Archive for the ‘Investing’ Category
Since it’s Friday, I thought I’d take a break from the normal stock market news and talk about investing in a different market: Real Estate. So, not much has changed: the economy looks like we’re headed for a recession, credit markets remain tight, and inflation is gradually emerging as a dark cloud on the horizon. However, sometimes opportunity may exist in even the bleakest of markets - even real estate.
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Tags: Investing
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It seems like investors are inundated on a daily basis with short term market headlines (especially now). This information, while useful and important, can be overwhelming and distracts from the most critical aspect investors should focus on: long term investing. The fact is, trying to time the market in the near term is an extremely difficult undertaking - one that many money managers fail miserably at. Still, many investors try their hand at market timing and ultimately lose money.
Small Cap Stock Investing as a Long Term Play
As an alternative, investors should focus on the long term while taking into account their risk profile. Investing in a diversified portfolio of small cap stocks can yield above average returns over the long term. Long term means 5-10 years, period (don’t kid yourself - be realistic about your capital requirements). However, I do not recommend that investors close to retirement or with near term financial responsibility (debt, children, college, etc.) maintain a large position in these types of stocks.
Don’t Be Myopic
In 2007, large cap stocks outperformed mid-cap and small cap stocks (this trend will likely continue). However, the good thing is that short term focused investors will neglect out of favor small and mid-cap stocks as a result. This could present a buying opportunity for long term focused investors.
The Value Proposition
Bottom line: small caps as measured by the Russell 2000 have outperformed large caps (Russell 3000) over the long term (see graph). There are several reasons for this. For example, small cap stocks typically experience higher variability in near term returns - this “risk” is essentially the trade off (remember, there is no free lunch on Wall Street). However, if we are focused 5 to 10 years in the future, we shouldn’t care what the 1 year or 3 year return is. Further, small caps offer a unique opportunity since they have the most room to grow. Think about it, even large growth plays such as Apple (NASDAQ: AAPL) were once small cap stocks.
Don’t Forget
The fundamentals of investing still apply: you must be diversified. Investing in a small number of stocks (of whatever size) is assuming a level of risk that I am not comfortable with. If one stock heads for bankruptcy you could easily lose most of your portfolio (and never get it back). That’s right, never. So, stay diversified, monitor the fundamentals, and stay focused on the long view.
World markets were mostly in positive territory as investors await the Federal Reserve’s announcement on interest rates tomorrow. Wall Street expects the Federal Funds rate (the rate which governs lending rates in the US) to fall about half of a percentage point from 3.5% to 3.0%. While this should boost the US economy in the short run, many worry that inflation could pose a long term risk as a result.
Tags: federal reserve, interest rates, rate cuts
The Wall Street Journal announced today that Bank of America (NYSE: BAC) will indeed purchase troubled lender Countrywide Financial (NYSE: CFC) for $4 billion in stock. CFC shareholders will receive around 0.1822 shares of BAC for each share of CFC they own (which is actually a discount to yesterday’s closing price). The deal is expected to close in Q3 of this year.
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All of the turmoil and volatility in the market these days makes understanding the value of a stock extremely important. While valuation is not an exact science (and can get fairly complex) a basic model using Free Cash Flow is useful to get a general idea of whether a stock is properly valued.
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