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If you are reading this article I assume that you are, or are looking soon to become an investor/trader. In this I will give you some quick do's and Don't's of how to go about the exciting investment game:
For all of you that are not able to dedicate a large bulk of your time to stay current with business and market news, I strongly caution you against trying to play games in the stock market. Be realistic, there are many people who dedicate every moment of their entire lives to outsmarting the market, and most of them sadly fail. If you do not have real time to dedicate, don't think your smarter than everyone else, put 40% of your money in a bond fund such as PIMCO, another 40% in a dow jones tracking fund such as the "diamonds" ticker DIA, 10% in some sort of gold tracking stock such as ticker GLD or a gold mining company like Barrick (ABX), with the other 10% you can take some risks on a company you feel is a winner. This way if your right and you double your money with your pick it drives the value of your portfolio up 10% and if you are wrong your loss is probably canceled out with gains in the other areas.
If you are a value investor, you are probably licking your chops right now because many solid companies have been beaten down so far that they represent great deals that most of us will never again see in our lifetimes. Now would be a good time to buy back into the market with a few solid blue-chip stocks (if there is such a thing), or simply invest any spare money in the DIA or SPY. Don't try and pick a bottom of the market, as I said before, you, like me, are not smarter than the market.
The type of investing strategy that I feel can be most profitable for people who can be very proactive about their investing is that of Swing Trading. Swing trading, for those of you unfamiliar with the term, is a style of trading in which you buy a stock with a reasonable "guess" (I hate to use that term but in todays market that's all it really amounts to) that the price of the stock will go up in the near term; be it 1 day, 1 week, or one month. Swing trading lies somewhere between day trading and value investing in that it requires skills of both styles for you to master it. A good swing trader is watching CNBC, Bloomberg Television, Reading the Wall Street Journal, Following the pulse of the market just like a good day trader; and at the same time is learning everything he/she possibly can about individual companies and sectors much as a value investor would. A person must be fairly intelligent and be able to act on a moments notice to changing events; and most importantly most be emotionally detached from every single position that you open. It gets complicated and is really worth reading more about if you have money and our looking to watch it grow. If you email me or leave a comment I'd be glad to reccomend some books.
Something here that I feel I must mention is that you also dont fall into the trap of getting a "Herd Mentality" following the crowd and doing what you are told. Millions of people watch Jim Cramer's Mad Money everynight on CNBC, not to put it down because it is a very interesting program, but often times when a Guru makes a pick on national television it often times cancels out any validity his thesis held prior to his announcement. I know that sounds a little cock-eyed but it has been proven time and again that anyone, with any kind of a real following, who has made money hand-over-fist in the past, seems to go south as soon as his ideas become mainstream.
Now I'm not advocating taking advice from a person such as myself anymore than I advocate taking Mr. Cramer's ideas. What I am trying to say here is that any information you gather must just be another piece of a puzzle that you must complete on your own. To make beat the markets takes time and dedication just like anything else (sorry if you were looking for some magic formula here). I urge you to go out and do your own research on companies that you here about, that sound promising and logical, and form your own opinions before you ever place a trade.
I hope this has helped you make some decisions about you Trading/Investing choices and if you would like a reading list based on your style of investment don't hesisitate to send me an E-Mail at Cheechfpc@gmail.com and I would be more than happy to help you out.
Showing posts with label current events. Show all posts
Showing posts with label current events. Show all posts
Wednesday, February 11, 2009
Tuesday, February 10, 2009
Marked-to-Market Acounting
Senator Dodd of Connecticut has been quoted as saying that as part of the financial bailout plan the government will be getting rid of mark-to-market accounting. If this is in fact true, the stock market will jump many hundreds of points when this news is officially released.
What is marked-to-market? Essentially it is an accounting technique that allows you to value your assets based on the going market price. huh? Let us suppose you buy 1000 shares of company A for 10$, it subsequently rises to 20$, you get to mark it on your books as $20,000. Thats great as all of you day traders out there know, your margin gets increased and you have more buying power. the same thing happens with big banks. Lets say that a bank has a bond for par (even) at 100 (lets say its a mortgage for a home worth $100,000). As the prices of homes had kept rising in previous years, the price of the bond kept rising as well, say to 150. This meant that banks had on there books $150,000. Now the same principal you use on your day trading was being applied to big banks, when their investments went up they were able to use more leverage (margin) to make more loans, which in turn increased in value....etc etc. in a neverending cycle. and all this was well and good when the price of homes kept rising. (obviously this is an oversimplification but you get the picture).
So now home prices have fallen off a cliff because too many people bought too many homes with fake money that banks loaned them when they really didnt have the money either. So the market collapses and now that same bond we were talking about early's value is now say 50 ($50,000). Now the bank has to right the loan down on their books to reflect that they only have $50,000 from said bond. Imagine getting a margin call but on a massive scale and with much more leverage than us lay people could ever get; yea its not pretty but that is exactly what has been happening and is what has been causing the collapse in the financial system.
So basically the banks used this marked-to-market accounting princple to their benefit in the good years but it has absolutely killed them in the past few months. Imagine now that said accounting princple is repealed, guess what these banks can now value these loans at a higher value than what the market is currently willing to pay for it (and actually closer to the true value of the bond; the market tends to get overly pessimistic just as easily as it gets overly optimistic). So basically the banks will get to use another accounting trick to pump up their assets but no one is going to argue that this does not need to be done. It must be done, even though these financial institutions absolutely brought all the troubles on themselves without them this country would be cast into another depression. Marked-to-market must be suspended immediately, and it appears it will be, and this will do wonders for the values of financial stocks as soon as it happens. When you hear "Marked-to-Market is being suspended" i can gurantee you are going to see a tremendous upsurge of stock prices.
What is marked-to-market? Essentially it is an accounting technique that allows you to value your assets based on the going market price. huh? Let us suppose you buy 1000 shares of company A for 10$, it subsequently rises to 20$, you get to mark it on your books as $20,000. Thats great as all of you day traders out there know, your margin gets increased and you have more buying power. the same thing happens with big banks. Lets say that a bank has a bond for par (even) at 100 (lets say its a mortgage for a home worth $100,000). As the prices of homes had kept rising in previous years, the price of the bond kept rising as well, say to 150. This meant that banks had on there books $150,000. Now the same principal you use on your day trading was being applied to big banks, when their investments went up they were able to use more leverage (margin) to make more loans, which in turn increased in value....etc etc. in a neverending cycle. and all this was well and good when the price of homes kept rising. (obviously this is an oversimplification but you get the picture).
So now home prices have fallen off a cliff because too many people bought too many homes with fake money that banks loaned them when they really didnt have the money either. So the market collapses and now that same bond we were talking about early's value is now say 50 ($50,000). Now the bank has to right the loan down on their books to reflect that they only have $50,000 from said bond. Imagine getting a margin call but on a massive scale and with much more leverage than us lay people could ever get; yea its not pretty but that is exactly what has been happening and is what has been causing the collapse in the financial system.
So basically the banks used this marked-to-market accounting princple to their benefit in the good years but it has absolutely killed them in the past few months. Imagine now that said accounting princple is repealed, guess what these banks can now value these loans at a higher value than what the market is currently willing to pay for it (and actually closer to the true value of the bond; the market tends to get overly pessimistic just as easily as it gets overly optimistic). So basically the banks will get to use another accounting trick to pump up their assets but no one is going to argue that this does not need to be done. It must be done, even though these financial institutions absolutely brought all the troubles on themselves without them this country would be cast into another depression. Marked-to-market must be suspended immediately, and it appears it will be, and this will do wonders for the values of financial stocks as soon as it happens. When you hear "Marked-to-Market is being suspended" i can gurantee you are going to see a tremendous upsurge of stock prices.
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