The Grow Your Dough Showdown – My Investment Pick

Jeff Rose, of Good Financial Cents, decided to start a little competition. I immediately was down with the contest. In fact, he attributes the idea from my WTF Fund.

Jeff’s throwdown showdown is setup for the following reasons:

  1. Show you how easy it is to get started investing
  2. Show you the plethora of online options available
  3. Show you different strategies you can try
  4. Erase any doubts that you can’t do this on your own. Because you can.

I believe Investor Junkie has discussed reasons 1 and 2 quite a bit. For my entry, I wanted to focus more on 3 and 4. In addition, want to highlight the fact that there are many paths to financial freedom. Basically showing the various strategies out there for you to invest, and I’m just one of them. Mine might not be the “best” strategy, but that is another discussion.

The throwdown is a fun and educational challenge. All that is required is taking $1,000 at the beginning of the year, through opening a brokerage account, and then investing in whatever you want: stocks, mutual funds, ETFs, real estate, a business, gold…whatever.

Whoever has the best return at the end of the year is the winner!

Disclaimer

Now hear me out on this. I’m not suggesting you dump all of your investments, your asset allocation, and start day trading. Far from it!

The amount I’m investing ($1,000) is a very small amount of our total net worth, and similar to my WTF Fund. It is otherwise known as “play money”. Most of my investments are in long term good asset allocation mix, and so should yours!

Most of your money (80% or more) should be in low-cost index based investments. What matters most for long-term success is selecting a good asset allocation for your investments.

If you have the time (and potential skill), I recommend putting no more than 20% into active investments. Some of you might think you have the skills to beat the market. You might, but odds are against you. That way if your active investments go “boom” you haven’t completely wiped out your nest egg.

If you don’t think you have the skills, or can’t handle the risk, you should put 100% of your investments into indexed funds.

In fact, for this contest, I hope I lose compared to the sound investment strategies. I hope it loses against the other passive investments that I am competing against. If I do win, while some skill is involved, it will be more because of luck. Of course I’ll do my damned best to not lose. I have my doubts that I can beat the other bloggers, or the market overall. Time will tell.

My Investment Strategy

So more importantly, for this contest, I’m trying to beat out the other personal finance bloggers. So it’s either go big, or go home.

I knew in order to win I must invest in one stock. It’s not going to be properly diversified, and I know this. It’s a trade, and not a long-term investment.

Another criteria for picking the stock was higher volatility compared to the overall stock market. With proper asset allocation you aren’t trying to time the market, and with this trade I’m trying to predict the future.

So let me start with my macro economic premise:

I believe 2014 will be a rough year for the stock market. It will not be as good as 2013.

Any signs of FED tapering that was discussed in 2013 will disappear because the market is still weak. It will be full steam ahead with 0% FED rate, and continuing QE for the foreseeable future.

All of these macro indicators are positives for gold. Even if the FED were to taper, this is also good for gold. Gold also preforms well in a deflationary cycles.

Also based upon PE10 (otherwise known as CAPE ratio), the stock market is fully valued at 26.17. We should expect stock market gains to return to the norm.

Meaning we should either expect lower returns in the next 5-10 years, or a stock market correction to adjust accordingly. Increase volatility in the stock market is traditionally a boon for commodities.

With that said, I believe the economy will slow down in 2014. We’ve had a great run for the past 5 years, and historically recessions happen every 5-7 years as well.

CAPE isn’t a perfect measurement — it is more a rule of thumb. So it’s fully possible that in the next year the stock market will go higher, and my thesis won’t work. If my strategy does work, then I should pick an investment that will perform well under these market conditions.

Being that I’m a value investor I decided to do my research with YCharts, and get the list of the most beaten down stocks for 2013. I wanted to see what stock, and/or sector saw the biggest losses.

It so happens that gold experienced a 28% loss in 2013. Gold mining stocks (majors and juniors) follow along with the commodity. Both major and junior mining stocks in fact amplify the commodities gains, or losses.

So it was no wonder in my stock screener I saw many mining stocks down for the year. So I was onto something with my screener.

So I knew what sector to invest in — mining stocks. My next determination was which company in that sector. I wanted to find the best of the best in the mining sector. This lead me to a name I’ve heard many times previously — Newmont Mining Corp (NEM). Last year they were down 46% and one of the worst performing mining stocks of 2013.

As a value investor this met my criteria:

  1. Discounted Stock – Stock was below book value
  2. Volatile Sector – Great for this contest since my goal is to beat other investors who mostly are investing in the market overall
  3. Negative Sentiment – Gold was down 28% in 2013. After a 10 year, 700% gain run. This also meant all of the mining stocks were down as well.
  4. Contrarian Indicator – Recently I’ve seen many articles emphasizing the downward trend in gold. Basically stating it’s over for gold. This typically means we’ve come close, or at a bottom.

From my own research, the stock should conservatively be worth around $30-35/share. In checking with Morningstar’s Premium service it is in line with my estimations. Morningstar evaluates it at $35/share. In fact, Morningstar recommends it is a buy at $21/share. This is of course for margin of error.

So with my criteria checking out, and solid company fundamentals — I knew NEM was my choice.

On January 2nd 2013, I purchased 37 shares at $23.89 of Newmont Mining Corp. I plan on holding on to it for the year, unless I hit the 25% stop loss order I have in place. If that is the case, I will find another investment. Though the chances of this occurring are low based upon how cheap the stock is currently valued at.

Throwdown (January 2014)

(click to enlarge)

Unfortunately with funding requirements at optionsXpress, I could not invest the full $1,000. I will be adding an additional $100 so I am able to invest the full amount to meet the competition requirements.

Choice of Broker – optionsXpress

I opened my investment account with optionsXpress. They have a decent signup bonus; get $100 when depositing $500. It is also one of the few brokers I personally did not have an account with, until now.

Like other brokers, at review at Investor Junkie — we fully test them and put real money them.

I’ll update my performance and any trades via social media and on this web site. I will relay my performance information to Jeff @ Good Financial Cents. Good luck to the others and may the best man/woman win!

See how the other participants are doing with the Grow Your Dough Throwdown
Visit the series’ home at Good Financial Cents.

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