1 month NOOB INVESTING update

[DesertCat]

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Keep in mind that Baruch and Livermore at many times made millions of dollars in the stock market. I'm not sure about lexicographers.

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Jesse Livermore went bust four times and committed suicide, dying penniless. He was a true speculator.

Baruch made a huge donation to Woodrow Wilsons campaign fund. He was rewarded with inside information from government officials he used for his trading decisions. That would be illegal today.

[Sniper]

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Fundamental analysis tells you what a stock is really worth. You will only buy it at a substantial discount to that value (Graham's "margin of safety"). If the stock gets cheaper after you buy it, why would you sell it? You will either hold or buy more.

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This may hold true for a pure breed Value Investor that has done a complete analysis, but very few people actually make stock investing decisions this way.

BTW Cat, would you care to post a fundamental analysis of Party's stock to show off how a true fundamentalist thinks?

[buffett]

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Cat, would you care to post a fundamental analysis of Party's stock

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This reminds me of a recent quote from a Ben Stein article: "Warren Buffett said a few years ago that he would like to give a business school exam asking students to value an Internet company. Anyone who gave an answer other than "I don't know" would fail."
-web

[DesertCat]

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This may hold true for a pure breed Value Investor that has done a complete analysis, but very few people actually make stock investing decisions this way.

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Even if you don't, it still doesn't make sense to sell something for much less than you believe it's worth, just because the price declines. That is letting someone else's fear drive your own investment decisions.

From Warren Buffet.
"“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business. Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his.

Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you.

But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game.”

And even investors who don't do the full fundamental analysis can still understand the concept of value. Many people make decisions based on PE and PEG ratios. For example, one of my favorite investments right now is a small cap company that has been growing earnings for a decade at around 25% per year, trading for about 10x 2005 earnings. Great management, great business model, over 48 quarters of earnings growth, and no growth limits for at least a decade.

Any investor might get excited about this company since it's EPS growth rate is much higher than it's PE. If you bought today you'd pay about $9.80 cents per share. If it dropped below $9 per share tomorrow, you'd recommend selling it? Even when you knew it is highly likely to be earning $2 per share in 3 years, and $4 per share in 6 years?

The first stock I ever invested in as pure value investor was Preview Systems. They had announced they were liquidating and would pay out an initial distribution of at least $3.25 as soon as shareholders approved the plan. I bought some shares at $2.95 a month before the vote. Are you suggesting that if my shares dropped 8% in that month I should have sold?

If I did, I would have missed out on the first distribution which was actually $3.50, and two more later distributions that totaled another 40 cents or so. About a 30% return with a one month holding period.

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BTW Cat, would you care to post a fundamental analysis of Party's stock to show off how a true fundamentalist thinks?

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I don't do foreign stocks, not even canadian. I have too many attractive opportunities in the U.S. markets, so don't have time to learn the processes of researching and buying foreign stocks.

I'm guessing the answer is no but I have to ask anyway. If I have no income for the year, but have recieved $2,000 in gifts, can I put that 2,000 into a roth IRA?

[Ed Miller]

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I'm guessing the answer is no but I have to ask anyway. If I have no income for the year, but have recieved $2,000 in gifts, can I put that 2,000 into a roth IRA?

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Nope. Has to be earned income.

[[censored]]

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I don't know exactly what the 7-8% rule is, but could you think of an equivalent 7-8% rule for poker that would be sound? If not, I urge you to question it for securities as well.

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Ed,

With all due respect, this is bad advice for stock market traders/investors. (Unless you are advocating a smaller stop loss) You must have a stop loss, if you hope to make any money long term from the market.

The 7-8% rule, to cut your losses short, comes from William O'neill. "The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you're wrong."

FWIW, as an active trader, I use a 1-2% stop loss rule! This is a very common rule for traders.

As for Poker... You must know when to fold 'em!!! It's all a matter of discipline and patience.

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With all due respect dude this is laughable, entirely laughable.

Oh and I'm not basing this on something like the intelligent investor but rather a degree's worth of education in finance. Simply put nothing in your above statement is remotely true. It is an abirtrary rule and nothing more. You might as well advocate buying stocks and the end of the a quarter and selling them in late September.

[Sniper]

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I don't know exactly what the 7-8% rule is, but could you think of an equivalent 7-8% rule for poker that would be sound? If not, I urge you to question it for securities as well.

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Ed,

With all due respect, this is bad advice for stock market traders/investors. (Unless you are advocating a smaller stop loss) You must have a stop loss, if you hope to make any money long term from the market.

The 7-8% rule, to cut your losses short, comes from William O'neill. "The whole secret to winning big in the stock market is not to be right all the time, but to lose the least amount possible when you're wrong."

FWIW, as an active trader, I use a 1-2% stop loss rule! This is a very common rule for traders.

As for Poker... You must know when to fold 'em!!! It's all a matter of discipline and patience.

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With all due respect dude this is laughable, entirely laughable.

Oh and I'm not basing this on something like the intelligent investor but rather a degree's worth of education in finance. Simply put nothing in your above statement is remotely true. It is an abirtrary rule and nothing more. You might as well advocate buying stocks and the end of the a quarter and selling them in late September.

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A finance degree does not, in and of itself, make you a great trader or investor. Although, you might have better than average skills in evaluating the financials of a company. (fwiw, my degree was also in finance and my work history is in finance and technology)

William O'neill's 7-8% stop rule is part of his trading system, which is based on extensive analysis that he has done to determine what works!

Active traders using a 1-2% (of equity) stop loss, is a widely recomended way to ensure that no single bad trade cripples you and takes you out of the game!

Fundamentalists, use different methods, but they also use "stops" that relate to the changing value of a company.

If you don't have a way to know that "you are wrong" to be in a stock position, you are only asking for trouble... Just like you shouldn't take AA to every showdown, just because it was the best hand pre flop!

I highly recommend that all traders and investors have a trading/investing plan that includes some mechanism to "stop" you out of a losing position. You must have a system in place other than "Hope and Pray"! [img]/images/graemlins/wink.gif[/img]

[James282]

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If you don't have a way to know that "you are wrong" to be in a stock position, you are only asking for trouble... Just like you shouldn't take AA to every showdown, just because it was the best hand pre flop!

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The showdown is a long ways off in this game. What you are talking about is not folding AA when the river pairs the top card and brings a flush draw, it's essentially folding AA preflop because you lost with it the last 3 times you played it. Losing those previous times doesn't change the value of the hand in the future.

But in the stock market, we don't come across pocket aces very often. We find far more 89o blind defense situations, or J8s after X number of limpers, or a small pairs after 2 limpers and a raise. Small edges either way that by themselves don't effect our bottom line greatly but taken as a whole, do. Our hand to hand variance with these hands is much higher than it is with AA, and we need to not get so caught up in the recent results that we've had with these hands, and instead explore the fundamental theory that caused us to play(or fold) these hands in the first place.

The poker analogy fits, but not in the way you believe it does.
-James

[DesertCat]

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William O'neill's 7-8% stop rule is part of his trading system, which is based on extensive analysis that he has done to determine what works!



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His analysis is called "back-testing" and it's notoriously inaccurate. To use a poker example, it's like saying I reviewed my pokertracker database, and found that if I reraise with 32o on mondays, wednesdays and thursdays, it's profitable (even though a huge loser on other days), so I'm going to do that in the future and have a positive expectation.

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Fundamentalists, use different methods, but they also use "stops" that relate to the changing value of a company.


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If you are using stops, you aren't a fundamentalist, you just say you are. All of the leading value investors that I'm aware of (including Buffett, Graham, etc, etc), none uses or used stops. And every one would laugh at the suggestion.