Stocks and bonds have historically been an excellent long-term investment vehicle. In short it means ownership in the businesses that move the world forward. As the world grows, so do the companies and the underlying stocks that are their foundation. Financial markets are no longer determined by a few powerful exchanges such as the New York Stock Exchange and Deutsche Börse (German), but are influenced by a vast and complex, interconnected web of financial pick-up sticks. Of course, there are many ways to invest in these global slices of corporate ownership, but for now we’ll save the sexy, albeit risky, methods of trading stocks involving derivatives, forex, and day-trading for other columns.
Lusha, Investment Guru
Investing in stocks and bonds is very simple in principle: buy low and sell high. Quite simply, in fact, fortunes have been made by men with PhDs and MBAs to their names and financial network television personalities who have a knack for trends and charts and flash indicators and stochastics and investment psychology and even rally trading. There have been volumes written about all that have been based on the Dallas Cowboys. win or lose. They are all experts and they all have different opinions, literally thousands of opinions. There is even a now famous chimpanzee in Russia named Lusha who defecates on a list of stocks on a chart, and those stocks have matched or beaten the likes of some of the world’s most sophisticated analysts. What does this tell us? That it just isn’t that easy or better to buy low and sell high, we can choose to pay large fees to analysts or hire a primate at very low cost to be our stock picker.
Indicators and Common Sense
A good place to start when buying stocks, bonds and mutual funds is to learn a little about indicators. These are tools that provide an analytical look at a company and its relative stock price. One of the most common is the P/E ratio (price earnings ratio) which looks at the current stock price in relation to earnings per share. that makes sense! The P/E ratio is simply the share price divided by the earnings per share (which can be found in any number of financial publications). A high P/E ratio may indicate that the stock is overvalued and a low P/E ratio may mean that the stock is undervalued but this is just an indicator and is completely flippable. As an example, during the dot-com bubble, some companies had zero P/E ratios with no earnings at all… nada… a big fat doughnut… and yet these stocks were highly inflationary. Prices sold through the roof. Which brings us to the most important indicator you can use. This six inch wide analyzer is found hidden between your two ears.
Warren Buffet has said, “Invest in what you know.” For example, perhaps you agree that the post-WWII baby boomer population is aging. What does it mean? This could mean that companies selling services or products to the elderly demographic will do well in the years to come. FN Walkers Inc. (fictional) that has developed a compact titanium walking device with a built in espresso maker. The company is reporting back-orders through the roof. Or you can consider government bonds. These are generally the safest investments on the planet and tend to do well in times of turmoil. Why? Because investors run to safety faster than gophers on the golf course. When the world starts firing missiles, investment dollars flow like rivers to safe havens and accordingly, the price goes up. With bonds, forget about stochastic oscillators and 10-year moving averages and pray for volatility and bad news!
After all, you don’t need an expensive investment guide or a chimpanzee poop.
Diversification by putting your eggs in one big basket
Another way is to buy stocks and bonds. This is through mutual funds. A mutual fund is a managed collection of stocks or bonds or commodities that are put into one big basket and managed by really smart people. Mutual funds come in many packages such as funds based on Dow industrial stocks or growth companies or corporate and government bonds, or pharmaceuticals, or emerging markets in China or Brazil. The theory is that owning a small piece of a hundred shares is safer than owning a lot of just one stock. Another advantage of holding mutual funds is that they are completely liquid, meaning you can exit your position almost instantly. Mutual fund performance is largely based on the expertise of the fund manager and in many cases results can be closely monitored with 1 year, 5 year, 10 year or 20 year moving averages.
This author is pet peeve who needs anger management counseling
Always, always, always, be aware of the advice of your stockbroker or the advice given by so called experts. On October 9, 2007, the Dow Industrial Average reached an all-time high of $14,164. It then started free-falling like a base jumper without a parachute, and finally plummeted to a low of $7062 on February 27, 2009. Poppycock, Fuber!!! It is better to sell the stock as high as possible to get out and then jump back in convulsions into a pile scattered on the floor. If you exit shortly after the market selloff begins and then re-enter after the dust settles, you’ll be in a much better position than riding the investment, even if the market is now dancing around 12,000. Have been Will still be down 15% from the market high hitting $14164. Shouldn’t brokers do this?
Anyway, I get sick of speeding rollercoasters.