Stocks and Bonds and a Stock Picking Chimpanzee
Stocks and Bonds have historically been an excellent long term investment vehicle. In essence it means ownership in the businesses that drive the world forward. As the world grows, so do the companies and underlying stocks that are their foundation. The financial markets are no longer dictated by a just a few powerful exchanges like the New York Stock Exchange and Deutsche Boerse (German), but instead are impacted by a vast and complex, interconnected web of financial pick-up sticks. There are of course, many ways to invest in these global slices of corporate ownership, but for now we’ll save the sexy, albeit risky methods of trading shares involving derivatives, foreign exchange, and day-trading for other columns.
Lusha, the Investment Guru
Investing in stocks and bonds is very simple in principle: Buy low and sell high. Easy enough, in fact, fortunes have been made by men with PHD’s and MBA’s beside their names and financial network television celebrities who have all written volumes about trends and charts and flash indicators and stochastics and investment psychology and even rally’s based on whether the Dallas Cowboys win or lose. They’re all experts and they all have different opinions, literally thousands of opinions. There’s also a now famous chimpanzee in Russia named Lusha who throws her defecation at a list of stocks on a chart and those stocks have tended to match or beat the picks of some of the most sophisticated analysts in the world. What does this tell us? That buying low and selling high ain’t that easy or better yet, we can choose to pay analysts big fees or hire a primate at a much reduced cost to be our stock picker.
Indicators and Common Sense
A good place to start when buying stocks, bonds and mutual funds is to learn a bit about indicators. These are tools that provide an analytical look at a company and its relative stock price. One of the most common is the P/E Ratio (Price Earnings Ratio) which looks at the current stock price in relation to its earnings per share. That makes sense! The P/E ratio is simply the stock price divided by the earnings per share (which can be found in any number of financial publications). A high P/E ratio might indicate a stock is overvalued and a low P/E ratio might imply a stock is undervalued but this is just one indicator and is completely flappable. As an example, back during the dot-com bubble, some companies had no earnings as in a zero P/E ratio… nada…a big fat doughnut… and yet these stocks sold through the roof at hyper inflated prices. Which brings us to the most important indicator you can use. It’s found in the six-inch- wide analyst hiding between your two ears.
Warren Buffet said “Invest in what you know.” For example, perhaps you agree that there is an aging, post-WWII baby boomer population. What does that mean? It could mean that companies that sell services or products to the elderly demographic will do well in the coming years. You might invest in a start up called the F.N. Walkers Inc. (fictitious) who has developed a compact titanium walking device with a built in espresso maker. The company is reporting back-orders through the roof. Or you might consider Government Bonds. These are typically the safest investments on the planet and tend to do well in times of upheaval. Why? Because investors run to security faster than gophers on a golf course. When missiles start firing in the world, investment dollars flow like rivers to safe havens and accordingly, the price rises. With bonds, forget about stochastic oscillators and 10-year moving averages and pray for instability and bad news!
You don’t need a pricey investment guide or defecating Chimpanzee after all.
Diversification by Putting Your Eggs in a Big Basket
There’s another way to buy stocks and bonds. It’s through mutual funds. A mutual fund is simply a managed collection of stocks or bonds or commodities that are held in one big basket and managed by really smart guys. Mutual Funds come in many packages such as funds based on Dow Industrial Stocks or growth companies or corporate and government bonds, or pharmaceuticals, or emerging markets say in China or Brazil. The theory is that owning a small piece of a hundred stocks is safer than owning a lot of just one stock. Another advantage to owning mutual funds is that they are completely liquid which means you can exit your position almost immediately. Mutual Fund performances are largely based on the expertise of the fund manager and the results can be closely monitored in many cases with a 1 year, 5 year, 10 year, or even 20 year, moving average.
This Authors Pet Peeve Which Requires Anger Management Counseling
Always, Always, Always, be aware of your stockbrokers advice or the advice offered by so called experts. On October 9, 2007 the Dow Industrial Average hit an all time high at $14164. After that it started free falling like a base jumper with no parachute and eventual smacked hard at a low of $7062 on February 27, 2009. Investment Gurus were telling us to hold… that the market will rebound. Poppycock, Fubar!!! Better to sell the stock as high as possible to exit and then jump back in when it’s convulsing in a splattered heap on the floor. If you did exit some time after the market starting selling off and then re-entered after the dust settled, you would be in a substantially better position than just letting the investment ride, in fact, even though the market is now dancing around 12,000 you would still be 15% BELOW the high of the market that hit $14164. Isn’t that what Brokers are supposed to do?
Anyway, I get sick on fast rollercoasters.