How do you pick stocks or other investments?

[RichardtheFrog]

I will admit that I do not know how to pick stocks with accuracy. I know a fair deal about how the economy works, but I still couldn't tell you what stock to pick right now. My best strategy would be to first pick a sector that I thought would do well, and then look at p/e ratios of particular companies.

What do the "major players" have access to that I don't? What information can they look at that I can't? Are the "major players" referring to mutual fund managers?

How much of the stock market is controlled by these major players?

For example, let's say that there is $100 billion in the stock market right now (a total guess). How much of this is controlled by "major players" and how much is your "average" investor?

What strategies do you use to pick stocks or stock sectors, or to decide whether you want to be in the stock market at all? Unfortunately, even the data from the economic indicators is already prices into the stock markets. When the stock market looks bad, do you go with precious metals and bonds? That is what I understand to do.

[Wozcreative]

Just watch a 15 minute video on youtube and that should help!
Or hire someone on fiverr for stock tips.

[Fulcrum]

The stock market is the world's largest casino - and the house (trading houses) always wins. A few people can make huge profits, some people make some profits, many break even, and many lose a lot.

I was looking at my own mutual funds today. I bought in, on an investment loan (don't do this), early to mid 2007 when the market was not much lower than it is today. Late 2007/early 2008 the real estate bubble burst and markets tanked. My investments lost 60% of their (perceived) value. Since then they are up 130% (gotta love the roller coaster that is high risk investments) give or take. Unfortunately for me, I'm only at breakeven after factoring in the loan (principal and interest) and inflation - if I factor in time - value of money than I have lost my shirt.

The biggest question that you need to ask before investing is:

Where and how is the value of the stock/mutual fund being derived and calculated?

Answering this question takes a ton of research and you will never have all the information you want. This same question also applies to bonds with the additional question of "how good is the underlying security".

[RichardtheFrog]

It cannot be just like a casino. Professionals regularly beat the market average, so there is a way to do it. And not all of these professionals have access to "secret" information that I don't have.

Is Jim Cramer or Warren Buffet just gambling? I should probably just read on of their books.

[billbenson]

Let''s just sum up all your posts Richard. You can make money in just about anything. But plan on 5 years educating yourself on it. Being smart may reduce the learning curve but you still have to learn it!

[Freelancier]

Professionals regularly beat the market averageThis statement does not reflect reality. Most professionals only make money for themselves by trading with other people's money. The poor schmucks who give them the money? Not such a great return relative to a market index ETF.

[RichardtheFrog]

Okay well I should have said.... there are people who are good enough at it to beat the average, despite the fact that they only have access to the same information as everyone else. Jim Cramer was a hedge fund manager for years. Obviously, he put lots of homework into it. I should just read one of his books.

Unless they do have access to information that I don't, which I don't know if that's true or not.

[billbenson]

This statement does not reflect reality. Most professionals only make money for themselves by trading with other people's money. The poor schmucks who give them the money? Not such a great return relative to a market index ETF.

People do make money in investments. And its not by screwing customers over although that is one way just like bad SEO.

[Fulcrum]

It cannot be just like a casino. Professionals regularly beat the market average, so there is a way to do it. And not all of these professionals have access to "secret" information that I don't have.

Is Jim Cramer or Warren Buffet just gambling? I should probably just read on of their books.

Stock markets are like a casino. You give your money to a broker (the guys who make the big bucks outside of professional investors), your broker buys the investments and receives a commission, you hold your stocks for however long you wish, your broker sells your stocks when you decide and receives a commission (I should note that some brokers only take a commission on either the purchase or sale and not both). What, exactly, have you done to affect the price of the shares during your holding period? At least in blackjack or poker you have the ability to either count cards or bluff your way to a pot.

I don't know who Jim Cramer is, but I found the section on "Market Manipulation" at Jim Cramer - Wikipedia, the free encyclopedia (http://en.wikipedia.org/wiki/Jim_Cramer) interesting. That manipulation leads me to believe that everything in the markets is at best a game and at worst rigged.

Warren Buffet, on the other hand, is a believer in the buy and hold strategy. He buys into companies that are well managed, often in industries that have recently had their values decimated (market fluctuations). He surrounds himself with very capable people in Berkshire/Hathaway. He is also able, and willing, to admit his mistakes with companies that he has bought into.

I hope that this helps you understand my thinking and that critical thinking is required for all things.

[Freelancier]

People do make money in investments. And its not by screwing customers over although that is one way just like bad SEO.I didn't say that. I make money in investments. But the professionals DO NOT consistently make money for their clients. In fact, most hedge funds have poor returns relative to just buying an index fund, usually because the management fees are ridiculously high. So the professionals always win... the clients, not so much.

[RichardtheFrog]

It is also true that if you simply put money in an S&P index fund and just leave it in there for decades, it will probably make a nice return.

A lot of people make money on stocks. They just go on a hunch or some research they have done and hope for the best. But obviously, they don't have control over everything that happens. No one could predict that 9/11 would happen and that the defense sector would skyrocket all of a sudden, for example.

If someone gave me $1,000,000 and told me to invest it in securities right now, I would be too scared to lose it and freeze. But on the other hand, if I do nothing with it, it will be losing out to inflation. So you actually have to invest it and match inflation just to break even.

[Paul]

Read the disclosure statements every public company files with the SEC. Read the annual and quarterly reports. Don’t just read the glossy annual report the companies send to their shareholders, read the actual reports filed with the SEC. They have all the financial statements, management discussion ,financing transactions, insider holdings and sales, etc. Read analyst reports…read industry reports.

That is the info professional fund managers read (or should read). That’s what Jim Cramer does. The difference is Jim Cramer understands what he reads. Make sure you understand.

Don’t try to make short term trading of stocks a business. That is how most money is lost. Never try to “day trade”. That is a discipline that requires comprehensive knowledge of the market.

Even the hedge funds that are considered successful don’t pick all winners. They just pick a few more winners than losers. They can literally hedge, hence the name, their investments by understanding the dynamic relationships between different stocks , different sectors, interest rates and currency fluctuations. They understand (or should) the intricate relationships of investments to other factors. IE: The price of gold that affects currency values that in turn affect commodity prices that in turn affect the cost of certain products and processes that in turn affects profitability that in turn affect stock prices.

A major benefit that hedge funds, investment banks and Buffett level investors have is access to IPOs and large funding opportunities. When a company has a billion dollar opportunity they don’t call me or you, they call Warren. By the time those deals trickle down to us they are so diluted that they are worthless. We are the suckers that buy at ‘retail” after the real money was made.

In general, for most of us, the market is a risky place and certainly not a way to make a living.