Novel Investor • Compounding investing wisdom...

Investing In Index Funds

July 14, 2011

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Jon

Index funds have, arguably, been touted as the best investment for the average investor. They have consistently outperformed the majority of the actively managed mutual funds. Over the long term broad stock market index funds have averaged an annual return of about 8%. Unfortunately many investors have taken these points to assume an index fund is a safer investment. Which is far from the truth.

You’ve most likely come across index funds as an option in a retirement plan, at a fund company’s website or seen them offered through your online broker. Almost every fund family offers several different index funds. But not all index funds are equal.

What Is An Index?

An index is a group of stocks used to represent a portion of the stock market. If you’ve heard of the Dow, Nasdaq, S&P 500, Russel 2000, or Wilshire 5000 you’ve heard of an index. Which are all used to measure a portion of the markets performance.

The most well known index, the Dow is an index of 30 large companies that are believed to mimic the overall market. The S&P 500, however, is an index of 500 companies that offers a representation of the overall markets performance. Continue Reading…
Stock Basics: Know The Analyst Ratings Game

June 22, 2011

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Jon

There are four earnings calls each year that have a critical impact on a stock. These events coincide with what is known as earnings season. A time where companies release their quarterly earnings results to the public. A company’s earnings can drive it’s stock price up or down. But how do we know how good an earnings release really is?

Earnings are so important that a whole sub industry has been created just to study a company’s future earnings potential. Analysts, as their called, release an earnings forecast or estimate, which can have a big impact on a stock price. I use the term “forecast” loosely, analysts like weathermen, can often be wrong. That being said, a the stock price is tied to how well a company’s earnings compare to the average analysts estimate. If a company beats the estimates, the stock usually rises in value. And does the opposite if it fails to meet the estimates.

The Analyst Estimate

An analyst is charged with studying an industry and the publicly traded companies within it. Companies in the same industry do business in similar ways, have similar products and services, and tend to react similarly to economic changes. By studying these things, the analyst can make an educated guess to a companies future earnings, provide a stock rating, and a potential target stock price if their estimates are achieved.

If you own stocks or have a brokerage account, you’ll come across analyst estimates being revised, upgraded, updated, initiated, downgraded and the stock price will move entirely on these changes. This happens because the market is starving for information. Continue Reading…
Investing With The Glass Half Full

June 17, 2011

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Jon

One of the hardest things to do with money in the market, is to hold on for the ride. The easy way out is to simple sell everything and curse the day you thought you could make money in the market. I’m not surprised that some people may feel this way. I think too often, people expect their money to only go up. But after ’08, I wouldn’t blame you for taking your money and going home.

People saw 30%, 40%, even 50% or more losses in less than a year. Something most people never experienced and for some, should never have been in that position. It’s one of the major faults with a 401k. Even though many people have a good understanding of how to invest, there’s even more that don’t, yet are pushed into it blindly by their own retirement plans.

The stock market isn’t built for everyone. To paraphrase Warren Buffett, people who can’t handle a 50% loss in their stock’s value, shouldn’t own stocks. There has to be an emotional disconnect between you and your money. It’s the only way to maintain sanity. But is easier said than done.

When the market collapsed in Oct. ’08 most people eventually took their money and ran. Fear set in, which caused a bigger sell off, causing even more fear, and more selling. Until it finally bottomed in March ’09 with the Dow around 6500. People took the pain all the way down until they couldn’t take it any longer. They finally got out of the market, but it was at the worst time possible. Right near the bottom. Continue Reading…
Long Term Profits From Cyber Attacks

June 10, 2011

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Jon

It seems that hacking data networks has become the new fad recently. With companies like Google, Sony, Nintendo, Lockheed Martin, and most recently Citibank, it appears that, with the exception of Lockheed Martin, the attackers are going after customer data. All this coming at a time when the internet is experiencing an evolution to a wireless, mobile (or cloud) network.

It’s a potential one step forward, two steps back moment and companies will need to start spending on their security in order to keep customer confidence up. Especially when most people, myself included, don’t really understand the how, where, and why these cyber attacks are possible.

The Corporate Perspective

Big business has been turning to the “cloud” to do business and maintain their data. If you haven’t heard of the “cloud” yet, it’s a broad term covering the evolution of the internet that allows corporations to store data, applications, programs, etc., on a virtual server. It allows both big and small businesses to have the use of all the new technology, without the cost of buying the new hardware.

Corporate spending will continue to be the bulk of the revenues for security companies. The more businesses that turn to the “cloud”, the more security that is required to protect those companies. With the latest cyber attacks hitting some major corporations, the spending will only increase to protect brand names, and keep them out of the headlines. Combine that with the fact that the “cloud” is still at the early stages of it’s life cycle, the technology to secure the “cloud” will continue to evolve. Continue Reading…
Stock Basics: How Does The Company Make Money?

June 2, 2011

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Jon

The best advice I’ve ever heard regarding investing is if you don’t understand the investment don’t put your money into it. Similar advice can be said about stocks and is the philosophy of some of the greatest money managers. If you don’t understand how the company makes money, don’t buy the stock. It’s a pretty simple idea, but often overlooked.

By knowing how a company makes money, it becomes much easier to understand what will help and hurt a company when the facts change. Higher oil prices, for instance, may be good for an oil company, but bad for transportation companies.

If we are researching McDonald’s Corp. (NYSE: MCD), the next step is to find out how the company makes money. Head on over to your favorite research site and look for the company profile section. Digging through this information is the best place to start your research. Continue Reading…
Stock Basics: Stock Price Summary

May 27, 2011

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Jon

The stock price summary is the first information you see when researching a stock. Whether you use a free site like Yahoo Finance, a premium research site, or just your online broker, this information defines a stock every day. And is a great place to start a “Stock Basics” series to show how to sift out the important information when doing your own stock research.

The stock price summary is simply a quick overview of a stocks performance. It tells us where the stock is at right now, what it has done for the day so far and over the past year.

The goal of this initial research is to eventually find a stock that is going to make us some money, from either a rising stock price, dividends, or both. We thought we’d use McDonald’s Corp. (NYSE: MCD) as an example since its a well known company. A few questions we might want answered are where is the stock price at now? How close to it’s one year high is it? Does it pay a dividend? And what’s the yield? Continue Reading…