I must, by law, begin this section by telling you that I am not a licensed financial advisor. I do not hold any licenses or certifications. I do not work for a brokerage, I will not be giving you *any* stock tips or individual stocks to invest in. Any companies I use as examples will be just that, examples, and used anecdotally unless otherwise indicated. I also do not wear Pinstripe suits, do cocaine, or take clients out golfing.
With my disclaimer out of the way, we can begin our discussion about investments. I am going to defer to the Wikipedia definition of ‘Investment’ because I think it is perfectly ambiguous, which, with investments we kind of need to be, as it is a rather broad category.
“Investing is the active redirection of resources: from being consumed today, to creating benefits in the future; the use of assets to earn income or profit.”
We can invest in a great many things… years ago, a family member invested $1,000 in Fred De Luca’s ideas to sell sandwiches to pay for College. Today, that company is known as “Subway”. Likewise we could have bought thousands of shares of fledgling Microsoft or McDonalds and been retired today. If we were afraid the end of the world was nigh, we could take out our life savings and buy gold bullion coins or bars, or invest in a foreign currency. If we believed California was going to rebound, we could invest money in those junk bonds the state issues, and if we were right, we might just make out like bandits. In other words, investing is putting your money into something you believe will make a profit in order to earn more than what you initially put in. Simple, yet so complex.
The first, immediate, number one, numbero uno, ichiban, form of investment you should take part in is your company 401k! We briefly covered this in a previous chapter, but it bears repeating, your 401k money comes out of your check before taxes. What does that mean? It means that since I contribute 15% of each paycheck to my plan, I only pay 85% of my wages in tax at the end of the year… that’s a big bump in many cases, sometimes enough to change your entire tax outlook from depressing to delightful. Also, most companies offer some sort of match… If your company matches you 100% up to 5%, that’s a 5% RAISE for you right off the bat without even asking for it, most companies give 2% or 3%! There is no better way to form savings discipline than by doing this.
The downside, is that most 401k plans are invested in mutual funds. Downside, or upside depending on how you choose to view things. Last year I watched my money evaporate, seriously, it literally evaporated into thin air. But not REALLY, you see, I didn’t cash it out, I didn’t sell it, in fact, I pumped MORE money into the most troubled sector funds. Why? Am I suicidal? No, I am young. I have a high risk tolerance, and maybe I am stupid. Actually no, the reason why is because by the very virtue of my stocks losing value, buying them became cheaper.
A quick example… Mutual Fund A sells shares for 10.00. Each week, my paycheck puts $300 toward Mutual Fund A, that means I buy 30 shares per week. A few months down the line, times are good, and my 401k balance looks good, Mutual Fund A sells at $60.00 a share! While that means that the 30 I bought at 10 dollars are now worth $1800.00, it also means that next week, when my $300.00 are applied to buy Mutual Fund A, I will only be able to buy 5 shares instead of my usual 30!
Conversely, when the market is down, and Mutual Fund A is at $1.00 per share, and I am looking at my shrinking balance with a bottle of whisky and a bottle of Percocet in my hand, ready to sleep the long sleep like Marilyn Monroe, my $300 buys me 300 shares! See? There is always a bright side. I can attest to this, because during the recent ‘troubles’ in late 08 – early 09, I shifted ALL of my 401k future allotments into the banking sector and made out like a fucking bandit. Stock fund shares for the banking sector (not naming names on purpose) were at costs of a dollar and change, when the year before they had been at $19.00! Today they sit at around $6.00. But for a few months, I was buying shares at a frenzied pace because they were dirt cheap. I only knew this because I know how to read a few simple things on my statement. With that, let’s talk specifics!
Let’s get ourselves acquainted with mutual funds so that we may better understand! A Mutual Fund is a managed fund that pools investments into neat little packages. They are typically industry based or sector based, although there are trends now toward ‘target funds’ where you choose your retirement date, let’s say 2030, and the fund will (in theory) adjust over time to become more and more conservative the closer you get to retirement date. Funds are also categorized by their risk tolerance or market capitalization (micro cap, small cap, midcap, large cap). The market capitalization is nothing more than the value of their total shares (to grossly oversimplify) and adjusts as a stock moves up or down. Most 401k plans will also offer several bond or money market funds with very low yields for those with a low tolerance for risk. Often these funds will yield less than the rate of inflation so there is a downside.
“Shares” of a mutual fund are valued and expressed in a term known as NAV (Net Asset Value) which is basically the book value (asset-liability) of the pool of investments. When you see your statement, the NAV is what your shares are worth. And if it were as simple as just watching the NAV go up and down and buying and selling as it does, we’d all be rich and these Wall Street douche bags would be homeless and living under the Rickenbacker causeway with the pedophiles. Again, this is a game of chance and a confusing one at that… We have to look at the COSTS of buying and selling these shares to know just how much this ‘investment’ is costing us… What? You thought they were offering you these funds out of the kindness of their heart?
Fees on a mutual fund are known as “Loads” which is a GREAT term for them, because they most often are a load of shit. There are two types of loads, front loads and back loads. A front load means they are charging you the cost up front, when you buy the shares. A back load, as you might already have deduced, is charged when you exit the fund or sell shares. There is also a third category, the constant-load, where they just fuck you all the time. And then, there is the NO-LOAD fund! You typically won’t find these in your 401k options, but if you personally wish to invest in a fund, you’ll certainly want to look into them.
These loads are very important, because they can really add up. In fact, they average around 5%, and if you aren’t careful you could be losing your entire match or even some of your own investment! Always, always, do your research! I will say this over and over again during this chapter because with investment it is essential. Most workplaces with options have some sort of online system for you to log in and do your benefit elections. In the 401k section you will typically find the prospectus or costs associated with each fund, look very carefully at this… How has the fund been doing? Where is it spending its profits? Is the fund manager earning $100,000,000 a year? Is their 12b-1 expenditure (cost of marketing to potential investors) ridiculous because they want to buy 20 minutes during next year’s super bowl? Remember, all of these costs get passed on to you in one way or another, so beware! It is known as the fund’s “Expense Ratio”.
The last thing I will say about your 401k is this… DON’T TOUCH IT. Do not, under any circumstances, withdraw money or take a loan against your 401k. There are very strict tax codes which govern these plans and early withdraw usually means getting screwed with tax penalties. Is a vacation or a new set of rims worth it? No. Be disciplined.
This leads me to the wild world of self-directed investing. But first, another disclaimer…
DO NOT OPEN AN INVESTMENT ACCOUNT AND PLAY WITH MONEY YOU DON’T HAVE IN HOPES OF MAKING MONEY YOU WON’T MAKE. DO NOT SKIP YOUR 401K OR SAVINGS ACCOUNT DEPOSITS BECAUSE YOU BELIEVE YOUR UNCLE JOE’S STOCK TIP IS GOING TO RETURN YOU 1000% IN A MONTH. DO NOT PLAY WITH THE RENT MONEY, ALLOWANCE MONEY, WEDDING SAVINGS, BAR MITZVAH FUND, CHRISTMAS CLUB, OR ANY OTHER MONEY WHICH YOU DO NOT CONSIDER TO BE ABSOLUTELY EXPENDABLE! *whew*
With that out of the way, let’s talk stocks! The world of stock trading may seem exciting, it may seem like the glitz and glamour of Wall Street calls to you, the fast paced action of the pits, BUY BUY BUY! SELL SELL SELL! The truth of the matter is that most of us are destined to lose in the stock game because they are a bunch of backstabbing cheaters who manipulate stocks and the news to try and get a reaction out of people. They don’t respect us as self-directed investors, they think we are dumb and uneducated and weak, and often times they are right. Many a fool (including this one) has bought into many a bubble over the years, and as you can imagine, though the institutions also took some nasty hits, they fared well better than any of us did.
There are many brokers out there for those wishing to open an account. Nowadays it’s much easier than times past. You can use the internet to place orders, or manage your portfolio in real time. And the fees fluctuate wildly. From your ZECCO TRADING which gives you 10 FREE trades a month (protip: most people won’t make more than 10 trades a month), to E*Trade, which will give you an iphone app to buy/sell stocks but also charge you $12.95 per order (buy OR sell). Go with whichever one you want, odds are if you need to read this posting to understand stock trading you won’t need powerful tools and level II quotes. But again, DO YOUR RESEARCH.
We’ve got our trading account established and have it funded with an initial deposit of $5000.00. Now, we have to buy some stocks! The first thing we will want to do is turn on CNBC and watch the shows on there for a few days… JUST KIDDING. The first thing we want to do is establish our objectives. Are you looking for some quick cash? Are you looking to start a small account and grow it over time? If you chose the first, get the fuck out of here and read the first post in this series again… If you chose the second, congratulations, let’s get to work.
Diversification is a wise strategy for investment. To simplify it and get away from the jargon, ‘Don’t put all of your eggs into one basket.’ Let’s, for simplicity’s sake, say you wanted to invest in 5 stocks, $1000.00 each. Should you choose Cisco, Microsoft, Redhat, Oracle, and NVIDIA? No, no you should not. Because all five of them are in the tech sector, and if tech experiences a catastrophe you will, likewise, experience it. That is why diversification pays dividends! Typically when something is up, another thing is down, again a gross oversimplification, but true most of the time. On the other hand, if you bought a tech company, an agriculture firm, a telecommunications firm, a retail store, and a food company you would have effectively spread your money out and into a variety of places. Most of which won’t overlap. I highly recommend it. I once, out of greed, did not heed the warnings of diversification and ended up taking a hit because of it, because when one sector dropped, I lost on 2 individual companies.
How you choose these companies is up to you… Personally, I recommend doing some industry research. Any publicly traded company, by virtue of being so, will have an ‘investor relations’ tab on their website, in it you will find all pertinent documents such as the annual report, insider buying/selling, etc. By seeing the numbers, reading the story, and making an informed decision you will greatly mitigate your risk. DO NOT LISTEN TO TIPS! From anybody, I don’t care if they WORK on Wall Street, always verify any claims made by anyone, do not trust their business acumen. Do not trust their claims, because even if they aren’t trying to mislead you, someone may have misled them! There is no substitute for due diligence here ladies and gents… If you DON’T want to do it, DON’T become a self-directed investor, just give your money over to some scumbag at a firm to manage for you, or better yet, increase that 401k contribution or savings account!
People who work on Wall Street, with few exceptions, are backstabbing opportunistic fucks. The predominant ethos on “The Street” is “Eat what you Kill”. In other words, one should reap the rewards of that which they have accomplished. This, is a dangerous way to think, because clients should not be viewed as prey. Unfortunately that sort of mentality leads to the breaking of many promises and deep delving into the murky, gray, area of securities law.
I am just trying to give you an idea of what you are up against as a self-directed investor in a sea of sharks. Don’t trust message boards, don’t trust individuals, and don’t trust investment newsletters or analysts. Trust the numbers and trust in your ability to sniff out bullshit. Listen to the quarterly conference calls and the annual meeting, because you may be able to tell by the way the CEO is speaking or the tone of his voice just how you ought to feel about the future. The best way to win at the trading game, if it’s even possible, is by being diligent and being informed. There is NO SUBSTITUTE FOR HARD WORK.
Now that we have discussed the theory of investing, we will shift to the practical side of investing, and how to get the most out of our investment experience. That will have to wait until tomorrow though.
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