Question #9: Should I subscribe to a newsletter or go to a broker for help
picking stocks? Or am I better of making my own investment decisions and
not paying for advice?
Answer: The answer to this question depends on the answer to two
other questions. How much time will you commit to working on your
investments? And how comfortable do you feel analyzing numbers?
People who claim to have found the single trick to making money in the
stock market shoot e-mails everywhere. “I made 932%, and so can you!”
Sometimes they’re lying about the return, and sometimes they’re telling the
truth. Even if an investor did manage to make a 932% return on a stock
once, you can’t assume he’ll do it again. Markets simply don’t work that way.
Real stock analysis—the type of research performed by experts who
manage other people’s money and can get fired if they mess up—takes time.
You don’t need to commit 40 hours a week, but unless you know you’ll
spend at least 3 hours a week reading about your companies, following
market news, and comparing one stock with another, don’t try to go it alone.
Find someone you trust—a newsletter editor, a financial planner, or an
online guru who actually offers advice without spitting through the
computer screen—and pay attention. You don’t have to follow anyone’s
advice exactly, but you’ll make better decisions when you can start your
own analysis by looking at stocks other people like, or when you can use
someone else’s strategy to double-check your own selections.
Now, regarding the numbers. More and more, math geeks rule the world.
Stock analysis isn’t rocket science, and you don’t need a PhD in mathematics
or statistics to analyze stocks. The job merely requires a flexible mind, a
willingness to learn a few new ideas, and a calculator. In Chapters 4 through
7, you’ll learn how to analyze stocks from a variety of angles. If you can
handle those calculations, you can do your own analysis. (Most high school
graduates willing to put in a little effort can handle the math.)
Question #10: The stock market is falling, but I like the looks of Acme
Widget. Should I buy the shares now or wait until the price dips further?
Answer: Plenty of investors make buy and sell decisions based solely on
a stock’s price action—a process called technical analysis. Technical
analysts look at a stock’s price chart and draw conclusions about where it
will go based on where it has been. Some people make money this way, and
some lose it. However, even experts will agree that predicting and timing
short-term stock or market movements is extremely difficult.
This book provides you with the tools to analyze stocks from a
fundamental standpoint: by looking at their operating statistics or valuation
ratios. Once you identify a stock with strong investment potential at its
current price, you take a risk by not purchasing it immediately. Sure, the
stock could dip, offering you a chance to snap it up at a bargain. However,
the price could also rise, eating away some of your potential profit. As a
practical matter, investors who loved a stock at $50 per share tend to find it
far more difficult to pull the trigger on the buy after it jumps to $60, even if
it rises on good news and the future still looks bright.
Markets often shift direction erratically, and just because stocks have
declined over the last week doesn’t mean they’ll keep declining any more
than it means they’ll reverse course completely. In most cases, you just can’t
tell. Unless you have some personal insight about the direction of the stock
or the market in the coming days, don’t hold off on your purchase in the
hopes of buying at a better price.
Keep in mind that after you buy, the market could always go up or go
down. Don’t kick yourself for acting too soon if the market declines, and
don’t pat yourself on the back because you bought right before an upturn. If
you purchased the right stock, you’ll reap your reward in time, regardless of
what the market does immediately after you make your buy.
These first two chapters looked at the very basics of the stock market—why
to invest, how to get started, and answers to common questions. In the next
chapter, we’ll take a closer look at the different kinds of investment
opportunities that exist today.