Picking Stocks like Gambling?

[PRICEPLUS]

I was talking to a friend of mine the other day who thinks the stock market is a scam. He believes that the wealthy few control the moves in the market. He further believes that it is impossible to make good picks on a regular basis.

I am of the opinion that you can make sensible purchases through research and calculated risk. My position now is in mutual funds and ETFs that are Indexes and diversified. I may make selected purchases in some stocks.

What say you folks!

[Haku]

For what it's worth, I agree with your position.

[Fern]

I think it's possible thru sheer randomly decent luck to pick decent stocks about half the time, i'm talking individual equities, not mutual funds, but the other half the time you do poorly because it's impossible to anticipate every catastrophe that could send a stock pick tanking.

Like who would ever think that a reputable company like Bausch & Lomb would be so gravely damaged by the eye fungus in their contact lens saline solution?

I think individual stock picking is best limited to the industry(ies) you know intimately well, due to your career or for other reasons, but that you should stick with mutual funds for the vast bulk of your portfolio. Most people don't have the time to not just do the initial research needed to purchase the stock, but to monitor it on a continuing basis as well.

They've done studies showing that while guys tend to like buying stocks more than women, who buy more mutual funds, the women do just as well over the long run.

[Ima saver]

For my birthday several years ago, my husband decided to buy me some stock as a surprise. My father use to be the general manager of a semi pro baseball team called the Red Hats. The stock, Red Hat had just come out as an IPO.
My husband bought me some shares at $7 a share. It was recently selling for $28 a share. But that was just pure luck.

[flash]

Originally Posted by Fern

I think it's possible thru sheer randomly decent luck to pick decent stocks about half the time, i'm talking individual equities, not mutual funds, but the other half the time you do poorly because it's impossible to anticipate every catastrophe that could send a stock pick tanking.

Like who would ever think that a reputable company like Bausch & Lomb would be so gravely damaged by the eye fungus in their contact lens saline solution?

I think individual stock picking is best limited to the industry(ies) you know intimately well, due to your career or for other reasons, but that you should stick with mutual funds for the vast bulk of your portfolio. Most people don't have the time to not just do the initial research needed to purchase the stock, but to monitor it on a continuing basis as well.

They've done studies showing that while guys tend to like buying stocks more than women, who buy more mutual funds, the women do just as well over the long run.

I think you can pick stocks well, but it does require research, thought, and evaluation of your risk level. People who randomly buy on a whim, or because Kiplinger said the stocks did well last year (oops, too late) have problems. Not as risky as commodities, but you have to keep focus.

[JBinKC]

I guess I am super lucky according to your friend. I disagree with him but you definitely need to know what to look for and you better be loaded with tons of information not only about the company but its competitors and general economic conditions. It is not an easy process but it can be done. As for market timing I agree it is becoming much more difficult. The old traditional indicators apparently aren't working that well.

As for the super wealthy most of them incur very little risk as they get exhorbitant salaries and rip off sharehholders by issuing dilutive stock options to themselves at large discounts to their real worth.

[Bluezy]

Originally Posted by PRICEPLUS

I was talking to a friend of mine the other day who thinks the stock market is a scam. He believes that the wealthy few control the moves in the market. He further believes that it is impossible to make good picks on a regular basis.

I am of the opinion that you can make sensible purchases through research and calculated risk. My position now is in mutual funds and ETFs that are Indexes and diversified. I may make selected purchases in some stocks.

What say you folks!

I tend to agree with you, Price. I sit back and watch certain stocks like Berkshire Hathaway climb during this Bearish market, while the panic sell-offs on Emerging Markets continue...Just the "Chosen Few" are going to make real profit with stocks.

Cheers!

[Crystallas]

Its not for everyone. But its not a scam, and its not just for the wealthy. You don't go into stocks, buy your favorite companies and then expect them to grow. There is a great deal of reading between the lines to figure out where to put your money.

You learn a lot about how not every idea is a good idea. Reading reports and studying companies, you see quickly how EVERYONE seems like they have a good idea. If youre the type of person who falls for sales campaigns easily(infomercials make you spend, overhyped products *cough* ipods, have to buy brand name clothes to feel good... ect) then the stock market is most likely not for you, and you should stick with something simple, like mutual funds or more tangible investments. Its not an insult on people, its just how it is.

[msnln]

I have been in stock market for over 16 years and first few years I really stunk at investments. My first investment lost over 50% in matter of few months. After a few stinkers, I started hitting the books and reading up on reading financial statement, portfolio theories, technical analysis.

Over the years, I learned that you can beat the market through studing each company's financial condition and buying at right entry points through the technical analysis. Most people tend to think technicals are scam and do not work and many times they may not work for short term but longer term technicals work well for me. I have had losing trades, but over the last 8 years, I have not had any down year and this includes bear market of 2001-2003.

My first rule is to diversify, sometimes excessively. I typically hold up to 25 different stocks. My second rule is not to lose too much on one position. A friend who is a portfolio manager told me years ago that trading stocks is very simple and there are only four outcomes as result. You can make a lot of money, you can make little money, you can lose little money, or you can lose a lot of money. As long as you can avoid that last outcome, you will make money. Set a loss limit. My third rule is not to get too greedy and know when to say enough profit is enough. I have many winning positions become losing positions because I got too greedy or wanted just a little more profit. When a stock moves up too much to the point where charts cannot show where the resisitance is and starts going down, then it is time to take profits and wait for a better entry points.

Every so often I look at the stocks I hold and ask myself if I would be buying that stock today. If my answer is no, I look to sell that position. Just like anything, stock trading takes practice and patience. You need to learn what works for you and learn it really well. It took me 5 years of down or flat years to learn this but this was before internet and all information was available. With all the information out there, it should take a lot less time now. In any case, now I beat the market averages by 2 - 3X consistently. I was up 25% before the correction earlier this month, but after indices gave back all gains, I am still up 16%. I think this type of return can be achieved by anyone, if they would commit just 1-2 hours daily to learning the market.

[Crystallas]

Good post msnin. My first few months were the worst. I was as nervous as a homeless alcoholic for that whole time. I lost 20% and if I didnt get a chance to learn the hardway, I would never have figured out my own plan. Thats really good that you made up in a bear market. I moved onto tangibles for 4 years because I couldnt make out enough profit to make it worth spending all that time researching. I guess you need to take the good with the bad sometimes.

[msnln]

I always tell beginners to start out with a small capital, small enough the it won't matter even if you ,lose everything. As you acquire necessary skills and confidence, you should add more funds slowly. I have yet to see anyone who has made any money with initial investment. If you are conservative investor, best you can do is break even for some time and if you like to trade and gamble (which most new investors are), chances are you will lose some before seeing any profits. Anyway you cut it, you have to pay the piper. Only when you learn to manage the risk, is when you can expect to see steady gains. I am not sure what tangible investments you are in Crystallas but I tried commodities futures trading in 2001 for about three months. First month was great as I made 300% but within three months, I had lost everything and gave up. I guess there is no investment that is right for all

[Crystallas]

My tangibles were things that could be sold on ebay, collectables ect. I did pretty good with buying good comic books before Marvel would release the movie. Then I sold the stuff I didnt want for my own person. Daredevil stuff was my best investment in that period. First appearace of electra books were bought for $10-30 then sold for over $150.
My purchases sometimes arent business decisions. The way I see it, if my hobbies involve collecting things that appreciate in value, then its a win win. Im actually glad I became involved in it. I was able to buy a lot of things that I couldn't afford as a kid for a great price. So there is also a large amount of enjoyment in tangibles. Something hardcore investors need, because the market will eat you alive with stress if you cant unwind(without blowing your paycheck.)

[msnln]

Sounds like a fun way of making money. I had a friend in high school who used to collect comic books and he would have boxes full of comics in his room, all individually covered in plastic. I never thought returns would be that high, although I knew there was a market for such things. I think stock investment in similar to comic books in a sense that you need to buy at the low before a major news is announced or when long term fundamentals dictate. You knew that if Marvel was making movie about a comic book character, then comic books would appreciate. Stocks are the same. You need to think where the economy is and what companies will benefit from current market condition. I bought Marvel comic books stock last year just before Fantastic Four was released. Reviews were terrible and nobody seemed to like the movie. But it was beginning of summer and there were no other blockbusters. So I took a gamble and bought the stock. Monday following the release, Fantastic Four was highest grossing movie for the weekend and stock moved up 20+%.

A long term investment I had made in 2003 is Corning (GLW). They make fiber optic lines and LCD components. At the time I bought it, everyone was bearish on tech companies and people were saying only about 10% of fiber optic lines that were installed during dotcom era was being utilized and that outlook for Corning was negative. I watched a program on PBS on the subject and they were saying that although there was excess capacity at the moment, they will eventually need to be replaced due to decay(obsolescense) or additional lines put in as our needs will increase. At the time, stock was $10 and I have seen it rise to around $30. Currently stock is around $25 and I have added on to the position.

I think trading any product is same in its concept. Comic book market can crash or depreciate too but you have comfort of knowing you own the comic book that you can hold, read and enjoy. Stock, of course, is not tangible but I take comfort that I am a small share owner of a viable business that is contributing to the growth of the economy, or forefront of exciting products. Although there have been instances when I have regretted buying stock in particular companies but that was from making spur of moment decisions from greed without analyzing companies. However, when I buy companies after a thorough due diligence, I have confidence in my decision and price decline does not cause any stress as I know stock will go up to suppport company valuations. But I do set strict loss limit at 10% and that is the key of not being eaten alive with stress

[Duchesse]

I too have approx. 25-30 stocks in my portfolio at any given time. I didn't start with so many, I started with 15 I researched and over time I picked more. I find that my approach as a turtle (the race between the tortoise and the hare) is exactly as you said. I make a little money or I break even. I began investing in the stock market 4years ago. I buy dollar cost averaging at Sharebuilder and I have some DRIPS.

At first I thought I was spreading myself too thin, but I wanted to diversify and keep my losses to a minimum. I was SCARED of the stock market, so I stayed with real estate, bonds, mutuals (hate 'em), and Money Markets for years.

At first my portfolio had no depth, any gains were small, since I only had on average 5-20 shares of each. My goal was income and growth. Most of my picks are dividend paying bluechips and about 7 growth stocks on the Nasdaq (msft, intc, siri,payx, sbux). I've been at this for about four years now and I am starting to see positive result from this approach. I agree with all of you. You must do your research, you must be realistic, and you can't be greedy or you will LOSE.

In my humble opinion, if you are conservative you won't make a lot of money but you won't lose alot either.

[WellManicuredMan]

Originally Posted by Duchesse

I too have approx. 25-30 stocks in my portfolio at any given time. I didn't start with so many, I started with 15 I researched and over time I picked more. I find that my approach as a turtle (the race between the tortoise and the hare) is exactly as you said. I make a little money or I break even. I began investing in the stock market 4years ago. I buy dollar cost averaging at Sharebuilder and I have some DRIPS.

At first I thought I was spreading myself too thin, but I wanted to diversify and keep my losses to a minimum. I was SCARED of the stock market, so I stayed with real estate, bonds, mutuals (hate 'em), and Money Markets for years.

At first my portfolio had no depth, any gains were small, since I only had on average 5-20 shares of each. My goal was income and growth. Most of my picks are dividend paying bluechips and about 7 growth stocks on the Nasdaq (msft, intc, siri,payx, sbux). I've been at this for about four years now and I am starting to see positive result from this approach. I agree with all of you. You must do your research, you must be realistic, and you can't be greedy or you will LOSE.

In my humble opinion, if you are conservative you won't make a lot of money but you won't lose alot either.

If you are only going to be conservative and don't gain or lose a lot, then wouldn't it be easier to buy an index fund or one of those life cycle / target retirement funds from T Rowe. Price, Vanguard, and Fidelity? I really like Vanguard's Target 2045 fund.

[msnln]

Mutual Fund is good for people who have little care or time to learn about the stock market and want to pay someone anywhere between 0.50% to 2+% fees. But most fund managers underperform the market averages. On the other hand, you get instant diversified portfolio. If you put in some effort to learn about the market, you can outperform most mutual funds.

It is very difficult for mutual fund managers to beat the market by design. They get a huge inflow of funds at the top of the market. Most investors wait to see market rising before adding additional capital, or investing. Almost always, that is the top of the market. Mutual funds must invest all the incoming cash as their mandate allows only certain percentage to be held as cash. Also, mutual funds cannot short, so fund manager must buy overpriced securities.

On the downside, things work reverse. When investors see market declining, they start liquidating mutual fund positions. Inevitably, mutual fund manager must sell securities to meet the redemptions. Many times, these are times when assets are cheaply priced and should be purchased. Then, fund manager takes his cut of fees, further reducing returns for investor.

Indexing has been popular of late because so fund managers' inability to keep up with the market due to above limitations. However, problem with indexing is that by nature, index contains good investments along with bad investments to show market averages. By selecting just good companies with solid fundamentals, anyone can create a portfolio that will beat any market averages long term.

About only time I use mutual fund is when I invest overseas and cannot purchase directly, or direct purchases would be too expensive. Up until few years ago, brokerage commission was prohibitively expensive for individuals but with discount brokerages, this barrier is eliminated.

[Duchesse]

Originally Posted by WellManicuredMan

If you are only going to be conservative and don't gain or lose a lot, then wouldn't it be easier to buy an index fund or one of those life cycle / target retirement funds from T Rowe. Price, Vanguard, and Fidelity? I really like Vanguard's Target 2045 fund.

According to most finanacial advisors, at my age my portfolio should consist of at least 50% stock and 50% fixed income investments. My portfolio contains less than 20% stocks. Again, I am very nervous about the stock market and believe in taking my time. I don't expect to, but if I lose every cent I have invested in the stock market, I'm still going to retire on time. If you are ahead of the game you can "go on like a turtle."

[msnln]

Duchess,

You are doing fine. Financial advisor's role is to sell products to you and churning stocks make them more money than fixed income products. Everyone has different risk tolerance and it's always better to sleep well at nights than make (or lose) few extra bucks short term. You have the right investment approach -- you are in it for a long haul.