LegendKiller

I am going to sum up Welfwarelosers post in one word. Ignorance.


Anyway, now that that is done.


I would not invest in "stock", nor would I invest in one company. If you wanted to maximize your return, I would first look into getting what is called a "Spider". More or less, they are a portfolio of stocks (big basket) that represents a certain index. For example, if there was a spider for the S&P500 that you wanted to buy, you purchase it for $500. This 500 will get you a share representing ALL of the stocks in the S&P500, which means that you will get the EXACT return of the S&P500. The NASDAQ spider is ticker symbol "QQQ".

This is beneficial because it removes most of the fees of a mutual fund and gives you full market diversification. Historically, the market has earned ~9% annual return, some people put it at 7, others at as much as 12% annual.

I would get a nice base of diversified funds up, follow them to get better acquanted, then start getting into individuals once you know better what to look for.

here are some rules to follow.


1. If you read the Wall Street Journal, NEVER buy into stocks that they pick as "hot". Usually those who know they are hot have already gotten "in" and raised the price by doing so. THey will dump them eventually. What usually happens is you buy in at the top, they sell and you dont sell fast enough (because they are THERE to sell and you have to call your broker or go online), Thus you hit the downside and get f'd.

2. NEVER buy into a stock that you "heard" about that was hot. These most often lead to bad investment decisions.

3. NEVER "double down". If you are in a losing position, make rules for yourself such as "If it goes down to x% I will sell", if it goes up x%, I will sell.

I usually look to make 3-4%. Also, dont knee-jerk your picks, going down 5% doesn't matter, as a stock will ALMOST always come back up.

4. NEVER day trade. There have been hundreds of studies that have shown that people who suddenly buy on big news during the day and sell that night LOSE money. Sure, some get abnormal profits, but the VAST MAJORITY LOSE. If you are going to buy a stock, pick your limits and ALWAYS stick with them. NEVER sell off of news and NEVER buy off of news.


Now, as far as analysis goes. There are some things you should always check. One is the Price per share/ Earnings per share (P/E ratio). This represents many things to different people. Purely, it shows how much you are paying for each dollar the company makes. Technically, every dollar the company makes in earnings WILL get paid out in the future. Thus, if a company makes 1.00 per share and costs $50 per share, then it COULD take the company as much as 50 years to pay you back once it starts paying out dividends. However, if the company is doing well and invests in good projects and keeps plowing money into investments AND increases shareholder capital, then the stock will keep appreciating and you will get returns that way.

Look at a company and its peers, if the one company has a super-high P/E, its either doing something REALLY right compared to peers, or people are going crazy-stupid over it.

Next, check out why its high. Did they suddenly discover a new product? Did they get a new patent? Is there ANYTHING that shows that their future is better than the competition?

If there is nothing, then what about their business model? Does it make any sense? If you are lucent and you are growing at 30% per year, can you continue this trend? Will people keep buying 30% more switches than the previous year?

If this doesn't make sense, then the stock price doesn't make sense. Which means that people are crazy-stupid, or management is doing something whack.

To check if something is wrong with the company, start looking at ratio's. Compare year-to-year, and then break it down quarter-to-quarter. If you see a quarter-to-quarter downward trend in asset turnover, the company is becomming less efficient in utilizing its resources.

If you see Work In Progress Inventory going down, this means that the company is expecting sales to slow (which lucent predicted in 1999...go figure).


My favorite one is increasing Earnings Per Share (EPS), even earnings. Which means there are less shares. Most companies claim that they are "giving" their investors returns by buying back shares. However, this also means that the company cannot find any better investments (ahem, IBM), which is a prelude to the company declining.

Of course, there are dozens of other tricks that companies pull to "even" earnings, Microsoft and support allocations, Pfizer and R&D "capitalizations". AOL and their capitalization of their stupid discs.

You need to be sceptical of companies that are "too good to be true". Not being sceptical enough lead to the .com boom/bust.

However, dont be jaded because of that. Doing your homework on major investments ALWAYS pays off.

The stock market isn't a gamble if you are learned. If you do not want to put as much work into learning, then go for a diversified Spider or a mutual fund, you can never go wrong as long as it is diviersified.

If you want to pick stocks on your own, make sure that you balance your portfolio. Pick stocks in a variety of markets, heavy industry, auto, homes, durable goods, retail, tech, consumer goods. Some go up in a down economy (luxury and durable goods) and some go up in a down economy (consumer goods). Pick a good balance (20+ stocks) and you will do ok.


LK