Stock Markets Exposed

How do you make money in the stock market?

Do you make more money by buying and selling stocks or by just letting your stocks sit there and just receive the dividends quarterly/anually?

Public Comments

1. Almost everyone does better by buying stocks in a good company and holding them. The stocks may appreciate over time, as well as accrue dividends.
2. Yeah, I've had a team working on this over the past few weeks, and, uh, what we've come up with can be reduced to two fundamental concepts. One: people are not wearing enough hats. Two: matter is energy. In the universe, there are many energy fields which we cannot normally perceive. Some energies have a spiritual source which act upon a person's soul. However, this soul does not exist ab initio, as orthodox Christianity teaches. It has to be brought into existence by a process of guided self-observation. However, this is rarely achieved, owing to man's unique ability to be distracted from spiritual matters by everyday trivia What was that about hats, again?
3. Simple answer...you buy when low and sell when high. Of course this is extremely difficult. Warren Buffet, the investor legend, has been asked how long he liked to hold onto stock. His reply was "forever". Getting into the buying and selling of stocks is a tough game to play and only for those willing to do the time and study security analysis. Buffet has said that Benjamin Graham was the master (particularly in value investing). Getting his overview book, "The Intelligent Investor" wouldn't be a bad place to start. If you really get into it you can get more advanced by reading the 1940 version of Grahams and Dodd's, Security Analysis. I've listed both links for you below. Alternatively you can look into mutual funds. These are much simpler and as long as you follow some simple guidelines you'll go very far. Burton Malkiel wrote the "Random Walk Down Wall Street" which is an excellent guide to the world of passive investing. A watered down version, "The Random Walk Guide to Investing" is a great introduction. You may also want to research William Bernstein who wrote a couple of great books: "The Intelligent Asset Allocator" and "The Four Pillars of Investing" Anyways, HTH. Jesse
4. You can make money by doing either. It is harder to make money by frequently buying and selling because it is hard to predict the future. A buy-and-hold strategy usually works over the long run. Fundamental analysis (a method of choosing specific stocks) works sometimes in the short run, but rarely over the long run. Every year, there are investors and mutual fund managers whose portfolios of stocks beat the market index that particular year. So, there is some validity to it. However, to do this consistently requires intuition that borders on clairvoyance, and even the best fundamentalists eventually make mistakes. The further into the future fundamentalists try to predict corporate earnings, the wider their degree of error. So, over long periods of time, fundamental analysis does not appear to help investors beat the stock market average by a significant amount, especially when you factor in expenses The reason that fundamental analysis, technical analysis, or any stock-picking procedure usually does not produce superior long-term results is because the analysts have to be correct such a high percentage of the time in order to overcome the extra costs of research and frequent trading. In her book "All About Stocks", Esme Faerber quotes a study from T. Rowe Price that shows investors would have to be correct 70% of the time with their stock selections in order to beat the market's average return. Even a 50% correct track record produced inferior results due to transaction costs. The longer a fundamentalist invests, the more money he has riding on his picks, but the more chance he has to screw up. It only takes a few wrong choices to negate most of the positive benefits previously obtained. And even if you are willing to perform fundamental analysis, you have paid the "expense" of your free time … time that could have been better spent with family, friends, or Xbox. There are no special prizes or additional virgins in the after-life reserved for the elite few that beat the S&P 500 index. Markets are strikingly efficient. First, by the time the information is released and analyzed, the price of a stock may have already risen/fallen to reflect this. Secondly, stock prices tend to react in advance of anticipated news or dividend increases. If a company announces higher dividends, it is because the company had several years of good earnings . . . A fact that is already known to investors and has already pushed up the stock's price. This announcement of increased dividends is not a surprise to investors, but is the culmination of their expectations and the very reason they bought the stock in the first place. In order to beat the market average, you have to buy profitable stocks before other investors recognize them, which is hard to do in an efficient market. With more than half of the world's invested money held within mutual funds and pension funds from companies who watch the economy and the markets 24/7, using men and women educated with a century of market history and theory, who are required to display all their stock picks to the general public, how can anyone spot "underpriced" stocks? One of the hardest concepts for new investors to grasp is that the markets can be both rational and random at the same time. People do not like situations where they have no control over the outcome. This is why Wall Street has created the illusion that they are experts. Their various fakeries hide the fact that they, themselves, cannot beat the market's average over long periods of time through superior stock selection or proper timing. CNBC's minute-by-minute coverage, Scottrade's commercials showing you their latest "powerful investing tools", technical analysis charts … these are all just investing pornography. Just like porn, their images appear to be real, but real investors do not do it this way. The sooner you get the notion of randomness through your skull, the quicker you will be on the road to financial independence for retirement. Don't fight it. You'll only make things harder on yourself. In essence, there is only one way to make money in the stock market over the long run. Buy a stock and wait for unpredictable events to occur which raise its price. Then either collect the dividends or sell it for a capital gain. Since you cannot know which stock will go up and by how much, you might as well hedge your bets by owning a diversified lineup of many different stocks. In fact, you should own a very large batch of them. And since neither you nor I can predict these random future events, there is no reason to believe that one particular group of diversified stocks will eventually do better than another batch of the same type. And you might as well do this as cheaply as possible, since there is no incentive for owning a batch with higher expenses. I wonder … what investment vehicle accomplishes all of this? (Hint: Index Mutual Funds)