In addition to advising clients on real estate transactions, I occasionally get asked what I think about stocks (that’s what you get for following the market for 40 years — in my case, literally since I was 10 years old).
Unfortunately, I don’t get paid for the latter, which allows me to remind people that “you get what you pay for.”
With that caveat out of the way, my standard advice to most would-be investors is to consider low-cost, broad-based index funds — as opposed to picking individual stocks.
That’s because, to do the latter well, you have to get 3 things right.
One. Forecast which markets are poised to grow the most.
Just to take one example, consider whether smart phones are a good market to be in the next 5-10 years.
You’d certainly guess that unit sales are going to go up.
But that doesn’t mean that the revenues and profits of companies selling smart phones will go up.
Just look what happened to PC makers.
Even though PC sales are higher today than ever before, PC makers (Apple is much, much more than that) have largely been “dud” investments because PCs have plummeted in price.
So, Dell’s stock today is less than half of what it was — 10 years ago.
Two. Pick the winner(s) in a growing market.
In retrospect, it seems obvious that Google was destined to emerge as the “winner-take-all” in the online search and advertising category.
But that was hardly apparent back in 2000.
Then, dozens of companies were vying for that position.
Companies like AltaVista, Excite, Lycos, AOL, C/Net, CompuServe, Yahoo!, Microsoft and literally dozens of others.
Ask investors in those companies how much money they made (if they remember, and are willing to talk about it).
Admission: my negligible position in Microsoft is worth — yup — half of what I paid for it a decade ago. At least I got a tax loss out of it along the way, by doing what’s called a “wash sale.”
Three. Buy (and sell) the winner(s) at the right price.
Speaking of AOL . . . my all-time home run was buying it in 1997 at a (split-adjusted) price of 29 cents a share.
Not being greedy, I unloaded my position for a huge profit between $5 – $10 share.
The stock ultimately went to $90(!) a share before collapsing — along with the entire Internet bubble — in 2000.
Perils of Stock-Picking
To go back to Google, even though the company continues to enjoy explosive growth and bountiful profits, its stock is well below its all-time high of $700-plus a few years ago.
So is it a buy now at around $500?
None of the above is to say people shouldn’t be in the stock market.
Rather, the right strategy for most people is be in all of the market (including overseas), so they’re positioned to gain when stocks inevitably advance again for real, sometime in the future.