First, we invested in things that had done well for the last couple of years. Not individual stocks, because we wanted to be broadly diversified, to protect against single-company risks. Mutual funds, offered by the providers of my girlfriend’s accounts.
Morningstar.com, a company that provides information about mutual funds and the stocks they invest in, classifies companies in two ways: by their market capitalization, the current “paper value”, combined price of all their shares, into large-caps, mid-caps, and small-caps; and into “growth” companies that are expected to have growing profits and growing share prices, and “value” companies whose shares are cheap compared to what they “should” cost. (“Value investing” is a whole science started by Benjamin Graham and followed by Warren Buffett. “The value is what it’s worth; the price is what you pay for it.”)
Stock mutual funds can be “growth” funds that invest in growth companies, “value” funds, or “blend” funds that invest in both. This classification, together with the other, gives rise to a 3-by-3 table, with cells, pigeon holes, with names like “small-cap growth” or “large-cap value”. Funds that invest in one of these pigeon holes are called “style funds”.
The best style funds turned out to be the TIAA-CREF Midcap Growth and the Fidelity Small-cap Enhanced Index fund. Her portfolio started growing faster, as if you added new yeast to an old batch of dough.
My friend, the financial guru, sends his friends a list of stocks he thinks are worth investing in. He pores over annual reports, financial statements, reads the lines, and between the lines. I wrote another program to draw charts, so I could see all 20 on one screen. I chose 5, started reading about them, at first just to know, for each, what’s the business of the business. Around Valentine’s Day, one of them, V.F. Corporation (ticker symbol VFC), announced that it had missed earnings expectations, by 1 cent per share. Its stock dropped by more than 6%. I thought that was too much: the missed penny corresponded to about 3% of the earnings, so we could expect a 3% drop as a correction; the company was still as good as it had been; so any further drop was a discount, a sale. They say, you can make more money buying than selling.
I wrote a program to “watch” stocks. I would start it with a list of ticker symbols, and it would contact Yahoo Finance every minute, request their current prices, and display them on the screen. On Monday, we started watching VFC. It was still down, but stabilized, stopped tanking. We bought. The lesson: find a good company, do your homework, wait for superficial bad news, pounce as others panic.
Things went up and down, but more up than down. After about a year of some contributions and some growth, she had about 40% more than when she started.
Then she fired me.