nin137

Nick's Journal
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Ezoic
2007-04-09 15:38:16 (UTC)

Investmentingilization

so about a month or so ago i finally ventured into the real
world of picking my own stocks and throwing some money into
them. while in undergrad finance we had a project where we
had to pick stocks and see their return at the end of the
school year (too short in my opinion but whatever) and i
went ahead and picked 10 stocks which i thought were the
best. i beat the class hands down and have since done two
more "virtual portfolios" and have done exceedingly well.
but of course when it came to my own money i turned into a
punk bitch and waffled and eventually invested in mutual
funds. going against the maxim of one of my favorite
finance teachers that, "nobody knows how to handle your
money better than you do."
but not anymore! so in between the rigors of school work i
decided to return to my researching stocks and finally came
up with about 5 stocks which i thought were the best and
invested in them a month ago (by the way, if you're an
individual investor, use scottrade, $7 trades and you always
get a live person on the phone when you call).
well the stocks were doing great and one of them even paid
me a $15/share dividend! i was really flying high!
so on monday i look at my portfolio (the dividend was on
friday) and i notice something odd.
my portfolio was down about $150 and the market hadn't even
opened!
for the longest time i just couldn't figure out what had
went wrong and then i finally checked the stock that had
paid the dividend...it had crashed $13!!! or almost 50%!!!
i was beside myself. first of all, how the fuck can it
crash during a period in which the market wasn't even open?
second of all, why would someone sell a stock that
exhibited one of hte greatest maxims of fundamental
investing...namely high dividend yield?
well i researched and researched and couldn't find anything,
so i finally called scottrade completely perplexed.
"yeah we've gotten a lot of calls about that."
"i just can't figure out why in the world it would go down
so much...i mean the only logical explanation i can think of
is that the payout ratio is abnormally high because of such
a large dividend, but that couldn't be the case because it
was a one-time dividend, not drawn from net income but an
outstanding line of credit."
"bingo."
"bingo?"
"you nailed it as to why the stock went down."
"but that doesn't make any sense."
"well it doesn't if you look at it from a logical point of
view, but take into account institutional investors."
"yeah."
"they all have these 'buzz-points' in which they sell stocks
based on a certain ratios...since the pay-out ratio was so
abnormal all of these institutions automatically sold the
stock...which is also why all the activity generated over
the weekend."
so the lesson from this is that...as a personal investor,
you are at the mercy of the institutiional investors. they
just have so much sway over the market, it's incredible.
plus they don't actually loook at the stocks in such close
scrutiny.
anyhow this more t han ever has led me to belivee that the
only way to succeed in the stock market is through
fundamental analysis.
there are essentially two types of stock analysis schools.
once is fundamental analysis which is based on researching
hte 'fundamentals' of the company (i.e. balance sheet, etc.)
and finding a solid company to invest in in the future.
then there is technical analysis which relies on past
performance and a lot of chart watching, trying to figure
out where certain 'basis points' of a stock are and what
trends are likely to emerge (if you want a great newspaper
that follows this approach read investors business daily).
then there are two sub-schools of fundamental analysis which
are value and growth. value investing is based on teh
principle that a company is undervalued in the stockmarket
(in that you get a liquidated value of the companies
financials and future payouts...discounted of course...and
copare it to the current stock market value). growth
investing doesn't care so much about what the valuation of a
stock is but more along the lines of its potentnial for
growth in the future.
anyhow, i've kept all of my stocks and reinvested my
dividend into that one stock because i truly believe it is
going to soar like an eagle from the crest of a mountain.
but this just goes to show that you have to rely on a
fundamental investigation of teh companies core capabilities
rather than trying to predict trends as they rarely seem
driven by the actual underlying company's value, but more
along the lines of the whims of the instiutional investors.


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