Some investing lessons worth considering...
---------------------------------------------
Harry Newton's Stockmarket Lessons from 2001
technologyinvestor.com
1. You must understand what your money represents to you psychologically. There's a broad spectrum -- from money you need to buy food today, to money you intend to retire on, to money you can afford to lose without affecting your lifestyle. You must understand the psychology of your money and align your investments with that psychology. Your psychology changes as the market changes. I ended the year primarily in cash and triple tax-free New York State muni bonds. I can afford to lose the little I still have in equities. It's largely in equities to help me learn, to see if I can learn enough to make some money and to help me write intelligently. Once I realized that I had taken care of the family's expenses with the interest from the bonds, I felt 1000% more comfortable with my life not being out of control. I started sleeping a whole lot better -- even though the market was tanking.
2. Stop loss orders make enormous sense. Never buy anything without placing a 15% stop loss order. When your stock rises (some actually do), lift your stop loss order. With stop loss orders, you lock in your gains and you limit your losses. The easiest part of investing is buying. Any idiot can buy stock. But few have the discipline to sell that stock, particularly if it falls. The only trait the good professionals have over us amateurs is that they have discipline.
3. Diversification makes sense. Diversification doesn't meaning owning ten different publicly traded stocks across five different industries. It means owning bonds (and different types of bonds), real estate, private equity investments, etc. There was no "hot" sector nor hot stock in 2002 that you could predict. The imaging and security stocks did well after September 11. But who could predict that? Here are the top gainers of 2001 -- Acclaim Entertainment (AKLM -- up 1129% -- they make video games), Sonus Pharmaceuticals (SNUS -- up 1111%), Interneuron Pharmaceuticals (IPIC -- up 669%), FLIR Systems (FLIR -- up 656% -- they make imaging equipment for the military and for security), Genesis Microchip (GNSS -- up 542% -- they makes chips for imaging), Spatial Light (HDTV -- up 504% -- they make microdisplays).
4. Bad news always follows bad news. Or said another way, the first bad news is not the last bad news. Enron(ENE), Lucent(LU), Nortel (NT) and AT&T (T) are examples. There are many more.
5. Management, management, management should be our slogan, just as location, location and location is the real estate industry's slogan. You can watch what management does and ask yourself a simple question, "Does this make sense to me?" You don't have to be a graduate of the Harvard Business School to figure the logic of what the boss is doing. In fact, I'll tell you a secret. I am a graduate of the Harvard Business School and I wouldn't employ 95% of my classmates. Many have messed their lives up beyond belief.
6. For most people, emotion gets too much in the way. We all know of neighbors who paid too much for their house because they fell in love with it. Ditto for stocks. My friend stayed in love with Enron (ENE) all the way down from $45 and never sold. Which leads me to...
7. The price you buy at is critical. This is pretty obvious but few people pay attention. Markets can be surprisingly thin. Place an order to buy a bunch of a stock you've just fallen in love with. Watch the market maker take advantage of you by moving the price up for you and then dropping it immediately afterwards.
8. Always define an Exit Strategy. If you get involved in private equity investments -- by yourself or with others -- always define a term (in years) and a way to get your money out. I'm involved in a few investments that I cannot get out of. I wish I could.
9. Wall Street's advice stinks. In the main, Wall Street's analysts,strategists and money managers (etc.) are salespeople, not analysts. No year proved that better than 2001. Wall Street will use any "logic" to get you and I to spend money on brokerage. An example I read just today: One learned columnist wrote, "Overall, the market is still down for the year, which surprisingly increases the probability of the January Effect. Satya Pradhuman, the director of small-cap research at Merrill Lynch in New York, points out that the January Effect is a recoil effect. His research indicates that the odds are higher whenever the year is ending at a loss; the probability goes from a 70% chance to almost 90%. Not only is the January Effect more likely than normal to occur this year, a survey of several financial, political and military events that shook the markets in the last century indicates that the War on Terrorism should not deter the effect." Go figure.
10. BubbleVision sells more ads when life is ebullient. BubbleVision is a generic name for CNBC, CNNfn, Bloomberg TV, etc. BubbleVision's business is selling advertisements. It succeeds mightily when markets rise. Two years ago you could watch BubbleVision interview an executive, buy the stock that moment, and sell it two hours later at a profit. It was that easy. People sat transfixed in front of CNBC. Ratings were high. Their ads were expensive. No more. Interviews don't produce instant money. Few people are watching. Ratings are low. That's why today you see a lot of direct mail ads -- for magic wallets, for dietary supplements, for the latest 500 country music songs, etc. The networks typically don't charge for those ads. They get a piece of the action -- if there is any action. (I still am trying to buy my magic wallet.) The upshot of all this is that BubbleVision tried to always be "up." You can't sell a negative story. You'll rarely hear them talking about shorting.
11. "Investments" you have control over make enormous sense. Most people do better with their own business or their own profession than they'll ever do on the market. You have control. You can do logical things. You can do them fast. Invest the money in yourself first.
12. Sometimes it makes sense to be 100% out of the stockmarket. This past year was a good year to be out. The first six months of this new year may also be a good time to be out. I'm very dubious about the next few months. More about that in the next few days.
13. Everything on Wall Street is negotiable. That includes fees, commissions, invitations to conferences, etc. etc.
14. The squeaky wheel gets the most attention. This is a rule of life. Being nice works most of the time. But sometimes being a pain in the neck works better.
15. Check. Check. Check. Do your own due diligence on every investment. Do not just trust a tip you read in a newsletter, on a web site, on BubbleVision, or in an Internet chat room, or your broker. Just assume that everyone who tells you to buy something stands to gain financially. Wall Street pushes stocks because of its investment banking relationship with the company. Your broker pushes a stock because his boss told him to push it. (He has no idea why.)
16. Watch Wall Street's accounting. It's amazing how bad Wall Street's administration and accounting systems are. I've found mistakes on virtually every type of transaction I've done on Wall Street. The commission we agreed to comes in wrong. The fund we agreed to comes in wrong. Wall Street's paperwork and on-line systems give obfuscation a whole new meaning. If I didn't believe in the honesty of mankind, I'd say it was all designed to confuse the poor little investor (like you and me) in order to gyp us out of our few hard-earned shekels.
17. Watch Wall Street's communications systems. Wall Street changes its email systems faster than I change underwear. The idiocy of their IT professionals has no bounds. From one moment to another their email, their voice mail, their whole communications system may or may not work. My suggestion (born out of desperation): Send emails. Follow up with voice conversations and record every conversation you have with anyone on Wall Street -- your broker, your hedge fund manager, etc. Staples and Radio Shack have great tape recorders that plug directly into phone lines. I'm using one from Radio Shack that plugs directly into my phone's handset cord. I can't give you the model number because Radio Shack's web site is hopeless and it isn't listed on the device itself!
18. There is no substitute for specialized knowledge. Wall Street is an immensely complex place. You can never learn it all. About the best you can hope for is to learn a tiny sliver of it and specialize in that sliver. With knowledge you have a greater shot at doing well.
19. It's hard to fight city hall. The telecom stocks are beaten down. Some will recover this year. But recognize the environment you're in. According to RHK, Inc., a telecom industry watcher, carriers' capital expenditures hit $92 billion in 2000, fell to $66 billion in 2001, will fall to $53 billion in 2002, before climbing back to $61 billion in 2003. Corning (GLW) fell 84% in 2001. With all that unlit fiber around and telecom capex continuing to fall, will it come back a little in 2002? See the problem? |
