So, You Want To Be A Player

Yesterday I talked a little about stocks, but more about buying a mutual fund. Buying a mutual fund requires a certain amount of self education, but that is no different than educating oneself about any major purchase. You go out to buy a car, you do a little research. You know the price, that is the easy part. Now you need to know how the car performs and how much is it going to cost you every year in expenses. The same is true for a mutual fund. The price per unit is posted, but you need to do a little digging to find out what is in the fund, what the expense ratio is and most importantly, how well does the fund perform? There are funds that perform better in a “down” market and there are funds that perform better in an ‘up” market. When you have done all your research, and you should look at several mutual fund families to compare, then you are ready to pick a couple or more funds to invest your money.

Now if that is too simple for you, or you want more out of life, then you can go the route of picking your own stocks. Remember the scene from The Graduate that I mentioned yesterday? Well, imagine you run into me at a cocktail party and you start asking me about picking individual stocks, and I say one word and then walk away. What do you think that one word might be besides “fool”? I would tell you one word, “CATALYST!” You are looking for a catalyst that will cause that stock price to go up. What is a catalyst? When it comes to stocks a catalyst can be several things. For example, a new CEO can be a catalyst as it was for IBM a few years back. A catalyst can be a new product or a block buster drug. The ipod for Apple, or Viagra or Lipitor from a drug company. These can all be a catalyst that will move the earnings of a corporation.

But know this from the get-go, a stock’s price and its earnings don’t always move in tandem. For the most part, if a corporation’s earnings appear to be headed for the toilet, the price of the stock will go down, but picking stocks can get so much more complicated than knowing the direction of future earnings. For the most part, if you pick stocks where the earnings are going up, you will do fine. But understand the stock market does not always act rationally. The market's irrational behavior you can use to your benefit if you have the stomach and the mind to go against the grain. Buying a stock on its way down is a tricky business. You don’t want to be catching a “falling knife.” What the corporation does in running its business sometimes has little or no relationship to the way the stock is being valued by investors on any given day. Knowing when to buy and when to sell will keep you busy. Against that put up a background of changing technology, changing laws and regulations, and changing world wide competition. Add to this equation a currency that goes up and down, commodity prices that rise and fall, and for good measure, let’s throw in the weather. Now, you can play god with your money. Expect, if you are really good at this game to get 6 out of 10 right. That’s right, I said if you screw up on 4 out of 10 stock picks you are a head of the game. Don’t think in an up market, when everyone is riding the wave, that you are a genius. That is a big mistake. Develop a process to analyze stocks and improve on it. With computers you can set up screens to shake out the kind of stocks you are looking for. Computers are a great tool, but they are not the only tool. If computers were all you needed, Bill Gates would write a computer program and then everyone could be a winner. Stock picking takes research, analysis, insight and a little luck. Be humble. Be a quiet winner. You will lose some, no one bats a thousand. Even Sandy Koufax lost a game now and then. And remember, it took him six seasons before he really started to rock. Before you start investing your money, read a few books about stock picking and the market. Do a dry run for a few months to see how well you would have done had you had your money on the table. If you have an interest or a knowledge about an industry, start there and then work your way into industries you are less familiar. “Playing the market” is work. If you become a serious player and you are good, people will find you. Good luck and be humble.

Tomorrow is Friday, and I have no idea what I am going to write about. I am not going to write about politics or sex. I know, some days, they seem one in the same. If anyone out there in cyberspace has an idea for a topic, send me a comment. I do not promise I will address that subject, but I will certainly consider it. Stay tuned.