Buying Stocks: A How To Experiment
68Hey there. I’m the Banker. I want to start my story on hubpages by talking about buying stocks. Over the next month, I am planning on writing about 100 articles on the stock market that will hopefully serve as a tutorial on stock market investing that might prove valuable. But – I must warn you that I am not an expert on the subject. And while I do work in the financial services industry and I was a banker for a period of eight years, I am not a stock broker or a financial advisor. In fact, there’s a lot I could probably do better in my own financial situation. I probably owe a little bit too much and have saved too little.
So therefore, if you decide to read further, keep in mind that when it comes to your own situation, you must do your own research. Get your own advice. Make your own decisions. Do not purchase any stock that I just happen to mention. You can and will lose money in the stock market. Even the best investors do.
What’s ironic about a disclaimer like that is that even when you do get professional advice and buy stocks based on that advice, you can still lose money. I know people personally who lost a lot of money in the last bear market even with a stock broker.
To tell you the truth, it makes me pretty angry. And after all the bailouts for Wall Street and the bonuses paid out, millions of investors lost a ton of money when it was said and done. The question is why?
Why with all the expertise on Wall Street, did so many people lose so much money?
When you think about it, it is a valid question. And, if you think about it, there’s probably a pretty true answer as well. And that is this – they don’t know when to tell people when to SELL. There’s this perpetual myth that average investors must “buy and hold” for the long term has cost so many investors so much money.
The first step then is to look at this myth and see what to make of it. Let’s start with a personal example. I’ve got a friend of mine whose husband worked with me at the bank I used to work at. Over that time period he developed a substantial position in the stock of the bank. Over the years, this stock performed great and over the long term after several mergers and acquisitions, it turned into quite a nest egg for them.
Now let’s fast forward to last year. Everyone know that bank stocks tanked -- in a big way and while some have recovered somewhat in price, it might take a while for others and others were liquidated completely. This was the case with my friend. Meanwhile, the large accumulated growth that happened over a period of years just disappeared nearly over night to nothing.
If you buy stock with the intent of holding it forever, there are many people just like my friend that have been burned by that.
OK. How does Wall Street do it. After all they say that YOU should buy and hold. And, you’d also think that they would do as they recommend. Well, let’s have a look.
Many of us buy mutual funds and let them decide where to invest our money. Inside these mutual funds, the manager decides which stocks to buy and we hope they do a good job. If they do we make money. If they don’t we lose money as well.
Inside these funds, they buy and sell stocks on a regular basis and rarely keep them forever. The average turnover is 85 percent of the stocks bought in a mutual fund are sold within that year.
I guess that this also explains why so many of the funds underperform the market each year. But it leads me to my first rule of investing that I have formulated and that is:
Do as they do and not as they say.
Buy and sell stocks; buy and hold mutual funds depending on the manager.
I’ve been interested in buying stocks for a long time, but I’ve never sat down and taken the time to actually put together a strategy. I’ve got a collection of books I’ve studied over the years, most of which aren’t worth the paper they are printed on. I’ve been wanting to get back into studying the stock market and so I took a look at the books I’ve collected and pulled out my favorite book. It is called How to Make Money in Stocks by William O’Neil. I also pulled out another one of his books called The Successful Investor which I actually think breaks down the CANSLIM investing strategy in a more simplistic and easy to understand fashion. I reread his strategies again and restarted my subscription to the Investor’s Business Daily. It felt good to get back looking at stocks, the market and some specific stock market strategies.
After I did that, I thought the next best thing to do was to search the internet and see who else is following his approach. It was then that I came across a guy named Pradeep Bonde. He talked about an approach to stock market investing for beginners using the IBD 200. I thought that what he said made a lot of sense. Readers of his blog were thrilled with such a simple approach to a seemingly daunting task. He appears to be a successful trader from his site and from interviews on other sites I have read. But, I noticed an interesting thing about his readers. All but maybe one of them really reported any results and it was mainly an exercise in the mechanics of how to do what he said. He admits that very few people if any will actually try the strategy because he gave the information away for free.
What I really wanted to know though was this. Does this IBD 200 strategy work? Ever the one to experiment, I decided that for the next four to five weeks, I would put his strategy to the test and see exactly what happens if we purchase 25-30 stocks using his method and publish the results right here for everyone to see.
Now, I won’t be investing real money for this experiment, but will be using a stock market simulator at Investopedia. Now, I will say that using a simulator is not the same as using real money. The emotions aren’t the same and mechanically, there are probably some things that don’t work like they would in the real world. As a rookie investor though, it made sense to me to start practicing before I invested for real.
There will be some people who you’ll read on the web who will talk down the benefits of using a simulator and paper trading. And, they’ll make valid points. But, and I think this is key, there is no reason to put real money on the line before you understand the conditions and decisions you’ll face each day. By simulating the action, you can get an idea of the questions that will come up once you start a real brokerage account. Why not get those ironed out first. After all, some of the most highly skilled professions use simulators every day to prepare for things they might not ever face. The one that comes to mind immediately are the commercial pilots who fly us around the world. They use sophisticated simulators to create as close as they can the real world conditions they might experience in the event of an emergency. They also create and follow detailed checklists to help them stay focused on the process instead of the emotion. That’s exactly why I think that for beginners, a site like Investopedia can help tremendously.
Therefore, as part of this experiment, I’ll also start creating some investing checklists and spreadsheets to help track my investment program that I’ll share as part of this experiment. I hope you’ll follow along, but more importantly, I hope that you take action and join in. I’ll make some mistakes, but I’ll also learn something. That’s the only way to learn. In the meantime, I’ll dig in to some more specifics in the next hub.
OK. That's enough for today. Catch you in the next post, when we will pick up where we left off and continue our discussion on how to buy stocks.
