Stocks and bonds and a stock collecting chimpanzee

Historically, stocks and bonds have been an excellent long-term investment vehicle. In essence, it means ownership in the businesses that power the world. As the world grows, so do the companies and the underlying stocks that are their foundation. Financial markets are no longer dictated by a few powerful exchanges like the New York Stock Exchange and Deutsche Boerse (German), but are instead affected by a vast, complex, and interconnected web of financial pick-sticks. Of course, there are many ways to invest in these global chunks of corporate property, but for now we’ll leave the attractive, if risky, methods of trading stocks involving derivatives, currencies, and day trading to other columns.

Lusha, the investment guru

Investing in stocks and bonds is very simple in principle: buy low and sell high. Easy enough, in fact, fortunes have been made by men with PhDs and MBAs alongside their names and financial network TV celebrities who have written volumes on trends and charts and flash and stochastic indicators and investing psychology and even rallies based on whether the Dallas Cowboys win or lose. Everyone is an expert and everyone has different opinions, literally thousands of opinions. There’s also a now-famous chimpanzee in Russia named Lusha who throws her poo at a list of stocks on a chart, and those stocks have tended to match or beat the picks of some of the world’s most sophisticated analysts. What does this tell us? That buying low and selling high is not so easy or, better yet, we can choose to pay big fees to analysts or hire a much cheaper primate to be our stock picker.

Indicators and Common Sense

A good place to start shopping for stocks, bonds, and mutual funds is to learn a little about indicators. These are tools that provide an analytical look at a company and the relative price of its shares. One of the most common is the P/E ratio (Price Earnings Ratio) which looks at the current price of a stock in relation to its earnings per share. That makes sense! The P/E ratio is simply the stock price divided by the earnings per share (which can be found in any number of financial publications). A high P/E ratio could indicate that a stock is overvalued and a low P/E ratio could imply that a stock is undervalued, but this is only one indicator and is completely unstable. As an example, during the dotcom bubble, some companies had no earnings like at zero P/E… nothing… a big fat donut… and yet these stocks sold through the roof at hyperinflated prices. Which brings us to the most important indicator you can use. It sits on the six-inch-wide analyst tucked between his two ears.

Warren Buffett said, “Invest in what you know.” For example, perhaps he agrees that there is an aging post-World War II baby boomer population. What does that mean? It could mean that companies that sell services or products to seniors will do well for years to come. You might invest in a start-up called FN Walkers Inc. (fictional) that has developed a compact titanium walking device with a built-in espresso maker. The company is reporting sky-high backorders. Or you could consider Government Bonds. These are generally the safest investments on the planet and tend to do well in times of turmoil. Because? Because investors run to safety faster than squirrels on a golf course. When the missiles start to go off around the world, investment dollars flow like rivers to safe havens and consequently the price goes up. With bonds, forget stochastic oscillators and 10-year moving averages and pray for volatility and bad news!

After all, you don’t need an expensive investment guide or a pooping chimpanzee.

Diversify by putting your eggs in one big basket

There is another way to buy stocks and bonds. It is through mutual funds. A mutual fund is simply a managed collection of stocks, bonds, or commodities held in one big basket and run by really smart people. Mutual funds come in many packages, such as funds based on Dow Industrial Stocks or growth companies or corporate and government bonds, or pharmaceuticals or emerging markets, say in China or Brazil. The theory is that owning a small part of a hundred shares is safer than owning a large amount of a single share. Another advantage of owning mutual funds is that they are completely liquid, which means that you can exit your position almost immediately. Mutual fund returns are largely based on the experience of the fund manager, and results can be closely monitored in many cases with a 1-year, 5-year, 10-year, or even 20-year moving average.

This author’s pet peeve requiring anger management counseling

Always, Always, Always, listen to the advice of your stockbrokers or the advice of so-called experts. On October 9, 2007, the Dow Industrial Average reached an all-time high of $14,164. After that, it started to free fall like a base jumper without a parachute and finally hit hard to a low of $7062 on Feb 27, 2009. Investment gurus were telling us to hold on…the market will rally. Poppycock, Fubar!!! It’s better to sell the stock as high as possible to get out and then get back in when it convulses into a splattered heap on the floor. If you exited some time after the market started to sell off and then re-entered after the dust settled, you would be in a substantially better position than just letting the investment flow, in fact, even though the market is now dancing around 12,000, you would still be 15% BELOW the market high which hit $14164. Isn’t that what brokers are supposed to do?

Anyway, I get sick on fast roller coasters.