Monday, June 16, 2008

 

The Stock Market

Someone was asking for stock market advice over on jazzfanz.com. I decided to share my perspective there, and then decided it was worth publishing here.

Q. So what are the best 2-4 books to buy out there that I could read to learn about the market and how to play it?

A. Unfortunately I don't have any specific book recommendations for you. I read several books myself, several years ago, but wasn't real happy with any of them. But I *would* recommend you do read several books on the topic since odds are that any particular book will have its own biases. If I were buying a book for a friend today, I'd probably get one of these three (listed in no particular order): (Disclaimer - I haven't read any of the three, myself)

1. http://www.amazon.com/Investment-Completely-Revised-Expanded-Streets/dp/1416556176 - I had some good experiences with the Motley Fool website, back when it used to be 100% free. The writing and info was generally pretty good. Haven't used it in years, though.
2. http://www.amazon.com/Investing-Dummies-Business-Personal-Finance/dp/0764599038 - I've had some good experiences with "Dummies" books in the past.
3. http://www.amazon.com/Neatest-Little-Guide-Market-Investing/dp/0452289211 - This one looks like the type of thing you're looking for, and has *amazingly* good reviews on amazon. 90% of people gave it 5 stars--that's nearly unheard of for any type of book, in my experience. Might be a good one.

My advice: Use these types of books to get familiar with terminology and concepts. Don't necessarily use them for stock buying strategies. (For example, one book that I read had a purchasing scheme based on the stock's price. Not price/earnings ratio, just the price. However, a stock's price is not a meaningful number because it's set by the total number of shares there are, an artificial number, in addition to the total worth of a company, a meaningful number. So this was a stupid scheme, even if the book's author was able to find some circumstances where it worked well historically.)

Some more advice:
* Get an account with a discount brokerage. I use ameritrade izone, myself--$5 per trade and reasonably good free stock info. Make sure your charge per trade is as low as possible; it's easy to get killed by commissions.
* Keep up on news about the stocks you have. Don't ignore problems when they start to occur. I lost $1000 or so once because I had my head in the sand about bad news I didn't want to hear.
* Don't "day trade". Unless you really know what you're doing, that's the same as gambling in my opinion. Do "week trade" or "month trade".
* Avoid "dollar stocks" (ones whose price is less than $1/share). I've had nearly 100% bad experiences with them. Despite saying share price doesn't mean anything real, above, in this case it does--a company will never start with a price per share that is that low, so if you're looking at a company with <$1/share, it's because the company has been through some seriously hard times.
* Be wary of "get rich quick schemes". If something sounds too good to be true, it probably is. Pretty much the best you can hope for in my opinion is to outperform the overall market by a bit. If you do that, you're doing well.
* Hold on to the good stocks, get rid of the bad. This seems to be obvious advice, but it's very hard to have the discipline to follow it. It's human nature to want to "grab your profits" when a stock has done well, and it's human nature to hold out hope that a stock that has gone downhill is just temporarily in the dumper. It's a lot easier from a psychological standpoint to sell a stock when you're making a 20% profit than when you're selling at a 20% loss... but generally speaking the latter is what you really ought to be doing and not the former.
* In the same vein as the last point, the single best strategy that has worked for me is to evaluate my stocks weekly (I have 6-12 at any given time), and make sure that all my stocks are highly rated by various evaluation indices. If one of them stops being highly rated, I ditch it, and replace it with a more highly rated stock. Doing this, I typically buy and sell one stock a week this way, and I've made a ~26% return since the start of the year despite the overall market going down ~6% in the same time period.

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