Wednesday, August 15, 2007

It's a Simple Game: You Throw and You Catch

“Okay team, back to the basics.” Have you ever failed and had a coach tell you to return to the basics? It’s a simple game: you throw and you catch. For investors it’s back to the basics. Look at the ratios; look for solid companies; look to hold stock like your grandparents (the grandparents that believed in stocks). Don’t do any funny investing or doubling down, no tactics or strategy, and not anticipating. Just buy and hold.

Wall Street Makes Money on Volatility
Would you take a .04% increase in the stock market everyday? What if the DJIA gained 5 points everyday, and the S&P 500 gained .56 points everyday?

This yearning for stability would would make most people doubt my ability, but a .04% daily gain would turn into a cool 15% in a year. The next question is why does the market not move smoothly?

It’s because investors are people. The collective Wall Street movers accelerate toward a particular strategy, and a particular outcome. Wall Street keeps up with the Jones more than the typical upper-class high school student. Numbers have to match / beat your compatriot’s numbers.

We (personal investors) don’t make money on volatility.

Derivatives & ETFs
To stay with our theme of “basics:” the farther we get from the company and people making money in a company, the harder it is to put value to a particular fund. ETFs are a derivative: their value is derived not from the value of a company, but by how people feel about the value of a group of companies.

Deal directly with stocks, or mutual funds whose value is directly related to stock. The farther removed from the people making money for the company, the more risk you introduce.

I’ve heard the term “sub-prime mortgages” for the cause of all types of events, even why it’s 105 degrees in the South this summer. However, sub-prime is not the problem. I’ll leave you with this:

The market conditions are like a house that has a gas leak. The house fills up with gas. Sub-prime mortgages are a spark. The house blows up, not as a result of the sub-prime mortgages, but because of the other conditions.

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