money, and certainly not to have to worry about it. It seems to me it would be a waste of potential for me to spend my days working long hours just to make money, if the work itself is not meaningful to me. That applies whether it’s a retail job that pays crap or a CEO or hedge fund manager job that pays millions. In the end all we have is the individual moments of our lives; if we die with a fortune in the bank but having squandered most of those moments, what have we gained? That’s why Plan 5 is designed to take up very little of our time and require no stressful timing and deliberation, while at the same time producing returns that are well above average (so far, and hopefully still to come). Life is bursting with opportunities for us to grow to our potential, and can be about the things that matter, like love, connection, and creation. Plan 5 is intended to help me — and you — to reach toward our potential, to help us to thrive.

That’s all for this little introduction to Plan 5. I hope you’ve found it interesting, entertaining, and maybe even useful. If the Plan 5 approach appeals to you and you’d like to follow along in the future, you’re invited to register here.

-Mike Ferrier