Thought I had a simple question but....

[Zeno]

Thought I would check out, for the first time, The Stock Market Forum for some advice and information and what do I see....

Well, the pitbull market is moving sideways for the next few weeks as the traders momentum is down because the charting is whacked and the iba's and icb's and BFD's are put out to option with a kicker and don't invest until next year but the war will be a big upswing in the scheme of the overall picture and all will be golden as porkbelly futures will soon converge with bond prices when the planet pluto is in conjunction with the Dog Star and.....

JUST WHAT THE F**K ARE YOU PEOPLE TALKING ABOUT!

Anyway, I have padded my bank account with my pot-limit and $20/40 winnings and was thinking of investing in Something. Now, I am not so certain. Perhaps I should just take 5K and challenge Ray Zee to a heads up no-limit duce to seven lowball game - double through - and leave it at that. But I was thinking of buying stock in Intel, GE, and Motorola. Does anyone have some rudimentary, and SANE advice (if there is such a thing) about an investment of this type. This would be long-term. By that I mean at least 3 to 5 years and maybe more. Also, can anyone recommend a sound book on investing in the market. Again, I am looking at mostly longer-term investments. Thank You. And please - no astrology.

-Zeno "The Misanthrope"

[PokerBabe(aka)]

The best thing to do with 5K or so is to invest in a broad index fund such as the S&P500. This will give you instant diversification and the most "bang for your buck". You can reinvest the dividends and continue to add to the fund at whatever intervals are convenient. If you buy the S&P 500, you will own both INTC and GE along with other big names such as WalMart and IBM. It's the best way to start a program, IMO. This index fund will perform as well (or as poorly) as the S&P 500 does. Thus, if the index is up 8% next year, your fund will be up 8% as well. Try Vanguard Funds for this purpose. As for books, Peter Lynch's books are excellent. Also, William O'Neill's book entitled "How to make money in Stocks" has some good fundamental information as well. Buy low, and LGPG. Babe /forums/images/icons/cool.gif

[adios]

"Anyway, I have padded my bank account with my pot-limit and $20/40 winnings and was thinking of investing in Something."

Why do you think owning stocks represent an investment? Just wondering. Really you're just trying to hornswoggle whom ever is on the other side of the trade. In the last 5 years high quality bonds have way out performed the stock market.

</font><blockquote><font class="small">In reply to:</font><hr />
Why do you think owning stocks represent an investment? Just wondering. Really you're just trying to hornswoggle whom ever is on the other side of the trade.

[/ QUOTE ]

So the stock market is a zero-sum game over any time horizon?

</font><blockquote><font class="small">In reply to:</font><hr />
In the last 5 years high quality bonds have way out performed the stock market.

[/ QUOTE ]

So this is what you expect going forward?

These are not rhetorical questions. I am interested in your answers.

[adios]

First of all I confess that my answer was intended to be provocative. Thanks for "calling" me on it. I've given the issue of the stock market's viability as an investment vehicle a lot of thought.

"So the stock market is a zero-sum game over any time horizon?"

No but to me it's unclear as to how substantial the equity risk premium really is. From what I can discern the historical data isn't all that meaningful in establishing what the mean historical equity risk premium has been within say a 95% confidence interval. I believe that over any twenty year period since 1926 the valuation of the market has increased and in any 10 year period there are very few losing periods. So to me very long holding periods do indicate investment potential i.e. the existence of an equity risk premium. As to the magnitude of the premium I don't know and it bothers me a lot. I believe the CAPM indicates a risk premium for stocks of almost zero. Also the S&amp;P 500 itself has many deletions and additions so I'm not sure how good of gauge it really is for historical performance. What the data suggests to me is that prices can range over a wide and I mean really wide range which suggests to me that the "efficiency" of the market is probably overrated. Effecient in the long run, yes, in the short run, year to year and less, I don't think so.

"So this is what you expect going forward?"

Regarding the high quality bonds such as treasuries, they seem way over priced to me but who knows. I've seen a steady decline in interest rates over the last 20 years and I wonder if my opinion is tainted by the fact that the late 60's and 70's were extraordinary times for inflation. What I expect is that stocks will do just about as well as bonds say over the next 10 years.

[Wildbill]

It would be next to impossible for bonds to outperform stocks over the coming 10 years unless you think the US is heading to a Japan-style economy. Even in that bonds would probably be just a slightly positive return. Bonds right now are in my mind just simply a better than cash return but with obviously a lot more risk than cash. If you get into longer bonds right now you better have an exit point in mind because there is almost no way 30 year bond yields can remain under 5% over the long run. Then you have to think about the equity implication of bond yields being so low and of course they are very positive. I think the equity market is undervalued because there are far too many "premiums" on it. There is the energy cost premium, the accounting scandal premium, the real estate premium (where many participants cashed out and bought homes or land with their savings), the obvious war premium, etc. All these premiums are keeping a lot of money on the sidelines and the natural inclination of money on the sidelines is for it to go into bonds. Once a little inflation hits the economy the bonds will go soaring and the money will come rushing back into the market. In an inflationary or even slightly inflationary economy equities quickly gain value as a perceived hedge. The only time inflation is bad for equities is after its persisted for some time and companies start struggling with the rising costs that they didn't have to bear in early stages due to long-term contracts for employment and supplies. Companies get a free ride early on as they can easily raise prices and don't have to pay the piper until a few quarters or even years later. I don't think the next bout of inflation will be much at all, but I am certainly thinking a year or two of 3.5-5% inflation would do us all some good as investors and just plain people functioning within our economy. For this reason I am surprised that the Fed and especially the Japanese monetary authorities haven't pumped up the money supply to inflationary levels to get things moving again. Tax cuts and government spending do too little to get full bang for the buck, a little pop to the money supply gets everything greased for very minimal cost because as soon as you start it you can easily take it away. All you intend to do with it is add a little inflationary expectation out there and that is sorely lacking right now in both the US and Japan.

I think the conventional wisdom that stocks outperform bonds in the long run is extremely questionable. First, people always look at US when looking at the issue, but of course the US economy has been arguably the most successful one over the past century. Those who invested in Nikkei in late 80s will probably have to wait another 30 years or so before they see their stocks outperform bonds.

How's the market right now? Well, if you compare the earnings yield on the S&amp;P with the yield on a 10Y tresury, what do you get? Around 4% for the treasury and P/E of around 20... so an earnings yield of 5%. So the equity risk premium which people traditionally say is around 7% is still at an extremely low level. I would say buying BBB corporate bonds at something like 200 over treasuries is a much better bet... a semi-arbitrage really considering corporate bonds and stocks are really claims on the same cash flows EXCEPT that bonds have a seniority option.

In my opinion, stocks still have some way to fall before they become attractive.

[Zeno]

O.K. so stocks are no good. But then I have read the follow-on posts and the other responses and of course this adds to my confusion, somewhat. This is the deal. I already own through two 401k plans (I work for two companies but really I don't and no I will not explain it all) a number of Funds. Throught Vanguard the S&amp;P 500 index, windsorII and the explorer fund and through the other company's 401 k plan essentially some of the same types of funds plus an overseas investment fund. This is my "Locked in" investment money. You don't have much choice in these plans and you pick out the funds by all the cute boxes, graphs and charts etc. I usually pick a few funds that have the needle pegged all the way into the red zone (suppose to represent "risk") or at least yellow and orange. I have also purchased the last two years, Roth IRAs, and plan on doing so again next year. I buy the max and these are also locked in investments. So I was considering using about 5k or more for some fun money -to invest in some individual stocks (or bonds?) or something as a kind of experiment, to see if I could make some money while having complete control of all the investment(s).

So I will take Pokerbabes advice on the books and read up on this "stuff" and once I see that it is probably no different than a 4/8 omaha hi-lo kill game, I will jump into it with both feet. I may pop in and out with questions for awhile, and; If anyone shows interest, I will let you know what I finally invest in or decide to do. Thanks again.

-Zeno

[Wildbill]

Unless you really want to treat this as a semi-serious hobby I don't think you should even bother with the 5k dabble. Its not enough money to do anything but get nicked to death by commissions and leakage. With 5k you will be buying a lot of under 100 share positions and you have little chance of doing all that well unless you get lucky and hit some bonanzas. If you want to treat it as a hobby and learning experience with the caveat that you are almost certain to have more money to work with in the future, then go ahead and get your feet wet. The learning experience will be good for you for when you have real dollars to invest with. Otherwise just leave all your money in growth index funds and ignore the returns or account balances in the meantime. Sure its possible other asset classes could beat you over 20 years, but I would most certainly bet my money on the growth funds coming out ahead, in your case I think the Explorer fund is the growth fund but not sure. I am not a huge fan of the SP500 for long term due to its weighted feature, but it beats leaving money in anything conservative. Once you get about 10 years from your expected retirement age you then need to get more involved and start doing some homework to figure out where to go with the money, but until then I would just put the money in and sit tight.

[Ray Zee]

Zeno, since you wont follow scalf and the planets movements and guide you life by them, maybe playing me 2-7 is best. i will send the limo. just kidding. i used to play alot of the game back in the 80's and early 90's and did very well.
your best investment in life is buying a house. the second best investment is the house next door as a rental. when you have extra money or want to diversify buy some stocks or indexes and hold on for the long rollercoaster ride. i do like motorola and did tout it a while back as i think i see some changes coming with the company. my stock strategy is to find companies that are changing and bet for, or against them, in the direction i think they will go. it forces you to know the comapny and follow it. works for me but maybe not for others.
remember almost all very rich people not running big business throughout history, made their money in real estate.

[PokerBabe(aka)]

Hi Zeno- Since you already have "locked in" long term money in S&amp;P500 and Windsor funds, the 5k of "play money" could be used to buy 200 shares of Home Depot (HD) or 250 shares of Disney (DIS) or McDonalds (Mcd). Or...you could add a bit to it and do as Ray suggests...purchase a condo or a small house. Nothing wrong with real estate. When the real estate market goes down, at least you still have a "whole house" /forums/images/icons/wink.gif When the stock market goes down, you only have half of your investment /forums/images/icons/crazy.gif LGPG and BUY LOW. Babe /forums/images/icons/cool.gif

[PokerBabe(aka)]

Ray,..... Good advice on real estate as diversification. LGPG, Babe

[adios]

"O.K. so stocks are no good."

Didn't mean to leave you with that impression. No I actually think it is well worth your time to acquire as much knowledge as possible about the financial markets. Just be aware that any "investment" in stocks i.e. buy and hold has to be for a very long holding time to be considered an "investment". At least that's my opinion.

[Zeno]

I do appreciate the thoughtful respones everyone gave. I have already ordered three "investment type" books from Amazon.com and will soon be studying and also doing research on companies etc. Also will think about the real estate thing. One of my closest friends as already tried to kick me in the butt about getting a home or land etc. And Mr. Zee -- someday, maybe we will meet across a no-limit or pot-limit table somewhere. I hope so. Time will tell. I best start a side bankroll against that day, I'll probably need it.

Regards to all,

-Zeno

[scalf]

/forums/images/icons/smirk.gif the current planetory allignment is bullish for you, if you act now...gl /forums/images/icons/smile.gif /forums/images/icons/diamond.gif

[PokerBabe(aka)]