Over the years I have made enough mistakes and have had enough successes to learn enough about investing in stocks to have developed my own set of rules. These are general investing tips that can easily be adapted to most styles of investors.
Don't pay any attention to HOT tips
As tempting as the hot stock market tips may sound, don't risk your hard earned dollars on them. Impulsive buys are no different to gambling, so unless you can afford to lose your money, buying just because a friend says they have made a lot of money from a company is no reason to race out and buy it. If the hot stock tip is really worth adding to your portfolio, it will still be worth adding after a couple weeks of research.
Learn as much as you can about the stock before investing in it
Each stock is actually a business, not just a stock ticker symbol that goes up or down each day. You wouldn't buy a business before doing a lot of research into what the company actually sells, what services they provide, what the earnings have been, what earnings are expected to be, and a whole lot more about the business. The famous stock market investor from Omaha, Warren Buffett always refused to invest in businesses that he never understood. He avoided technology stocks as he knew very little about the businesses behind the stocks, which allowed him to miss both the boom and bust of the tech bubble.
Learning about the industry the stock is in can also be as important as learning about the company.
Don't pay too much for a stock
If a stock is getting a lot media attention and everyone from your local butcher to your taxi driver has been buying into it, there's a good chance that the price of the stock is inflated. Compare the company data with similar stocks in the same industry. If they don't compare, move with caution. It may be that the company is a quality stock in a strong, long term uptrend or it could be that a bunch of sheep are simply reacting to media hype. The challenge is to work out which stock is the quality company that demands a premium price and which is the stock that will halve in value.
Admit to your mistakes and don't be afraid to sell a losing stock
No one likes to admit they are wrong, but even the best investors make mistakes. Hoping for your stock to turn around while it keeps losing value month after month, year after year is a no win situation. Some companies will always underperform. Cut your losses and put it into something that has some hope of making you money.
Get Help from a Professional Advisor
Even if you have a lot of spare time to research the market and investing in stocks, it is advisable to see a professional before making any major financial decisions. The tax implications and financial obligations of individual investors may mean that it wiser to pay off debts or invest in other assets. If you are sure that stock market investing is the right thing for you, it is still good to seek professional advice.
With the abundance in financial data online now and online brokers being so easy and affordable to use there has been a massive increase in individual investors entering the markets for the first time. Don't ever feel that you have to buy stocks in haste though. Impatience will burn more people than it will reward. Know the stock, the company, and the industry it is in before even thinking about logging into your internet broker account!
For more than four decades I’ve involved myself in investments, including stocks and bonds, real estate, mortgage lending, and variety of enterprises, some of them hard to describe. However, there is one endeavor that I’ve systematically avoided. It is the mutual fund. At the risk of alienating the investment world, I offer the following observation: Mutual funds are not a particularly profitable way to invest. Let me share with you my biases on this subject.
As with most activities, what we get out generally relates to what we put in. Proficiency on the tennis court requires many hours of wielding a racquet. Mastery of an academic subject necessitates study. Similarly, to place your money for favorable return, you must familiarize yourself with the intricacies of each investment. For those of us who make this an active part of our lives, questions must be asked—and astutely answered. If we fail to do so, bad things happen.
This brings us to reality. The fact is, a majority of persons are unable or unwilling to analyze investments. There is something in the human psyche that tends to discourage methodical scrutiny. The average individual prefers to broad-brush most subjects while accepting pronouncements. Thus, if a banker or a broker assures that an offering is acceptable, it’s accepted without deliberation. As implausible as it may seem, this is how most persons conduct their financial lives.
It’s from this premise that the most powerful and profitable marketing tool of the securities industry developed. Since formation in 1924 of the first open-end investment company in the United States, known as the mutual fund, its acceptance by the public has grown to become universal. Quite simply, a mutual fund controls a pool of money provided by its shareholders that it invests in a portfolio of securities selected by the fund’s managers. In recent years they have proliferated like mushrooms, with over fifteen thousand registered funds in existence, and total assets now exceeding $10 trillion. They exist in near-infinite varieties offering almost every conceivable mix of securities. For the potential investor with both limited expertise and assets, this type of investment vehicle seems to meet two important criteria: astute selection of securities and advantageous portfolio diversification. Whatever else you may say about the mutual fund concept, one thing is undeniable: It truly captures the essence of the average citizen’s disdain for financial involvement. Each participant need only exhibit the astuteness demonstrated by loveable Sergeant Hans Schultz of the 1960s “Hogan’s Heroes” TV series, who regularly declared: “I see nothing! I hear nothing! I know nothing!” And in reality the mutual fund was designed so that only one involvement is required by the investor: contribution of money.
Though in theory the mutual fund meets the intended needs, theory and reality do not always coincide. Before describing my fundamental concerns, let me acknowledge that many mutual funds operate satisfactorily, and that large numbers of investors profited handsomely over recent years. Recognize, however, that these favorable results did not necessarily reflect the skill of the fund managers, but rather the consequence of a period during which the major indices posted their greatest sustained rises in history. There is no particular magic involved. These funds merely rise and fall with the general fortunes of the market.
When comparing the mutual funds against direct purchase of corporate stocks, the latter provides the better return. The reason is obvious. The additional overhead costs of the mutual fund operation must be superimposed on the investment. And don’t imagine that these costs are insignificant. Over the years the industry has devised ways to separate the populace from its money. Most managed funds assess “loads,” which are commissions charged to the buyers that run as high as 8½ percent of the purchase price. Although the conventional recommendation is to avoid the load in preference to the no-load funds, many of the no-load funds incorporate equally objectionable fees. These include redemption fees, often known as "back-end loads," to be paid when the shares are sold. A variation on the redemption fee is a deferred charge when shares are redeemed within a certain number of years, known as a deferred load. Another contrivance approved in 1980 by the Securities and Exchange Commission is known as the 12b-1 plan that permits a fund to confiscate up to 1¼ percent per year of the fund's assets for marketing purposes. At this rate, a participant in such a no-load fund over ten years contributes 12½ percent of the investment in such fees. You may add to the list of undesirables those funds that debit portions of reinvested interest, dividends, and capital gains, known as reinvestment loads, as well as other less than obvious ways some no-load funds separate client from asset.
To be certain, the lowest management fees are those assessed by index funds, which are an assembled collection of securities whose composition mimics that of a particular market index, such as the Dow Jones Industrials or the Standard & Poor's 500. As investment analysis and decision-making is not required of the managers, no justification exists for a substantial fee. However, use of the index fund raises a fundamental question: What justification is there for a mix of securities often selected at random? It’s my opinion that the index fund is the logical extension of the know-nothing canon. Not only need the investor disavow knowledge of anything financial, but the same rule pertains to management. An arbitrary set of index funds can then be designed and offered in which there ceases to be any responsibility for performance. Profitability for the fund operators becomes based solely upon the fees that can skimmed from the pot. In this way, the operation of an index fund becomes an exercise in pure marketing.
Tune in, if you will, to one of the many sources of financial advice offered to the general public. The investment purveyors seem limitless, all vying for your attention. In addition to a presence on radio and television, in newspapers, and over the internet, many of the authorities are now recognized authors, with their books aggressively advertised and prominently displayed. There is certainly a wide array of information being disseminated. Irrespective of the basic soundness of the investment advisory profession itself, the overwhelming fixation of most practitioners is on corporate securities.
No discussion of securities in the first decade of the twenty-first century may ignore what is now the most powerful and profitable marketing tool of the industry: the open-end investment company known as the mutual fund. Since formation of the first such company in the United States in 1924, acceptance by the public grew to become universal. Quite simply, a mutual fund controls a pool of money provided by its shareholders that it invests in a portfolio of securities selected by the fund's managers. In recent years they have proliferated like mushrooms, with over fifteen thousand registered funds now in existence.. vastly more than the number of companies found on the New York Stock Exchange. They exist in near-infinite varieties offering almost every conceivable mix of securities.
For the potential investor with both limited expertise and assets, this type of investment seems to meet two important criteria: knowledgeable selection of securities and advantageous portfolio diversification. Though in theory the mutual fund meets the intended needs, theory and reality do not always coincide. Irrespective of the basic soundness of the investment advisory profession itself, the overwhelming fixation of most practitioners is on these funds, often dominated by index funds. There is no particular magic involved. These vehicles merely rise and fall with the general fortunes of the market. There are legitimate arguments why this approach makes sense for the advisors, if not always for their clients. A primary reason is that shares in a mutual fund now occupy an anointed status within both the investment and the legal communities. Within most limits, an advisor is held blameless if recommendations on this investment prove less than astute. And, as expected, with their being widely touted, natural client resistance is reduced. What has thus been generated by the industry is investment by default.
Although I have objections to the basic concept of mutual fund investment, I can’t overcome a national obsession. Perhaps the best I can do is inform you of matters you must consider. As a start, familiarize yourself with the details of the mutual fund industry. Recognize terms such as alpha and beta coefficients, yield, distribution, load, and volatility. Understand the concepts of conversion privilege and net asset value, and distinguish between index, sector, and non-diversified funds. In short, do your homework, and garner the information from a source other than the firm through which you purchase your investments. Only after you know what is going on can you evaluate whether an offering merits your approval. A visit to the business section of your library or local bookstore will provide what you need. An excellent publication is Barron's Keys to Investing in Mutual Funds.
Next, recognize that the lowest management fees are those assessed by index funds, which are an assembled collection of securities whose composition mimics that of a particular market index, such as the Dow Jones Industrials or the Standard & Poor's 500. As investment analysis and decision-making is not required of the managers, no justification exists for a substantial fee. From this point, the type and amount of fees and charges become less predictable. A major distinction is made between "load" and "no-load" funds. These "loads" are commissions that run as high as 8½ percent of the purchase price. The conventional recommendation, to avoid the load in preference to the no-load funds, is where the admonition usually stops. By rights this is just the start. Many of the no-load funds, although assessing no up-front sales charges, incorporate other equally objectionable fees. These include redemption fees, often known as "back-end loads," to be paid when the shares are sold. A variation on the redemption fee is a deferred charge when shares are redeemed within a number of years, known as a deferred load.
Another goodie approved in 1980 by the SEC is known as the 12b-1 plan. This permits a fund to confiscate up to 1¼ percent per year of the fund's assets for marketing purposes. At this rate, a participant in such a no-load fund over ten years contributes 12½ percent of the investment in such fees. This may not be a load in the technical sense, but the Greek mythological figure Atlas would certainly recognize it for the load it is. You may add to the list of undesirables those funds that debit portions of reinvested interest, dividends, and capital gains, known as reinvestment loads. Finally, there are other less than obvious ways some no-load funds separate client from asset. You must scrutinize the fine print to know where the bodies are buried.
My discomfiture is with the evolution of an industry in which the placing of investors' money seems, at best, a secondary consideration. The fact that a substantial and growing percentage of the nation's assets is now committed to funds fuels a part of the concern. The rapid growth in the numbers and varieties of funds offered triggers more uneasiness. But it is the synergistic effect, coupled with basic human nature, that could result in unpredictable problems for the economy and the nation.
Let me conclude with a final thought. What the future holds for the mutual fund industry is hard to say, but one thing is certain: The fortunes to be made, legally or otherwise, fuel an insidious attraction. If it’s becoming a self-propelled labyrinth with few realistic controls, in the hands of persons who will systematically loot the assets with no compunction, the nation will surely experience a misfortune of momentous proportion
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