Stock Fest

More tips on getting started

Information and guidance is everything!

I have read many profiles of top investors and rich people alike. The one thing that they have in common is that they did initially borrow from their family members to get started in whatever business or investing career that they set about pursuing. So don’t be afraid to ask any of the wealthy members of your family for seed capital to get started.

For me, it was my dad who was the wealthiest member of my family. This is a pretty easy source for capital as there is no one in the world who wants to help you or see you succeed more than your parents.

Then you look to make money off of these initial capital investments and look to bring together some money from friends that you really like and whom you share a lot of common investment goals and values with. This is actually a mutual fund!

For me, it was a lot of the people that I met in college or in the workplace who were a lot like me when it came to money. They were frugal and wanted to see their money multiply. They were not going to fall for short term trends, but were in it for the long term gains and we just enjoyed each other’s company.

As the investment grows, it will inevitably attract more investors and like-minded individuals. I have always been passionate about investing and making money and there is nothing enjoyable for me than meeting people who share that passion. I think it is very important who you let into this ‘investment club’ and those core values and investment principles will be what guide you through the good times and the bad.

I actually wanted to talk about something other than the usual hot stock picks and investing jargon and I hope you liked this week’s post on Stock Fest.

How to get started stock trading

This is my own personal guide that I think you should follow.

Before I start, let me remind you that I have done quite a lot of posts on Investment Talk and also followed individual stocks like Apple and Microsoft in addition to whole industries like technology and even how to go about something like retirement.

Now that we have that out of the way, here is my guide to get started in stock trading. I know that there is so much information out there and people get overwhelmed prematurely. But the way I would approach stock trading is to first go for those stocks that will get you that check every month and that is the high dividend paying stocks.

This is how even someone like Kevin O’Leary approaches his investment in the stock market with his O’Leary mutual fund. So long as you can keep getting money in your hand every month, you will never go wrong. It is all about ensuring that there is some side income stream. When this has been accomplished you can start taking some risks and look for growth and income.

I have already talked about the blogs and sites that are great, but I will mention here again. Seekingalpha is good and so is The Street. But, nowadays even typing something like good stock picks and seeing what pops up on Google can be a good strategy. Investors react to news and often time the market based on what investment reports have to say as it is too time consuming to be going and investigating and following a stock or a company on their own.

As a rule of thumb, I would start with $5000 in the stock market but any amount should really be alright.

Top performing Hedge Fund managers on Wall Street

I wanted to use this post to focus on some fund managers that are riding high on Wall Street. Their hedge funds have also been doing really well and I guess it might be good for an investor to know about them when they go about picking stocks. These fund managers can be seen as the yardstick.

Raymond Dalio

He is the founder of the world’s largest hedge fund that is based out of Westport, Connecticut. Dalio earned an astounding $3.9 billion last year. Bridgewater will be focusing on adding commodities like gold this year with some exposure to emerging markets currencies.

Carl Icahn

Anybody who wants to get involved in investment should become familiar with this iconic corporate raider. Icahn Capital Management did extremely well in 2011 with a 34.5 percent gross return.

James Simmons

He is known as the smartest billionaire and keeps a very low profile. But his Renaissance Institutional Equities Fund was up 34 percent in 2011 which allowed Simmons to earn an estimated $2 billion. All this after there was talk of closing down his firm Renaissance Technologies because of two years of substandard performance leading up to 2009.

Kenneth Griffin

This Harvard graduate who started investing in his dorm room with seed capital from his grandmother saw Citadel Global Equities Fund surge over 21 percent in 2011. I guess tracking Citadel and the stocks they invest in would give you a good idea on what stocks to put your money as the investment firm did extremely well in equities.

Steven Cohen

Last, but definitely not least, we have Steven Cohen who was also mentioned in talks of buying the LA Dodgers. SAC Capital Advisors made a lot of money on the technology, retail and energy sectors.

Equity Research

"Other ways to get equity research reports are to simply sign up for a brokerage account at Charles Schwab or TD Ameritrade"

This is my attempt at stealing the show from Jim Cramer. I have been talking about stocks and how the stock market works in this blog, but I just wanted to post about what exactly equity research is. Here is a good example of an equity research report from the year 2008.

Basically, equity research involves tracking public companies and picking stocks that are good to invest in. Earnings announcements and the news are also closely monitored. It helps to have a sound knowledge of accounting and finance, but what is more important is to know an industry really well. Tracking stocks is useful and there is fundamental analysis and technical analysis that comes into play.

There are some blogs and websites that cover stocks and the market that are really great such as Seeking Alpha, FT Alphaville and Covestor that do most of the work for you. I also have been monitoring Microsoft stock and Apple stock in addition to the stocks that I monitor on this blog and others. The sites that I mentioned and also my own tracking of stocks use comparables, DCF analysis to make the recommendations of what stocks to buy, etc.

Other ways to get equity research reports are to simply sign up for a brokerage account at Charles Schwab or TD Ameritrade and you will be able to get reports from banks such as Credit Suisse.

On a side note, passion for the capital markets can lend you a job in equity research too provided you have an undergraduate degree and sometimes even an MBA or a PhD is required to break in. Again, it’s important to be social and make friends.

Capital asset pricing model

"There have been a lot of criticisms of the CAPM with an important one being that low beta stocks may provide higher returns than forecast."

This is a continuation of the discussion of how investors feel the stock market works that I touched upon in my post on the efficient-market hypothesis. The CAPM is probably on the opposite end of the spectrum in comparison to the efficient-market hypothesis.

The Capital asset pricing model better known as the CAPM is a way to determine the required rate of return on an investment. The famous financial economist Harry Markowitz laid the foundation for the CAPM with his work on the modern portfolio theory and diversification.

A tip for investors in developed markets such as the United States and the United Kingdom to have a well-diversified portfolio would be to have somewhere between 30 to 40 securities. This is not sufficient in the emerging economies and other developing markets where it would be better to have more securities in a portfolio due to the greater asset volatilities.

There have been a lot of criticisms of the CAPM with an important one being that low beta stocks may provide higher returns than the model would forecast. Another problem with the CAPM is that it assumes that all the investors whether they are passive or active have the same information available to them and that they agree about the expected return and the beta of all the securities.

Anyhow, the two key things in the CAPM are the diversifiable risk or the unsystematic risk and the non-diversifiable risk which is the market risk, systematic risk and the beta risk. The market as a whole has a beta of one. When an investor puts money in a mutual fund that is highly diversified and pretty big then he or she anticipates the performance to do the same as the market.

Stocks like Apple (the world’s hottest stock)

"I wanted to share 4 other stocks that have made similar type of gains and also have had analysts bullish about them"

I have talked about Apple stock for quite a bit on the Apple Talk blog. Now, I wanted to share 4 other stocks that have made similar type of gains and also have had analysts bullish about them. I am not only looking at gains but also comparable fundamentals and growth potential. It was pretty hard getting these 4 as Apple seems to be so hot.

Salesforce.com (NYSE:CRM)

Cloud computing is pretty hot right now and so is Silicon Valley where Salesforce.com is located. The stock price has had a 52 week range of $94.09 - $160.12. The company has had strong earnings growth, but because of it being unable to control its expenses properly the price could fall to $120 a share.

Anheuser-Busch (NYSE:BUD)

This is a renowned brewing company that has the brand Budweiser in its portfolio among others. It obviously hasn’t had Apple’s explosive gains, but it still has some good gains and has pretty good growth potential and great fundamentals.

Caterpillar Inc. (NYSE:CAT)

In the last three months, this Fortune 50 company stock has gone up by about $30 to finish at $112.49 last Friday. Caterpillar has strong dividends and remarkable growth ahead. Caterpillar stock’s return has been very impressive at 27 percent and skeptics point out that it is at the end of its 52 week high. But I think this should be a long term stock like Apple because of its growth globally with mining equipment and heavy machinery in China and South America.

Bank of America Corp (NYSE:BAC)

This is a financial stock that should not only be in your portfolio because of its return, but because it has that brand value and long term potential just like Apple. The other good thing is that at $8.13 a share it is not only a good buy, but very affordable to investors.

Efficient-market hypothesis

"There have been several criticisms of the efficient-market hypothesis..."

I talked about fundamental analysis and technical analysis in the Investment Talk blog. These are ways to go about picking stocks. An investor’s belief in the various models of how he or she feels the stock market works most often dictates what method the investors selects to analyze stocks. The efficient-market hypothesis is one of these models along with the Fed model Theory of Valuation, the Capital Asset Pricing Model and the Random Walk Hypothesis.

This model and the others mentioned in the previous paragraph are backed up by studies done on investors and financial markets. A research on the stock price after dividends have been slashed or increased over a period of three years found that when there is a proclamation of a dividend cut, the stock prices fell by 15.3 percent for the period. The opposite occurred when there was a dividend increase being announced as stocks then beat the market by an incredible 24.8 percent for the three years.[1]

The basic idea behind the efficient-market hypothesis is that financial markets are efficient and any investor cannot continue to earn a return over the average market return for a long period of time. This is strong-form efficiency and there is also semi-strong-form efficiency where no excess returns can be earned on any new information gleaned. Additionally, there is also weak-form efficiency which makes a strong case for fundamental analysis.

There have been several criticisms of the efficient-market hypothesis with the main one being that investors seem to pick growth stocks at above-average prices rather than put their money on value stocks that will provide the best return. Warren Buffet has also stated that the efficient-market hypothesis is not the greatest model because there are a lot of value investors that are actually seen as the best money managers which goes against what the hypothesis says.

Stock Market Bubble

Anything that goes up must come down.

There have been two very popular stock market bubbles in the twentieth century which ended in a crash. The first one was the boom and bust of the 1920s which saw the U.S. stock market soar to great heights. The crash came with the Great Depression in 1929. The more recent one was the dot-com bubble that ended with the bubble bursting at the turn of the millennium.

Both these stock market bubbles were attributed to the technological innovations that were introduced during the period with the 1920s seeing the advent of automobiles and radio among other household items. In the 1990s, it was the internet boom and the rapid growth of e-commerce and related technologies.

One thing that investors should be warned about is that in these bubbles investment tends to flow towards speculative areas rather than businesses that are actually great for the long haul and have solid value.

There is something called positive feedback that applies to stock markets and investors that helps in understanding what drives them. When a stock price goes up like what is happening lately with Apple, Inc. it will make investors take notice. Everyone does not have the time or the desire to be going into detail about the fundamentals and technicals of a stock and the rising price is often a good enough reason to put money on the stock.

When more people start investing in the stock, the price will shoot up even further. But the trouble is that the price can fall rapidly from here as the rising price gives investors a reason to sell a stock and discourages investors from buying in. So timing is key and it must be noted that in the United States equity markets are generally short-term.

Stocks that short-term traders should look out for

Inspired by my first post on this blog about day trading, I am going to talk about five stocks that traders who want to make some big moves in the near term should look into. All of these stocks trade above $10 and have the biggest intraday high-low ranges. This is according to observations in the last 50 days of the average percent spread between the intraday high and low.

Diamond Foods (NASDAQ:DMND)

Based in Stockton, CA, this packaged food company has a 52-week range of $21.44 - $96.13. If that doesn’t catch your eye, it is actually the only stock in the S&P 1500 with a stock price higher than $10 that averages a high/low spread of just over 7 percent each day.

Rubicon Technology, Inc. (NASDAQ:RBCN)

There are mixed reviews of this tech stock with some bulge brackets on Wall Street saying to sell while others being bullish on its growth prospects, but at $12.58 a share it sure is tempting to buy and trade.

Lumos Networks Corp (NASDAQ:LMOS)

Fundamental analysts seem to think that this telecom services company has solid fundamentals. The P/E ratio of 14.79 is in the fair value range, but it makes it into this list as a result of its volatility.

First Solar, Inc. (NASDAQ:FSLR)

There is another tech stock to make this list as expected. It is on the lower end of its very volatile 52-week range of $29.87-$175.45 at $49.03 a share. This stock is up 7 percent as of today’s trading day and should be a good addition to your portfolio if you’re looking to make a quick buck according to many stock analysts.

KB Home (NYSE:KBH)

The world’s largest asset manager BlackRock has bought more shares of KB Home and its total stake is now 9.3 percent and 7.2 million shares. The investment management firm might be onto something.

Dividend paying stocks to start with

"The good thing with the 5 stocks that I am about to mention is that they are all in the Dow 30"

I have been advising that the best way to start out in trading stock - and most experts would agree - is to go for the high dividend paying ones that ensure an investor gets a good return on investment. Here are 5 stocks that pay high dividends and are also large cap stocks that should be a good buy in 2012.

The good thing with the 5 stocks that I am about to mention is that they are all in the Dow 30 and have had good performance along with pretty good dividend growth rates.

AT&T, Inc.

The share performance for AT&T beat the S&P and it is a great buy for an income investor at only $29.95 a share. Its financials also are far superior to any other firm in the industry.

General Electric

The debt/equity ratio of GE is a lot higher than a lot of other stocks, but given its share performance and being at $19.02 a share, the multinational conglomerate should reward investors with a good dividend payout in 2012 as well.

Chevron

In addition to beating the S&P, Chevron also beat the Dow’s return last year. The stocks that I mention here paid quarterly dividends in 2011 and Chevron had the highest dividend payout of $0.81 per share.

Exxon Mobil

At $84.92 a share, Exxon Mobil is not only a bit pricey but it also is close to its 52-week high. However, this stock price could be affected by world events particularly in the Middle East that could cause oil prices to increase.

Johnson and Johnson

This is another stock that is close to its 52-week high with a stock price of $65.64 It does have better financials than its peers and its share performance in 2011 beat out the Dow and the S&P average return.

This serves as an introduction to these stocks and more information can be found on Google Finance.

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