How Not to Invest in Stocks: Learn From My Stupidity

So, on Wednesday, I sold my first ever stock, Novartis. In the process, I made at least one key mistake.

The stock had tanked after its Tuesday earnings call announced that for the next year it would be having slower than expected growth. This had been somewhat expected by analysts, but regardless, the stock still dropped almost 3% on the news.

On Wednesday, the stock dropped a further 2% based on several analysts dropping its rating. Importantly, the analysts did not have any information the market didn't have on Tuesday. Their downgrade was based on the Tuesday earnings call, which the market had already reacted to.

On Wednesday, after the stock had dropped more than 5%, I sold my stock. On Thursday, the stock rebounded 1.8%, mostly because some analysts held steady on their rating while others realized that that the Wednesday analysts didn't know anything the Tuesday market hadn't already known.

The end result is: I sold at the low. I still feel like it might be 8 months before the stock starts appreciating at a decent level. I should have either sold on Tuesday after the earnings report, or I should have held onto the stock until it came back from its Wednesday's loss.

Investment Newsletters- Are they Worth It?

I keep reading Motley Fool's promotional material about how their Hidden Gems newsletter has returned ridiculous profits, and it appears very tempting. I would love to read some reasons why I should NOT buy a newsletter though.

Here's what I have been able to come up with:

1. Risks- This is not free money, with the possibility of great returns comes the possibility of great risk. Any investments in their small cap value stocks could easily tank by more than 50%.
2. Cost- At $175+ you are basically paying a tremedous cost on any type of small investments. However, given the risks involved, you would be ill-advised to put too many of your assets into their reccomendations.
3. First Mover Advantage- In order to maximize your returns, you probably need to invest as soon as the recommendation comes out to get in on the reccomendation bump, this might cause you to do less research and cause you to make more mistakes.
4. Newsletter Bait and Switch- I suspect that the Motley Fool, like other newsletter companies, has newsletters that tank. They then discontinue the tanking newsletters and make it look like they are brilliant geniuses for having so many newsletters that outperform the market.
5. It could be a short-term fluctuation-It could be the types of stocks they are reccomending are on a temporary high and are headed for a crash.

Thats what I have been able to come up with, I would love to hear people's thoughts on this.

My First Stock

I wasn't planning on buying my first stock until I had paid off my student loans, my second mortgage, and also built up a stable of solid index funds to form the base of my investments, but plans change.

I stumbled across a stock that I really liked, Novartis (NVS), and the more I read, the more I liked, and I decided that all things considered it made sense to enter now. I bought 62 shares out of my Zecco account and it all went smoothly (though in retrospect I should have used a limit order, rather than a market order)

Here's my thoughts on the stock:

1. I like their business prospects- Its a global pharmaceutical company which stands poised to capitalize on the greying of the baby boomers in developed countries. While it suffers from the threats facing most pharmaceuticals (expired patents, increased competition from generics, increased lawsuits, increasingly regulatory climate) for various reasons it appears to be in a better or equal position vis-a-vis these risks than its competitors.


2. Analysts like it- It has a 5 star rating from Morningstar and S&P, and the talk on the Motley Fool's website has been pretty positive.


3. The stock doesn't seem to be overpriced- The PEG is like 1.25 and the P/E ratio and other measures don't seem to make it overpriced. Most analysts fair value of the stock is higher than the current stock price.


4. No looming problems- It seems to be dedicating a significant portion of its revenues to R&D, and doesn't seem to have a large debt problem.

Of course, this being my first stock purchase, it's very possible I don't know what I'm doing. Only time will tell.

Time to Raid the Emergency Fund

I have located my first ever stock that I would like to invest in (if you don't count the time my dad let me buy one share of General Mills when I was 10 because I liked their cereal). I read the Morningstar reports, the Standard & Poors reports, and the company's 20-F (the foreign equivalent of a 10K), and even logged into the motley fool forums to get a feeling of what people thought.

I've opened up a Zecco account, but now I have to fund it.

I will probably raid the emergency fund assuming I can figure out a way to set up a Zecco to FNBO Direct transfer. Lets hope our beat-up old car holds out for a couple of months.

Should You Try to Time the Market?

I recently found this post arguing against the Buffett style "buy and hold" investor. Citing to a book by Ben Stein, the post argues that the whole "no one can time the market" advice is an oversimplification, and that by working the numbers you can avoid predictable decreases and cash in on predictable upswings.

Specifically, buy whenever the following valuation ratios fall below their 15-year moving averages: price-earnings, dividend-yield, price-book, price-cash flow, and price-sales.

It strikes me that the two are not mutually exclusive. A value investor like Buffett takes the value of the stock at the time of purchase into account when he buys it, thus in a way he is timing the market.

When to Sell

The difference comes down to whether to sell or not when the stock becomes overvalued. Buffett's advice is usually reported as "sell rarely, if ever," but this does not seem like a prudent course for the ordinary investor.

Unlike Buffett, I can't run the companies I am buying into so as to ensure high returns on my investment. If my stocks become overvalued there is little I can do to maximize my return except sell and invest elsewhere. Of course, I might miss out if the company's long run growth remains stellar, but there is nothing preventing me from buying back into the company once it becomes less overvalued.

The buy and holders have a legitimate point, however, when they emphasize not overreacting to short term swings in the stock price and selling like a panicked feline. I am going to try not to panic at the first downswing.

How to Learn About Investing (For Free)

A half year ago, I couldn't tell a P/E ratio from a PE class. I am not even close to being ready to start investing in individual stocks, but I think one of my strengths is my ability to realize this and start the process of teaching myself how to invest.

Here are the Steps I have taken thus far:
1) Books- I've read the Motley Fool's Investment Guide as well as another Fool book, which wasn't as good. Other books I have read: A Random Walk Down Wall Street, Kiplinger's Guide to Investing, some Cramer books as well as some others which I wouldn't reccomend to my worst enemy (Someone's Rich Dad apparently never taught his son how to write in clear English). I checked these all out from the library.

2. Warren Buffett's annual letters to Berkshire shareholders. Everyone reccomends these as a great way to learn how to invest. I've only read 2 thus far, I am going to try to read as many as I can.

3. Stock Investing Blogs & Websites: I try to read Marketwatch, the WSJ, Motley Fool Online. and a couple of blogs every day. One Million to My Name has a great blog for stock investing where he runs through his successes and failures on a regular basis and you get the benefit of his experience.

4. Morningstar Classroom: This is huge, Morningstar has an online free classroom, where you can teach yourself about every major investment topic, and afterwards you take tests to test your knowlege. If you get enough points from the tests you qualify for premium trial membership.

5. My local library's website: I can access Standard & Poors' stock reports as well as Morningstar's stock reports online through my library's website (with my library card number)

6. Fantasy Stock Portfolio: There is no subsitute for experience. I have several fantasy portfolios, where I am learning from my successes and failures. For instance, acting on a "hot tip" from a blog, I converted 10% of my fantasy portfolio into MEDX, a biotech I knew almost nothing about. It promptly dropped 10%. Lesson learned: there is no such thing as insider or pseudo insider information, and there is no subsitute for doing my own due diligence.

Bonds? What are they good for?

So I was reading this great Ben Stein article, and he mentioned that he has no bond holdings in his portfolio. Instead he has 20% of his money in cash, i.e. money market funds, CDs, etc.

I read somewhere that there has never been a 10 year period where the average return on bonds has been better than the average return on stocks. This seems to imply that if you are investing for 10 years down the line or more (as I am), you should not own bonds.

Right now I have no bonds in my portfolio, but as I start investing outside of my 401K, I am torn between the feeling that I need to diversify in case stocks tank, and by my concern that I would be sinking my long term rate of return. I am not sure what investment vehicles out there are better positioned as a hedge against a falling stock market.

My plan right now is to invest around 10% of my portfolio in tax-free municipal bonds, which make sense given my temporary high income tax bracket. The question I have is:
Is this small risk hedge worth the drag on my total rate of return?