Archive for April, 2010

Have you made investing mistakes?

April 25th, 2010

Sometimes I think I’ll never get my investing decisions right
The stock market doesn’t repre¬sent the current economic situ¬ation in the world. Rather, it shows what people think will happen in the future. If “the market”, meaning all the people who are buying and selling stocks, be¬lieves that the world of money will improve, they will start buying stocks. The opposite is also true; if they feel that health-care reform, war, and unem¬ployment loom forebodingly, they’ll sell.

Buyers and sellers
If there are more buyers than sellers, the stock market will rise; if more people cash out their stocks, the prices will fall. This is because people normally make decisions based on how they feel, not on logic. As such, you can attribute the swings in the stock market to emotions rather than numbers.

Knowledge
Now that you have this background and knowledge to the market, there are two active steps you can take. The first is to understand that your own portfolio’s movements may not accurately reflect the overall economy, and the second is to realize how you yourself make investment decisions.

Psycho-Market
If the underlying financials of a company aren’t represented by its share prices, consider what “the market” believes, re¬gardless of whether the facts sup¬port this. For example, if the market believes that the price of oil will jump, you might want to consider investing in drilling companies. Even if we can’t pre¬dict the price of oil, if enough people believe it will go up, then they will buy stocks that could profit from its move, and you may profit from purchasing shares in a drilling company.

Emotional investing
When it comes to investor psychology, be wary about letting your emo¬tions get the better of you when making investment decisions. A friend I met recently said that she knew she should have a percentage of her portfolio in stocks, but couldn’t bear to lose money and even large-cap stocks were too risky for her. Therefore, I advised her to buy only CDs (certificates of deposits in banks, which are insured by the FDIC).

Not that easy
In times like these when the market is still in an unsettled yoyo state after its so-called recovery from the recession, making good decisions is very difficult. I have missed a couple of great opportunities because I held back due to nervousness and but on the other hand, I made some decisions that have turned out to be great, despite the dire warnings of all the investment advisory services. On the whole I am highly satisfied with my decisions.

Benjamin Graham
From time to time I read Benjamin Graham’s “Intelligent Investor.” Its principles are timeless, unquestionably accurate, and contain a sound intellectual framework for investing that has been tested by decades of experience. This reaffirms my faith in the market and in myself and gives me the boost of confidence I need for the coming months of buying and selling in the marketplace.

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Shop around before you buy

April 23rd, 2010

I’m sinking under the weight of special deal offers
My credit card company persists in offering me “special deals” on various products. Some of these are mighty tempting and I have to keep a tight rein on myself not to submit. But lately the offers are becoming worse. Last month I was offered a generic brand of the “nicer dicer” with only one of the two blades on sale from $150 for only $25. I was also offered a set of three pots on sale from $250 for only $100.

A rip-off
In reality, these prices, even the sale prices, are complete rip-offs. I can get the original nicer-dicer at a store in the market area for only $8, and I can buy pretty much any three pots I want for $30 to $50, provided I am not looking for solid gold pots. As an aside, I advise against the nicer dicer. I own one and can tell you first hand, any time that you save cutting will be spent cleaning all the little parts of the blades. Get the slap-chop instead.

Unrealistic retail price
By telling you the retail price, the company can tell you that what you are getting is a real bargain, even though it is a complete rip-off. After all, the retail price rarely takes into account supply and demand and is usually an imaginary figure dreamed up by the marketing department. By using an unrealistic retail price, companies aim to gain from the uninformed consumer who does not know the true market value. The real trick is in knowing the market value of the skirt in the window, the book on the shelf and the gadget in the electronic store.

Shop online
So how do you know when a deal is a deal? One solution is to shop online. Once you know what you want you can check out a bunch of websites in order to get the best deal. But when you are dealing with different products that you need to purchase offline and you have no idea what you should be paying, things can get more complicated. You need more information. The best way to get information is to get price quotes. This means the Rule of Three.

The Rule of Three
The Rule of Three is that when I want to buy something and I have no idea how much I should be paying for it, I get three quotes and then go with the cheapest or bargain one of them down. This rule has had so many applications and has saved me thousands of dollars.

Examples
When I go on vacation, I get prices from three cab companies. I call up all three the first couple of time I order a cab and quickly learn which is the cheapest. When I bought a mosquito zapper, a fantastic investment, I walked into three stores and asked the price. Within three minutes I learned where to get the best deal.

Posted in Personal / Internet | No Comments »

Were you an online casino investor or casino gambler?

April 22nd, 2010

How Americans caught a bad case of casinositis
The American stock market underwent a dramatic regression in the early 1990s when it retreated from mature, responsible behavior to infantile capriciousness. The next 15 years, from 1995 to 2009, looked completely different. The swings up and down were much more violent and average returns per year were much lower. Trading was far more volatile and the rewards were far more ephemeral, a nightmare scenario for investors.

The internet arrived
Over the last 15 years, the American stock market underwent a revolution that made it accessible to the broad public. Flocks of amateur investors leaped into the market, people driven by momentum rather than by cold analysis of fundamental data. That revolution was enabled by the advent of Internet and online trading.

Online trading
This broad accessibility to the stock market can be broken down into two aspects. The first is continuous coverage of developments in the market by websites. The second is immediate response by investors. Thousands of amateur and professional players could respond to information, however significant or meaningless or erroneous, in real time with the click of a mouse. The result was a huge increase in irrelevant noise arising from the markets. In parallel, trading fees plunged by double-digit percentages during the 1990s, mainly the fees charged intensive traders.

Trading fees
When you buy or sell a financial asset (stock, bond, whatever), you pay a fee. Always. But those fees dropped sharply. So the cost of a decision to buy or sell shares plummeted. An amateur investor can buy or sell $100,000 worth of units in an ETF at almost no cost, at a whim. In the past, a decision like that would have been very costly. In some cases, the systems that do the buying and selling are automated.

The growth of casinositis
The combination of these factors – tremendous “noise,” the ability to respond rapidly, the ability to invest large amounts, and the low costs – formed the background for what could fairly be called the disease of casinositis: The aspect of the capital market that resembles a casino grew enormously, at the expense of the aspect based on actual economics. The million-option question is where were the responsible adults – the institutional investors – throughout all this? Where was the moderating influence of the professionals?

Online gambling
Technological advances enabled every investor, however picayune, to enter the casino. The number of “blackjack and roulette tables” grew exponentially, so there was ample room for all. The tremendous increase in the amount of information reaching investors in real time gave them the kind of thrill, adrenaline rush, if you will, that becomes addictive. And if all that weren’t bad enough, the Fed undertook the role of croupier, gaily handing out chips at a discount.

The morning after
Is it any wonder that the markets keep getting hangovers? It’s only natural, under the circumstances described above, and it will happen again and again.

Posted in Finance, Personal / Internet | No Comments »

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