Your Questions About Investing

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John asks…

What good is diversification in investing?

What good is diversification in investing?

Isn’t it actually good to invest in just one thing you know well and can understand, then be very careful about it?

For instance, most homeowners have much of their wealth in their home, not scattered into numerous places and most small business owners have the bulk of their wealth in one business. Why is this principle different when you are an investor in securities?

Justin answers:

The most important thing in investing is Risk Control. It’s the only thing every good investor has in common. How you practice it is your decision.

I have invested in many things that I know very well. Things happen that are beyond everyone’s ability to forecast. Gaps of 50% do happen. Sometimes even higher. Reality can be a real problem. You are not smarter than destiny or random very bad luck.

Richard asks…

How much money is needed to begin investing?

Could I begin investing in the stock market with $1,500? How do you recommend I begin to invest?

Justin answers:

No. To invest in stocks, I’d say you should have at least $10,000.

An introductory book like _Stock Markets for Dummies_ is a good place to start. This will give you a basic explanation of most things there are to know about the mechanics of stock investing including useful websites to surf.

Investors Business Daily (IBD) is a solid daily resource (and its complement, www.investors.com ). It’s a better newspaper than the Wall Street Journal and it is built around a particular approach to trading. You could read _How to Make Money in Stocks_ by William O’Neil too–he’s the founder of IBD.

Search your local library for other books on stock investing. Try to absorb as much knowledge and understanding as you can.

After you have extensively researched and gained a solid foundation/education then look to open a brokerage account and paper trade–this is trading with play money before you put real capital at risk. You should do extensively before you eventually place your first trade live. Your early live trades should be with a very small position size. Only increase position size when you have done well to limit losses when the market has turned against you.

Charles asks…

I am looking to start investing any tips?

I am 15 and am looking to begin investing. I was thinking bonds and mutual funds but I want to see what may be the best place to start out. Any suggestions?

Justin answers:

It’s great to see a young person have a real interest in investing. I wish I had started at 15.

You need to be 18 to sign a contract, so you need a parent to help you open a custodial account. Good firms include Vanguard, Fidelity, Charles Schwab.

Educate yourself before investing. A few great books:

One Up On Wall Street – Peter Lynch
A Random Walk Down Wall Street – Burton Malkiel
The Intelligent Investor – Benjamin Graham (classic, but a more challenging read)

Mutual funds are diversified, so lower risk than individual stocks. On the other hand, I think you learn more by buying and following a company. Either way, start out as a long term investor. Don’t trade frequently until you have more experience.

James asks…

Will investing really make you rich? How do you know what to invest in to become rich?

I’ve heard that people do become quite rich from investing. How do you know exactly what to invest in, in order to become rich, and how long does it actually take for investments to make you rich? I’m 40-years-old, and would love to be rich while I’m still in my 40s, instead of waiting til I’m 60 or 70.

Justin answers:

Constant investing over a long period of time is the best. I started when Jimmy Carter was president and I’m still going. (I’m a lot older than my avatar would indicate.)

1) Find a number of low-cost mutual funds. In this recession, income-producing funds that invest in stocks that pay good dividends is a good choice like Franklin’s Income Fund NYSE symbol FKINX. Maybe find some reliable bond funds as well for a balance.

2) Keep a good reserve in cash to take advantage of when the market drops and you can buy more shares at a lower cost. (Known as dollar cost averaging)

Ken asks…

What books can you suggest to read for a person starting to learn investing, real estate and business?

I recently read few books for knowledge about investing and mindset toward investing and real estate but I am thinking to gain a lot more knowledge about this area . However to a beginner I do not know where or what books to start reading.
Could you guys help me out?

Justin answers:

Hi,

Forget “Random Walk”; it has been totally discredited, most recently by its own author.

Do your own due diligence. Your own ideas are the best. Do not depend on someone else to select stocks for you. Learn about investing so you don’t have to ask what stocks to invest in. Be self reliant.

Remember what Emerson said: A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do.

Find stocks that have steadily rising net profits (earnings), low debt, and good P/Es.

What interests you? Find stocks that pique your interest and passion.

You need fast growing good stocks with good earnings and in good sectors. You need to learn more about the stock market before you even think about investing in it.

The stocks world is divided into 12 sectors such as energy which chevron belongs to. It is next to last in the sectors list today.

Technology is numero uno, but within the sector, the fastest growing are computer services, not Microsoft. Then, Electronic Instruments and controls. Next is computer storage devices.

The next hot sector is Healthcare, but heed the warning below. Go here for sectors: (http://clearstation.etrade.com/cgi-bin/Itechnicals?Event=srp&Section=redge&Refer=/redge.html)

The best software is Vector Vest if you can afford it. It has sector investing.

Here is a free Web site for charting stocks: (http://www.incrediblecharts.com/).

First of all, stay away from “professional brokers” and tips coming to you via e-mail or friends and acquaintances. And tips at Yahoo! Answers. Do your own due diligence – don’t rely on someone else. Read Emerson’s essay “Self Reliance.

Hey! They will say anything to get you to buy their junk. If it’s too good to be true, it is.

Remember this, they are just sales people trying to sell you what their firm is pushing. They are not security analysts or financial planners, not even financial advisers. Trust me, I know from experience that they cannot be trusted especially with a million dollars. You risk losing it all. A million dollar account is known as a “whale” and they would love to get their greedy little paws on it and suck it dry. They just want to make commissions on what they buy and sell for the suckers, err…clients..

Risk avoidance is the name of the game.

Remember, the harder I work, the luckier I get.

Penny stocks are great, but highly speculative. I would avoid the ones under a dollar a share. For example, Best Buy started at less than $5. So there are some good companies, but it takes a lot of digging to find the good ones. You are looking for companies with good earnings, little debt, low capitalization, and good P/Es. For stocks under $5, very few will meet these requirements.

Stay away from the pharms unless they have patented drugs – do not invest in generic pharms, no growth there.

Check out which business sectors are the most popular and invest in the companies in those sectors. The number one, two and three are: technology, health care, and cyclicals (retail). These change periodically so keep current.

Go here for a list of growth stocks: http://www.thestreet.com/_googlen/newsanalysis/ratings/10345212.html?cm_ven=GOOGLEN&cm_cat=FREE&cm_ite=NA

There are these lists all over the Web – you pays your money and takes your chances.

Watch CNBC, but don’t pay too much attention to the talking heads, except for Jim Cramer, the wild man – but he tries to teach you how to invest and has some great advice.

Get Jim Cramer’s Real Money: Sane Investing in an Insane World by James J. Cramer

Listen to Jim Cramer on CNBC.com

Go to Clearstation for quotes and tutorials on investing at (http://clearstation.etrade.com/). Sign up is free. Look up a few stocks. Do their tutorials. Check out the sectors.

Get this book: Value Investing: From Graham to Buffett and Beyond (Wiley Finance) by Bruce C. N. Greenwald, Judd Kahn, Paul D. Sonkin, and Michael van Biema.

Another good book: The Motley Fool Investment Guide for Teens: 8 Steps to Having More Money Than Your Parents Ever Dreamed Of (Motley Fool) by David Gardner, Tom Gardner, and Selena Maranjian

Jim Cramer’s Mad Money: Watch TV, Get Rich by James J. Cramer and Cliff Mason

I Want to Make Money in the Stock Market: Learn to Begin Investing Without Losing Your Life Savings! By Chris M. Hart

Sensible Stock Investing: How to Pick, Value, and Manage Stocks by David P. Van Knapp

Stock Investing For Dummies (For Dummies (Business & Personal Finance)) by Paul Mladjenovic

All About Stock Market Strategies : The Easy Way To Get Started by David Brown and Kassandra Bentley

The Motley Fool Investment Guide and their Web site (http://www.fool.com/).

The Little Black Book of Microcap Investing: Beat the Market with NASDAQ/AMEX Microcap Stocks, OTCBB Penny Stocks, and Pink Sheet Stocks by Dan Holtzclaw

How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition by William J. O’Neil

Trading for a Living: Psychology, Trading Tactics, Money Management by Alexander Elder

Big Trends in Trading: Strategies to Master Major Market Moves (A Marketplace Book) by Price Headley

Extraordinary Popular Delusions & the Madness of Crowds (Paperback)
by Charles Mackay (Author), Andrew Tobias (Foreword) This book talks about the Tulip craze in Holland where people would mortgage their homes to buy Tulip bulbs. Same thing happened in 2001 – 2002 with the Internet bubble that brought the stock market to its knees. The dot com companies were the Tulip bulbs.

Buy Investors Business Daily. It has lots of tutorials and I like it better than the stodgy Wall St Journal.

Money Game by Adam Smith

Common Stocks and Uncommon Profits and Other Writings (Wiley Investment Classics) (Hardcover)
by Philip A. Fisher. Recommended by Warren Buffet who took $100,000 and grew it to $34 billion!

Value Investing with the Masters by Kirk Kazanjian

Valuegrowth Investing by Glen Arnold

The 5 Keys to Value Investing by J. Dennis Jean-Jacques

The Intelligent Investor Rev Ed. (Collins Business Essentials) by Benjamin Graham. Warren Buffet was his student at Columbia.

The Money Masters by John Train

The Bogleheads’ Guide to Investing by Taylor Larimore

Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor by John C. Bogle

Why Smart People Make Big Money Mistakes And How To Correct Them: Lessons From The New Science Of Behavioral Economics by Gary Belsky

Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week! By Phil Town . See his Web site at (http://www.ruleoneinvestor.com/). Free sign-up. I got the book at the library.

Listen. You don’t have to spend a lot of money on these books – most can be found at your library and those that your library doesn’t have they can usually get from other libraries in your state.

Most of these books talk about stock and mutual fund investing, but for a good introduction to other forms of investing Gerald Appel has a great book called Opportunity Investing – How to Profit When Stock Advance, Stocks decline, Inflation Run Rampant, Prices fall, Oil Prices Hit the Roof and Every Time In Between.

First, Break All the Rules: What the World’s Greatest Managers Do Differently by Marcus Buckingham and Curt Coffman Not a book on investing, but it’s a nice segue into the next book.

Now, Discover Your Strengths by Marcus Buckingham and Donald O. Clifton

Go Put Your Strengths to Work: 6 Powerful Steps to Achieve Outstanding Performance by Marcus Buckingham

Finding your strengths is important when investing. These books teach you to build on your strengths, what you a good at. Everyone is good or passionate about something. Why not get better at what you are good at?

Another good book is: Opportunity Investing: How To Profit When Stocks Advance, Stocks Decline, Inflation Runs Rampant, Prices Fall, Oil Prices Hit the Roof, … And Every Time in Between (Hardcover)
by Gerald Appel

Most mutual funds do not even keep up the the return on the S&P. That’s like 99% of them.

Vanguard Index funds are a no brainer.

A CD is better than a savings account. They range from six months to several years. You cannot touch your money tho until the time limit is up.

Check out this Web site on Direct Investment Plans where you can buy shares directly from companies: (http://www.fool.com/School/DRIPs.htm). Usually no fees and you can buy one share at a time.

Bonds are probably the safest. You might try a bond fund. They might return 5 or 6 percent. At 5% a million would return $50,000 a year – not a bad income. Remember, you have to pay taxes on the $50,000.

There are also municipal bonds and the income from them is taxfree especially if you buy them in a state that offers them, but they only pay about 3%, but it’s mostly taxfree.

Look into Fidelity sector funds. Buy the top three, then in six months look how they are doing and if not so hot, select the next three that are best. Do this for a few years and you will make lots of money.

Kindest Personal Regards,

Walt Brown
Site Build It Certified Webmaster
capecod1@capecod-beaches.com

P.S. This is a life-long learning process. Reading these books and applying the rules to analyzing stocks that may be good It takes time. Be patient and keep reading and listening. Don’t be a sucker and follow someone elses advice. Be your own man or woman. Depend on no one except yourself. You can only get smarter and stronger that way.

P.P.S. Internet has lots of good stuff, for example (http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_average_conve
Stockcharts.com is very good and their discussion of MACD is one of the best, barring its originator, Gerald Apple, but now we are getting into Technical Analysis and that is not for beginners. But it is an important factor in finding good stocks that are going up and growing. Remember, tiny acorns grow into mighty oaks.

Chris asks…

Are there any good free websites that can teach me about investing?

I know very little about investing. I know just a little about CD’s, less about mutual funds & even less about the stock market. I want & NEED to start investing. Please help.

Justin answers:

Decisionpoint is a VERY GOOD site to learn, however, I want to make a couple very important points about the investing climate….

We are in a “bear market” and could be for a long-time. The Fed is going to continue to drop interest rates just like Japan did in the 1990s. If the US market is anything like the Nikkei, the US market is the WORST place to be a buy-and-hold investor. Let’s say you started working in Japan in 1989 and added $5000 to your 401K every year… You would still be underwater 18 years later!! That is a taste of what is to come for the U.S. The US market and brokerage firms have “conditioned” the American investor to be buy-and-holders ever since witnessing the best bull market in US history (1980s-current). That is now changing!!

The places you want to be is gold, silver, agriculture, alternative energy, oil, commodities, etc. If you can short the market using an inverse fund (Rydex or Profund), you can probably do very well there too.

——————–

The following two problems is what is driving commodity prices through the roof:

NAFTA is Problem #1. When US companies create and move jobs overseas, they create a larger middle class globally. Now that there is a larger middle class globally, we are all competing for the same commodities.

BioFuels is Problem #2. Our farmers are now putting less food on our tables so that we can be more energy independent. This is causing SOARING food prices.

Because of the FED and the WAR, that has exacerbated #1 and #2. When the Fed lowers interest rates, the dollar drops and all those middle class people that we’ve created overseas can buy our commodities much cheaper. The war has increased our deficits so much that other countries no longer want US dollars.

Daniel asks…

What is the best way to start learning about investing?

I have a couple grand that I don’t need and would like to start investing.

But I don’t know anything about investing 🙂 Any advice? Any books I should read?

Justin answers:

I read a few books first. There are many out there.

2 that I can remember the titles of are “the guerrilla’s guide to investing” and “the stock market in a nut shell”.

But to be honest I found them very hard to follow and had nothing to relate to.

I learnt so much more when I just bit the bullet and invested my money, after that every thing I read/heard came into context and since I had money riding on the line, I was a lot more interested.

I lost 20% in the first month, but that just made my try harder. I’m now 18% in front and I only started investing in april.

Thats over 30% pa return.

Steven asks…

How should I be investing my extra cash?

Currently, I am investing in my employers 401K to the max as well as my Vanguard Roth IRA to the max. I also have an individual account with Vanguard (T-Bills) which is my emergency fund/big ticket down payment account. What do I invest in now? Currently, if I have anything left over at the end of the month, I’ve been investing in another index fund within my individual account. Basically, my current strategy is the keep the extra cash liquid, but I’m willing to gamble it.

Justin answers:

First of all, make sure that you have enough money set aside JUST IN CASE you were to lose you job. I would advise you keep 6 months through 1 year of liquid cash. With that in mind, any additional money should be invested in the stock market. I have done the same, but instead of extra money, I invest a good amount of my monthly pay check in stocks. Stocks are VERY cheap right know. I project to see returns as high as 50-200%. Do your research and make sure the company you choose to invest in is financially stable and will be able to weather the recession. I have personally invested some money in Apple, Sprint, HIG, Wal-Mart, McDonalds, etc. I have diversified my portfolio, meaning instead of investing in just one company I have invested in multiple companies. Another good thing to keep in mind is that you may have to wait about 1-3 years. I hope to see returns within 1 1/2 years, but am willing to wait 4 years in total. There are going to be more though times ahead, but I think I will be able to make it with a good profit. I hope this helps and good luck.

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