Your Questions About How To Pick Stocks

Linda asks…

When will Google stocks going up?

In the last month they went from a high of 510 to about 460.

I want to know, why did it go down?
And when will it go up again?

I know it is impossible to predict, but I would like to hear some opinions from people with experience and knowledge from the stock market. I started learning recently.

John answers:

Use yahoo finance and “buy” some stocks… Pick out about 30 stocks including Google.. Act like you are using real money and buying real shares. Yahoo finance just helps you keep track of your investments.. See how you do with 30 or so stocks before you invest anything,, try it for at least 6 months.

Steven asks…

What are the current motley fool stock picks?

what are the recent motley fool stock picks?

John answers:

It doesn’t really matter. Motley Fool gives good general advice on investing. Over the years they are consistently mediocre with stock picks.

Mandy asks…

What are the (3) best stock picks for the next 3 months that are under $5 ?

John answers:

I would advise you not to pick stocks. There is a substantial body of academic knowledge and 80 years of research data showing that individual investors competing with one another in a liquid market can not consistently beat the index. Bogle’s Vanguard Index fund beats 80% of all actively managed funds over a twenty-year period, primarily because of its low cost, but also because individuals traders consistently mistime the market.

Therefore, you, as a rational investor, should invest in an index fund, specifically a small-cap value fund, as Fama & French’s three factor model shows that these stocks have historically outperformed their peers by almost three percentage points. (12.9% vs 10.3%.)

If you you invest in an index, you can expect both appreciation and volatility. Your appreciation will be approximately 10% a year, or 2.5% for three months, and your volatility will be 16%, or 8% for three months. (Volatility calculations work differently.) Therefore you can expect to make between -5.5% and +10.5% within three months on your original investment with 68% confidence or between -13.5% and +18.5% with 95% confidence.

You can increase your appreciation and reduce your volatility by selecting a longer holding period for your investment. For example if you held your investment five years, you would expect to make +84%, with a volatility of 35%. Put another way, you have almost a 50% chance of doubling your money.

You can also achieve greater average returns through the use of leverage. Margin loans are one way, but the cheapest and safest way to get leverage is to use options, either long calls or bull call spreads. If used correctly, options give you tremendous capital efficiency – in other words you achieve the same long-term investment results but use less capital. If used incorrectly, you can wipe out your entire portfolio in a bad day, so you have to know what you’re doing.

Index funds, options, and small caps are not heavily marketed because nobody really benefits by educating you as an investor. Wall Street would rather you blow through your money picking stocks and paying high commission fees, and then give up and turn your money over to active management and pay high management fees. You will only learn about index funds in books and articles, in finance courses, or by going to the original academic research.

There are also a lot of scams out there involving options where people promise that you can get rich if you take their two-day three thousand dollar course. Options are not that complicated, and you can model any investment strategy you can think of with excel in an afternoon. And like I said before, all options do is let you trade stocks or indexes with less capital and achieve the same results (minus some fees associated with using other people’s money), so there’s no magic there.

And if anyone you know claims that they have a system for consistently beating the market, then ask them to publish it with 80 years of U Chicago securities data, and then go to Oslo to pick up the Nobel prize in Economics, and then to Wall Street to pick up a $25M a year job advising financial institutions.

Sandy asks…

Spammy stock pick emails that consistently get through the Yahoo email spam filter?

My yahoo account gets spam galore about breakthrough penny stocks. I get a couple of these each week.
A couple questions:

how do these consistently get through the Yahoo mail spam filters? Virtually all other spam gets caught, why not these stock pick emails?


– are ANY of these stocks ever legit, or are they generally just junk penny stocks?


John answers:

I have the same problem. One reason they get through the Yahoo filters is that these scammers send images instead of just text. Yahoo filters out according to text.

And these penny stocks are for real but what happens is that the sender of the spam buys a lot of shares of them and then hypes up the stock by sending out huge numbers of emails promoting the company, mostly in images in which text is embedded. It doesn’t take that many people buying stock in these companies, or much of an increase in share price to give the spammer a big profit in just a couple of days. And the gullible buyer is left holding stock of little value.

Robert asks…


What stock do you think will do well in the next few weeks?

John answers:

Had this question been asked of me a week ago I would have said Dendreon (DNDN). That trade however is over. Some people like DFR. I don’t like it though because it doesn’t have options associated with it. I never buy a stock that doesn’t have options available on it. Without knowing how much you’re willing to risk, it’s hard to answer.

I think Coca-Cola will see $17.50 in the next 3-4 weeks but that’s just me.

Bank of America pulled back on Friday and they have earnings coming out this week. Citigroup reported less than expected losses for the first quarter and was doing OK until their future projections triggered some profit taking. I pretty much expect BAC to do as well or better.

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