Monday, October 10, 2011

Stock Talk

In the years since I began writing this blog, I have refrained from commenting on the stock market. Some friends wonder at this, since I spent a quarter century as an intermediary between a fair-sized company and Wall Street, watching market behavior on a minute-by-minute basis. I have been silent on the subject for one reason: The more you know about the market, the less you know.

Still, certain principles must be respected, and they are these:

1. Day trading is idiocy. If you make money doing it, you have been lucky, not smart. The chances are you’ll eventually lose your shirt.

2. The same applies to short sales. I didn’t always feel that way, and I used to “pair trade” – balancing a long position with a short in the same industry. But now I realize that rule 2 is a corollary of rule 1.

3. If you believe that the dollar is overvalued because of investor nervousness (as I do), owning stock in a good company is wiser than owning dollars. Take Apple as a proxy for “good company,” an unarguable proposition. There are about a billion shares in Apple. So if you buy one share, at about $380, you own one billionth of the Company. No matter what happens to the dollar or to the stock market, your share will always be one billionth of the Company. (Dilution is a non-factor, since Apple has tons of cash.) Which would you rather own, a slice of Apple (or any other profitable, growing company) or dollars, euros, or bars of gold, given almost any political or economic scenario? (Full disclosure: I own Apple.)

4. Dividends matter. Why would any sane person accept 0.25 percent on a T bill or 0.75 percent on a bank CD when one can get 4 or 5 percent from a solid utility stock? Bonus: Dividend-paying stocks tend to behave better than growth stocks at times when the market craters.

5. Irrespective of the above, it makes sense to limit one’s exposure to equities. The older you are, the lower this limit will be. One expert suggests subtracting your age from 90, and setting that as your maximum exposure to the stock market, but I think the right number is whatever lets you sleep at night.

6. Never, ever buy stocks on margin.

7. Never buy a stock on a takeover rumor. Whoever is spreading the rumor owns the stock and is “talking his book.” The same warning applies to anything you hear from a CNBC talking head. I watch the channel, but often with the audio muted.

8. Buy what you know. This is the old Peter Lynch rule, and it makes sense. If you food-shop, be aware of what’s moving off the shelves. If you buy clothes, know what’s hot and what’s not. If you are a techie, buy technology. And don’t buy stocks in a business you know nothing about.

9. “Occupy Wall Street” makes a nice sign or headline, but it shouldn’t affect your investment decisions. Not because it doesn’t matter, but because it’s impossible to rationalize.

There. I put my oar in the water, and now I will pull it out again and return to matters I know more about, like books, movies, music, and plays.