Subject: Errors in Investing

The Wall Street Journal had an article on pages C1/C10 on Investment Errors and how to avoid them. As summarized from that article, the errors are:

     •   Not following an investment objective when you build a portfolio.
          •  Buying too many mutual funds.
          •  Not researching a one-product stock before you buy.
          •  Believing that you can pick market highs and lows (time the market).
          •  Taking profits early.
          •  Not cutting your losses.
          •  Buying the hottest {stock, mutual fund} from last year.
     Here's a recent quote that underscores the last item. When asked "What's the biggest mistake individual investors make?" on Wall $treet Week, John Bogle, founder and senior chairman of Vanguard mutual funds, said "Extrapolating the trend" or buying the hot stock.

Subject: Using a Full-Service Broker

There are several reasons to choose a full-service broker over a discount or web broker. People use a full-service broker because they may not want to do their own research, because they are only interested in long-term investing, because they like to hear the broker's investment ideas, etc. But another important reason is that not everybody likes to trade. I may want retirement planning services from my broker. I may want to buy 3 or 4 mutual funds and have my broker worry about them. If my broker is a financial planner, perhaps I want tax or estate advice on certain investment options. Maybe I'm saving for my newborn child's education but I have no idea or desire to work out a plan to make sure the money is there when she or he needs it.

A huge reason to stick with a full-service broker is access to initial public offerings (IPOs). These are generally reserved for the very best clients, where best is defined as "someone who generates lots of
revenue," so someone who trades just a few times a year doesn't have a chance. But if you can afford to trade frequently at the full-service commission rates, you may be favored with access to some great IPOs.

And the real big one for a lot of people is quite simply time. Full service brokerage clients also tend to be higher net worth individuals as well. If I'm a doctor or lawyer, I can probably make more money by focusing on my business than spending it researching stocks. For many people today, time is a more valuable commodity than money. In fact, it doesn't even have to do with how wealthy you are. Americans, in general, work some pretty insane hours. Spending time researching stocks or staying up on the market is quality time not spent with family, friends, or doing things that they enjoy. On the other hand some people enjoy the market and for those people there are discount brokers.

The one thing that sort of scares me about the difference between full service and discount brokers is that a pretty good chunk of discount brokerage firm clients are not that educated about investing. They look at a $20 commission (discount broker) and a $50 commission (full service broker) and they decide they can't afford to invest with a full service broker. Instead they plow their life savings into some wonder stock they heard about from a friend (hey, it's only a $20 commission, why not?) and lose a few hundred or thousand bucks when the investment goes south. Not that a broker is going to pick winners 100% of the time but at least the broker can guide or mentor a beginning investor until they learn enough to know what to look for and what not to look for in a stock. I look at the $30 difference in what the two types of brokerage firms charge as the rebate for education and doing my own research. If you're not going to educate yourself or do your own research, you don't deserve the rebate.

Subject: One-Line Wisdom

This is a collection of one-line pieces of investment wisdom, with brief explanations. Use and apply at your own risk or discretion. They are not in any particular order.

Hang up on cold calls.

While it is theoretically possible that someone is going to offer you the opportunity of a lifetime, it is more likely that it is some sort of scam. Even if it is legitimate, the caller cannot know your financial position, goals, risk tolerance, or any other parameters which should be considered when selecting investments. If you can't bear the thought of hanging up, ask for material to be sent by mail.

Don't invest in anything you don't understand.

There were horror stories of people who had lost fortunes by being short puts during the 87 crash. I imagine that they had no idea of the risks they were taking. Also, all the complaints about penny stocks, whether fraudulent or not, are partially a result of not understanding the risks and mechanisms.

If it sounds too good to be true, it probably is [too good to be true].

Also stated as ``There ain't no such thing as a free lunch (TANSTAAFL).'' Remember, every investment opportunity competes with every other investment opportunity. If one seems wildly better than the others, there are probably hidden risks or you don't understand something.

If your only tool is a hammer, every problem looks like a nail.

Someone (possibly a financial planner) with a very limited selection of products will naturally try to jam you into those which s/he sells. These may be less suitable than other products not carried.

Don't rush into an investment.

If someone tells you that the opportunity is closing, filling up fast, or in any other way suggests a time pressure, be very leery.

Very low priced stocks require special treatment.

Risks are substantial, bid/asked spreads are large, prices are volatile, and commissions are relatively high. You need a broker who knows how to purchase these stocks and dicker for a good price.

Subject: Researching a Company

This article gives a basic idea of some steps that you might take to research a company. Many sites on the web will help you in your quest for information, and this article gives a few of them. You might look for the following.

   What multiple of earnings is the company trading at versus other companies in the industry? The site http://www.stocksmart.com does this comparison reasonably well, and they base it on forward earnings instead of historical earnings, which is also good.
        Is the stock near a high or low, and how has it done recently. This is usually considered technical analysis. More sophisticated (or at least more complicated) studies can also be performed. There are several sites that will give you historical graphs; one is Yahoo.
http://biz.yahoo.com/r/
        When compared with other companies in the industry, how much times the book value or times sales is the company trading? For this information, the site http://www.marketguide.com is a good place to start.
        Does the company have good products, good management, good future prospects? Are they being sued? Do they have patents? What's the competition like? Do they have long term contracts established? Is their brand name recognized? Depending on the industry, some or all of these questions may be relevant. There isn't a simple web site for this information, of course. The Hoover's profiles have some limited information to at least let you get a feel for the basics of the company. And the SEC has lots of information in their Edgar databank.                                                                                                                                                           Next page