The Writers Coin

The above chart tracks the performance of a few things: my waning interest in watching Lost, everyone’s stock portfolio, and finally—the performance of the S&P 500 over the past five years.

Now that the panic/fear/delirium has kind of passed and all the talking heads are starting to mention “a bottom” rather than panicking and looking for stories where there are none, we can all pretty much agree on one thing: this is a great time to buy more stocks. Whether it’s for your Roth IRA, for your 401(k) (you can increase your contributions now), or your brokerage account.

But which stocks should you buy?

Clearly, you don’t need me for that—there are people out there that will run stock screeners showing you exactly what you should buy. They’ll look at P/E ratios and past earnings, how great a CEO has been at turning a company around in the past, etc. If you read the Wall Street Journal or you watch MSNBC, then you’ll have no problem getting some advice on what to buy.

Me? Well, I’m just not that into numbers. I know some of them are important—I definitely don’t want to buy a company that isn’t making any money.

But I’d rather take a look at the shopping universe and use what I know to pick potential stocks. Notice I used the word “potential” because I’m not going to go out there and buy a stock because I “know” something about it. I’ve mentioned all this before in my review on Peter Lynch’s One Up on Wall Street.

I do enjoy looking at all the stocks that are out there through this “invest in what you know” lens, though. It’s much more entertaining and fun when you’re reading an annual report on a company like Perry Ellis (PERY) when it just so happens to be one of the only places that makes clothes that fit you.

Or reading earnings reports from videogame companies—that’s what my post on videogame investing was all about.

My Bank of America Story

The last individual stock I ever bought (I’m mostly invested in index funds, which are a great investment, just not as fun) was Bank of America (BAC), and that was before they crumbled. Let me explain my thinking: I’ve been a customer since I was in college and for the most part I’m happy with their service. But a bank is a bank, right?

The thing is, they bought my old bank and they’ve been buying banks left and right. I know because I get all this stuff in the mail telling me about all their acquisitions. And when I heard that they were buying Countrywide, essentially turning themselves into one of the biggest mortgage players in the country—I figured it was a no-brainer.

Plus the dividend was so juicy at the time that it pushed me over the edge. I bought Bank of America.

And then it collapsed, so I bought a little bit more.

And it fell even further.

Now, for the most part I’m not a nervous guy. I’m a long-term investor so I knew this was part of the game, but for a minute there I got very nervous. What if Bank of America fails? What if it goes to zero? I figured that as long as it didn’t fail I would be OK.

So far, so good (knock on wood). That’s the beautiful thing about being a long-term investor: you don’t have to get results right away—it makes these little bumps in the road easier to absorb.

Anyway, I’m curious to hear what other people out there are buying or looking to buy now that the market is beaten down so much from a couple years ago. Anyone else want to share?

Sometimes it’s really tough to spot someone that doesn’t know what the hell they’re talking about because they’re just really good at hiding it.

But other times it’s so damn obvious it drives me crazy. Take investing—if you’re totally ignorant about it then you can always go to the well with stupid, generic phrases that you don’t really understand but that you hope will give off the right mix of knowledge and prudence.

“Buy low, sell high.”

Every time I hear this I think to myself: “Shut up you ignorant newbie.”

Why does this make me so angry? Because they don’t understand the complexity behind what they’re saying. They think that “Buy low, sell high” is a solid piece of responsible, investment advice. A nugget they can repeat at cocktail parties to sound smart, sensible, and in-the-know (it’s right up there with thinking a stock is “cheap” because the price is “low”).

Almost akin to the most important idiom of personal finance, “Spend less than you ear,” which no one can really argue with.

But “buy low, sell high” makes you look like a total douche because only a speculator believes it. If you’re spouting this left and right, then you’re claiming a whole bunch of stuff you probably don’t even understand.

Like market timing. Which, by the way, is impossible for those of you still listening to cassette players and waiting for MC Hammer to put out another great track. Market timing is bull****—it can’t be done by anyone, regardless of how powerful their computers are or how much experience they have in the market.

You cannot time the market, NO ONE CAN. So how do you expect to put your digestible, easy-to-spout phrase into practice?

“Buy low, sell high! Right guys?”

No. Wrong, guys.

When is low? Was it a month ago when the S&P dipped under 1,000?

Or was it a month later when the S&P plummeted even further down?

Same thing goes for the “high.” No one knows when it is, so shut your trap and stick to what you know, which is obviously not investing.

And to those of you starting off in the world of stocks, I give you this little nugget of advice: if you hear someone repeating this over and over again, they are full of crap. Call them out on it. Ask them when the low is and when the high is and how they know.

If they give you a bunch of valuation metrics, then they might actually know something (even if they’re still wrong). If they blabber on and on about investment basics and principles, they have no friggin’ clue.

Ahem.

I don’t want to just rant and rave here with nothing useful or positive to say, so here’s my advice to those who admit they don’t know enough about the market and even you—yes, you—the person who spouts “buy low, sell high” without realizing how angry you make me and how ignorant you make yourself sound.

Learn.

Read The Intelligent Investor. Read One Up on Wall Street. Read Stocks for the Long Run. Devour everything in Morningstar’s Classroom series. Check out About.com’s section on Investing 101. Read Yahoo Finance and MSN Money every day.

Start paper trading stocks to get a feel for what it’s like to watch a stock without risking your money.

Go out there and learn the meat of it, and ignore the fluff. It’ll make you a better investor and it’ll help keep my blood-pressure down…

by seanmcgrath

I’m afraid this is one of those posts where you read the title and say to yourself, “Oh boy, what was this guy thinking writing a post about religion?!” And then you start getting into the post and you realize he’s done a bit of playing around with the words in the title of his post just to lure you in, because the post isn’t really about religion, but about how something similar to religion exists in the world of investing. So if you feel tricked or fooled (or bamboozled) then I’m sorry but at least I’m telling you all this right up front, right? So doesn’t that kind of make up for the sleight of hand and warrant a “Well, maybe I’ll check out what he wants to say after all?” Doesn’t it?

There are two broad schools of thought when it comes to investing and how the market works. It’s impossible to say one is right and the other is wrong—no one can say for sure. People on both sides defend their theory with staunch ferocity, and there is oftentimes a fair bit of name calling from one side to the other. Let’s take a look at why investors and theoreticians are behaving like theologians.

Efficient Market Theory

This theory basically says that the stock market is a perfect weighing machine for public companies. There is a whole bunch of information out there and the market takes all of it into account. In other words, there’s nothing you can do to exploit this huge machine because the market is so fast and efficient that it has all the rumors, speculation, and actual numbers baked into the prices of the stocks that belong in it. So if you hear a rumor about a company possible getting this new patent approved and you’re thinking of buying that stock…forget about it. That rumor has already been taken into account.

Sound boring? It is. This theory might appeal to people who believe in fate and want to resign themselves to doing nothing because—well, it won’t matter. The market will do what it has to do and there’s nothing you can do about it. That means that picking stocks is little more than gambling, although you could rely on things like consumer sentiment to guide your decisions.

“Wow, so many people are buying these iPods now, maybe I should invest in Apple because of it.”

With the Internet and all the whatchamagadgets that are out there today, it’s easy to be tempted into becoming an EMT-ite.

The “Other” Theory

I’m not sure what this one is called, but it’s the side that famed investors like Warren Buffett and Peter Lynch fall on. It’s also the side that all those books with titles like “Pick Stocks Like Pro!” and “Beat the Market!” fall on, unfortunately.

This side claims that the market is NOT efficient. Stocks go up and down based on the same stuff that EMT relies on, only that here the investor can exploit these inefficiencies by examining the numbers behind a company. If you have the patience and the stamina to wade through LOTS of numbers, this theory believes that you can make it pay off big time.

“Wow, Johnson & Johnson is trading at a very low P/E ratio right now and their books look solid, I should invest in it.”

If you’re ever read The Intelligent Investor—(or any of the other books that mention it) the bible for this side of the argument—you’re probably heard of the term Mr. Market. Mr. Market will quote you a price every minute of the day for a given stock, but sometimes he’ll go off on these wild, moody swings that you can take advantage of. Another book I’ve read that falls squarely in this camp is Rule #1 (check out my book store for other books worth checking out).

Which is Best?

Impossible to say. But both theories bring something interesting to the table. If you believe in EMT, how do you explain Warren Buffett? Luck combined with his penchant for buying and influencing the management of certain companies? Luck alone? If you’ve done any investing at all, you know that luck eventually runs out and Warren is still going strong.

I’m not sure where I fall on the spectrum, but my man crush on Warren Buffett probably puts me square in that second group. Lately I’ve been re-examining this though, and the idea of not looking at all those numbers and trying to create meaning out of them is pretty tempting…

Then again, I love wading through baseball stats and making my opinions based on them…if only P/E ratios and balance sheets were as interesting as OBP and WHIP.

Today I want to highlight a post I wrote earlier in the year that, in retrospect, was just plain crazy. It was titled My 401(k) Rollover was Perfect. If you’re lazy, I’ll spare you: it was about how “perfect” my 401(k) rollover went when I went from my last job to my current job. Why did I think it was so perfect? I gloated that, while the S&P was “down 4%” I was “up 8%” because of the time I had been out of the market rolling over my 401(k). Essentially, I was taking credit for all the paperwork and bureaucracy involved in switching providers.

Real smart. Shall we go to the chart?

You see that red dot WAY at the top? That’s where I patted myself on the back. Appropriately enough though, here is the image I used for that congratulatory post:

Which is appropriate because my statement now reads something to the effect of -42%. Awesome! Was this the karma gods frowning upon my gloating or is this the market gods going through a little temper tantrum?

I don’t care, all I know is that I’m not retiring for a VERY long time. So screw you market gods! As for the karma gods…I shall sacrifice a cow in your honor tonight (I’ll get it with mushrooms and swiss cheese on a sesame-seed bun). Hopefully that will make up for my stupid, stupid, stupid decision to call myself “perfect.”

Other things I said in that post that were ridiculous? How about this doozy: “I accidentally timed the market to perfection.”

Ouch! How stupid was that one? At least I sort of made up for it with this jewel: “The lesson to learn here is an old one but good one: you can’t time the market.”

So if I wrote something that stupid relatively recently, how can anyone trust anything else that’s on this site? That’s part of the fun! If you can find the other 17 instances of stupidity, email them to me, and then send me a cooler picture than the one of a yellow SUV doing a cartwheel, you get a prize.