Your Questions About Successful Trading Companies

Sandra asks…

what is the best way to invest long term in the stock market?

1. invest directy in good solid large cap companies over many sectors through sip

2.invests directly in good large companies and emerging mid cap companies through value averaging, book short term profits and reinvest it.

3. invests directly in good large companies, emerging mid cap companies and high potential small cap companies through value averaging, book short term profits and invest it in a good diversified mutual fund

or a combination of any??
the thing with option 1 is that i’m worried if one of the companies i invest in crashes and never recovers(like sathyam, its recovering.. but at a very slow pace)
atleast with option 2 and 3 i book profits from time to time
my definition of a good solid stock is one with a low pe ratio, high net earnings(compared to its category) low debt and regular and increasing dividend payouts over atleast 5 years.

My plan is to invest 50% of my money in a stock when is below its 12 month average price, and sell if it rises by 5% or buy for another 25% if it falls by 5% to reduce the average cost and repeat until i sell. Since there’s are good stocks i dont expect them to fall by more than 15% continuously.
since i’m going to reinvest everything i earn along with additional funds every month it would add a compounding effect, if no stock is below its 12 month average price then i’ll let the money sit in a liquid fund

John answers:

As the other poster says…options 2 & 3 are not long term investments. You have not stated what your level of profit would be before cashing out and reinvesting. The very stocks you might be cashing out on might be the ones you should have kept.

Option one is the same as option 2 as far as buying a stock goes but to hold it forever is simply simply silly.

Your problem is that you have no plan for holding stocks and when to buy and when to sell. You seem to have no skills in selecting stocks other than their reputation as a “good solid company”. Apple Inc. Is by most criteria a GOOD SOLID COMPANY…they have more money than they know what to do with but the stock has lost about 40% since Sept 2012…would you still be holding it under your option #1???

Booking profits (funny you don’t talk about losing stocks and what you would do AND when you would give up on a stock that did not perform when you bought it)…means as I said, potentially giving up greater gains…oh you could say” Well I would buy back in again”…Really…if that was true you just wasted the profit buying a more expensive stock that you previously owned.

I do invest long term…which I consider more than a 3 month hold….I have some stocks that I have held for 3 years. But they did not start out as a long term hold. If you learn some skills in Charting and/or Fundamental analysis you should be able to judge when a stock is worth keeping and when to get out.

You cannot set up arbitrary rules as you have done and be successful in the long run


“My plan is to invest 50% of my money in a stock when is below its 12 month average price, and sell if it rises by 5% ”

This is not a long term hold plan…a stock could gain 5% in a day…and then you would sell it ??? You don’t seem to understand how to evaluate a stocks potential for gain. Also limiting yourself to stocks that are below their 12 month average means you are not considering successful stocks.

“my definition of a good solid stock is one with a low pe ratio, high net earnings(compared to its category) low debt and regular and increasing dividend payouts over at least 5 years.”

Such stocks are not generally in the category of trading below their 12 month average…these are generally successful stocks

Michael asks…

Serious question: What is it that these Wall Street people can do that us ‘ordinary citizens’ can’t?

What is it that these Wall Street people can do that us ‘ordinary citizens’ can’t? Can they perform miracles? Why are they so indispensable? Do they have the monolopy of whatever talent they have? Are they really very intelligent people? And if they are very intelligent people, why are their companies going down the drain? Why are they worthy to get paid in the millions? I want concrete, detailed, clear serious answers.

John answers:

Let’s see, where to start.

Do you have money in the stock market?
How are you doing?
I have enough that i don’t ever have to work again.
A few years ago, i made a bad decision, on a small account, and lost 25%.
At that point, i decided that someone whose job it was to study the market would make better decisions.
Today, i’m down 15% to 20% from the highest the account has ever been.
I know people that are down 60%.
The market is down 50%.
Yes, they CAN BE smarter.

Certainly that does not apply to all of them.
What i did when i moved my 401k to an IRA was to choose 4 different folks to manage portions, and i used scottrade to manage the rest.
After a year or so, i concentrated on the 2 that were doing the best.
After another couple years, i moved everything either to my Merrill Lynch account, or to my Scottrade account.
When i messed up in Scottrade, i let the Merrill Lynch guy manage it all.
One might keep in mind, that all Merrill Lynch, and every other full service broker, is competing with all the other brokers, both inside, and outside the companies.
I’m sure there are good folks at all such brokers.
And just as sure there are not-so-good ones.

40 years ago, there was a term (probably still is) “odd lot investors”.
When calculating how the market in general valued a company, trades made by large companies were valued more than trades made in smaller quantities.
In fact, odd lot trades tended to be made by individuals with little knowledge and experience in the market, and when calculating such averages, the number of odd lot trades were subtracted from the major trades because the market thought, correctly, that they made bad decisions.


they’re not all brilliant. But some are. On average, they’re probably more intelligent than the average guy on the street. And some are far better than most of us.


there are a number of factors.
— first, the housing industry. While it had been predicted, nobody listened. Well very few did. I’ve read that the Yale University endowment fund has increased in value at the same time that the market in general declined 50%. Obviously some money managers are better than others.
— insurance, and other industries, have a problem. They have money that they need to invest. They cannot stuff it under a pillow. You pay over many years for life insurance. Eventually they pay you back. Often more than you paid. In order to do that, and pay their expenses, they need to make the money you pay increase. They don’t have a choice, they must invest that money. They pay some of those people to decide where to put money, that is likely to produce the best return. For many years, they were successful, and earned those bonuses. MORE RISK MEANS HIGHER RETURNS. They know that, and took advantage of it. Over several years, they were correct, and made a lot of money for their companies. Their bonuses were only a small percentage of the money that they made for their companies. When the housing industry fell, it took everything else with it.

So, if your question is, why did they get bonuses, their companies thought that they were worth it. They’d made quite a lot of very good investments. They just got caught when the housing bubble burst, and everything went down.

If your question is, why are they still there, their companies still think they’re all still pretty smart folks. They did make a mistake, but they won’t make the same one again right away.

If your question is, what should congress do, probably nothing. They had contracts that they fulfilled. Suppose i sell you a house, and promise to fix anything that goes wrong for a year. And the plumbing just gives out. Should i not pay just because i didn’t know that would happen? That’s what a contract is. If i promise, then i pay.

If your question is about banks, then Geitner is probably doing the right thing. Keep in mind, that he’s inherited the worst situation since the great depression. “Cut taxes for the rich”, which has been the answer for way too many years now, isn’t going to fix it. In fact, that’s a big part of what got us here. It’s not going to help anyone when large financial institutions fail. It’s not going to help anyone to have the government try to run them. Paying taxes is not my favorite activity. Really, it’s not. But i’m not smarter than Geitner, or the other folks that Obama has working on the problem. Anyone who would tell you that those folks don’t know what they’re doing, you should avoid. They don’t have a clue, and worse, think that they do.

Have a good day.

Sharon asks…

how does an Initial public offering work?

when a company decides to go public how does that work? does the underwriting firm decide what price and exchange to list the shares on?do they look at how much the company is worth and then divide that by how many shares they wish to list?

John answers:

There are books written on this subject. Lets see if I can condense some of your points and questions…

First, the main purpose of a company is to RAISE capital (cash) so the company can go from just an idea to a viable entity. Often companies going public for the first time have little or no working capital, and many times they may have a negative net worth, so basing the value on the current financial condition of the company won’t do anything for the company. What they do have is a product or service (or the potential to develop one) that they feel they can sell for a profit, and that investors might be interested in. In essence, they are selling a dream or idea.

Companies can solicit underwriters, or underwriters can solicit companies to go public. (Betcha many underwriters are soliciting Facebook right now). If the underwriter has an interest, they will evaluate the business model and plan, look at the cash the company will need to get to profitability, look at the competition, the management of the company, and any other host of things done under “due diligence” of the underwriter. Due diligence means the underwriter will try to find out everything they can about the company, good or bad, and present that to the potential shareholders in the form of a prospectus, so they (the shareholders) can make an informed decision about whether to invest in the company.

The underwriter will then determine how much capital the company needs (usually the companies substantially underestimate this amount), what types of investors would be interested in the company (big guns or small investors), the overall market conditions, the current capital structure and ownership in the company, how many shares are authorized vs. How many shares are currently outstanding, the composure of the capital structure IF the offering is successful, and other factors.

By then the underwriter has a pretty good idea how much they can raise for the company. The initial prospectus will show a minimum and maximum amount they hope to raise, as determined by the offering price (for example, they want to sell ten million shares at no less than $5, nor no more than $9). If there isn’t enough interest in the minimum amount, the deal is essentially dead, at least for the time being. Interest can be revived later when investors are “in a better mood”.

Pricing the new issue is more of an art than a science. The SEC approves the offering, then the underwriter is free to price the offering. The underwriter gets a feel about the investor interest in the stock. In other words, how much will the stock be bid up by investors who didn’t get in at the opening price. Again, it’s an art, not a science.

So, now the offering is done, the company got the cash (minus the underwriting fee, 5%-10%), the investors got the stock. Right then and there the balance sheet of the company has substantially changed.

As for trading in the secondary market (on an exchange), there are listing requirements of each exchange, the most restrictive being the NYSE. Usually in conjunction with the IPO the company will apply for a listing at a major exchange, if it qualifies. Ultimately it’s the company that makes the decision where to list, if it can be listed. (Microsoft and Cisco are certainly qualify to be listed on the NYSE, but they choose to stay on the NASDAQ exchange). If the company is too small to meet any of the major exchange requirements, it may be traded on the OTC, pink sheets, or bulletin board.

If you get a chance, read the prospectus on a company that’s about to go public, or has just gone public, it will enlighten you.

Here’s a link to the prospectus of A123 Systems, which went pulic last year…


Donna asks…

Is it better to buy and hold stocks or trade?

Can you give me advice on Buying and trading stocks? Etc?

John answers:

It all depends on the amount of work you want to put into it, your timeframe, and how much risk you are willing to tolerate.

Buy and Hold is a good strategy for long term investing. My 95 year old grandfather bought stock in a bank 60 years ago, and he now gets about $50k each year in dividends. But if he had bought Enron, Worldcom, or GM, he would have already lost everything.

With Buy and Hold, you should diversify your investments among companies and industry sectors. My grandfather’s investment is not wise as all of his money is in one company. If that company goes bankrupt, he will lose everything. If he had diversified, one company in his portfolio could fail and it would not obliterate his life savings. I’ve tried to explain the reasoning behind this to him, but he is old and stubborn.

Buy and Hold is good if your timeframe is measured in decades. But it is a good idea to put safeguards in place such as “I will sell if the price falls below the 200 day Moving Average.” or “I will use a trailing stop of X% to prevent losses.”

Trading is not easy and prone to mistakes due to “knee-jerk reaction” trades. To trade in the short term, you have to do your due diligence, follow developments, make rules for your trades {and actually follow them}, and be willing to get rid of all your shares in a company no matter how much you “like” the company. Successful trading takes knowledge, practice, and patience.

Lisa asks…

Whats the difference between P company and the RAF regiment’s version?

Please provide links so answers can be verified. I am to use the information to settle arguments with a few Walts.

John answers:

Without getting overly complicated and whilst this is generally basic information that you can go on to do your own further research as required…..

Pegasus Company (P Coy) obviously is the Army’s training and selection facility for trainee Para’s at ITC Catterick, (inclusive of TA elements), and P Coy also runs the all arms course for regulars/TA. Trainees may already be serving in another Regiment or Corps within the Army, or they can be direct entrants for the Paras. Upon completion of certain elements of the course, they then attend the “Basic Parachute course”. Whilst the course itself is run at No.1 Parachute Training School, RAF Brize Norton, the training drops themselves are made at RAF Weston On The Green’s Drop Zone.

Upon successful completion of P Coy, and all other required Infantry training for the Paras, graduates may then be assigned to either 2 or 3 Para.

The RAF Regiment’s main airborne element falls under 2 Squadron, RAF Regiment.

2 Squadron, RAF Regiment Gunners are trained at RAF Honington. Upon completion of their training, or after previous time in service, they may then be selected or volunteer for the Pre-Para course, also held at RAF Honington. Following that, (as with the Army’s P Coy), trainees then also attend Basic Parachute Training with the RAF’s No.1 Parachute Training School.

Otherwise, individuals from other RAF Regiment squadrons, RAF trades, other Army Regiments/Corps, and even some Navy personnel may also have had the opportunity to complete their Basic Parachute training course, entitling them to wear their “Para Wings”. Personally (and for examples sake), I was regularly detached on exercises with 2620 RAFAuxAF Regiment, some of who’s members had also completed Basic Parachute training, and served many times on station augmentation force for 814 Squadron RAF Regiment, many of whose members had also completed Basic Parachute training.

For specific differences, you could easily end up spending hours surfing the net etc to find all of the information you may like to know. Hopefully the above will at least point you in the right direction to go and find out for yourself any additional info.

Good luck getting your point across with your ongoing debate :).

As for links, use Google and look up 2 Squadron, RAF Regiment, and P Company. I’d wager that will give you a fair amount of useful reading.

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