Archive for October, 2007
Wednesday, October 31st, 2007
If you’ve ever watched CNBC or read the Wall Street Journal, you’ve probably heard the term “value investing” thrown around quite a bit. And, like me, you probably assumed that it involves something along the lines of finding good stocks at cheap prices. Well, you’re right, but I think it’s important to lay it out a bit more formally. In a nutshell:
- Stocks prices are affected by many variables which cause them to fluctuate
- Human psychology (i.e., irrational behavior) is a huge driver of these fluctuations
- However, despite this, these stocks do have real underlying values
- Value investing entails buying only those stocks trading significantly below those real values
An Easy to Understand Example
For example, take the current housing situation. If you were to ask the average investor which housing stocks he would buy today, they would probably laugh and respond “I would stay away from anything having to do with housing right now”.
For the most part, they are right. But, what if you found a homebuilding stock that had a strong balance sheet, no debt, and had positioned itself to minimize risk exposure to falling property values? Further, what if that company was trading at a price per share that was lower than the per share value of its assets (if they were to be liquidated)?
A true value investor (i.e., Warren Buffett) would take a conservative approach and wait until the stock traded at a price at least 20% below what he / she thought it was worth before buying it. By doing so, they are taking advantage of irrational investor behavior, as well as the institutional “bias” toward stocks considered en vogue. In addition, they are giving themselves what Benjamin Graham dubbed a “margin of safety” which ensures solid returns.
Posted in Stock Basics | No Comments »
Wednesday, October 31st, 2007
Stocks were lifted by positive GDP growth numbers today, as investors chose to buy into the market after the announcement and ahead of the Fed’s rate decision. However, like many indicators, GDP is a lagging metric of past performance. While the news is still good, many are still scratching their heads and wondering if this is simply wishful thinking for the economy. With the recent rise in oil prices, the tightening of credit markets, and the housing “flu”, we could be in for some stormy weather going into 2008. Tissue anyone?
Posted in Economic Indicators, Investing, Stock Market News | No Comments »
Wednesday, October 31st, 2007
Investors are crossing their fingers and hoping another rate cut will be announced by the Fed today. With the housing market, a credit hangover, and high oil prices weighing on Wall Street’s mind, many fear consumer spending (which accounts for almost 2/3 of GDP) will take an extended holiday without Fed intervention. Still, while many believe the Fed will act, GDP growth may slow anyway.
Related Links:
http://www.federalreserve.gov/
Posted in Investing, Stock Market News | No Comments »
Tuesday, October 30th, 2007
Don’t worry folks, I won’t quit my day job, even with unbelievably innovative and clever post titles like this one. Back to business - The WSJ announced today that Google is close to officially announcing a suite of software that will enable wireless phone makers to make the “Google Phone” available by next year.
As expected, a bundle of Google Search, YouTube, and Gmail will be enabled on the phones. But the more controversial piece is the fact that Google wants the software to be completely open source (including the OS). At first this makes me cringe and conjures up visions of the worlds first pandemic cellphone virus. However, if you think about it, it may just be a good option.
Open source platforms on PCs such as Linux have been successful because the community in effect acts as the “safety net” for the code. That is, the collective would quickly identify and correct these problems as they occur. I may be oversimplifying this (or just naive) but I think this just might work for Google.
Posted in Large Cap Stocks | No Comments »
Monday, October 29th, 2007
Don’t panic folks, as outlined in the post here, Ellison had set up a plan to sell shares a while ago in order to diversify his individual holdings (my understanding is that part of the proceeds will also be gifted to a medical foundation). The trades fall under the somewhat controversial 10b5-1 rule, which allows executives to set up transactions in advance of possibly learning of material inside information.
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Posted in Large Cap Stocks | No Comments »
