Tuesday, June 12, 2012

Stock Advice - Macro vs. Micro

I'm off taking another great DAU course for my job.  The class I am taking is covering cost risk.  I got the chance much like very one else to introduce myself.  A chance to talk about myself and what I do for my job.  At the end you have the option to tell everyone something about yourself that interests you.  I told everyone that I wrote a financial blog.

After everyone was finished talking and introducing themselves...the instructor told me that he got out of the market and was waiting for a pullback to occur.  Basically wanted to know if what he did was a smart move.

In case you were wondering...I do have a crystal ball.  I'm not talking about the computer software program.  I'm talking about a real crystal ball.  I got it off a fancy chandelier.  So far, I haven't had time to use it. I've been too busy with other things.

I answered...you'll have to read my blog!  People laughed, and I had a couple people ask me how to get to this blog.  We have about 28 people in the class and I would guess that only one will visit which is around 3.5%.  That's right...out of 28 people 7% of the people are curious enough to ask wanting to learn more.  The rest of the people...aren't interested in learning about finance.

It's a real shame actually because you really need a mentor to help you out financially.  A stockbroker is not a mentor, and paying someone to mentor you seems wrong.  Although, people pay people vasts amounts of money to lose it...a different strategy might be in order.

Back to my question about whether I think the stock market will go up or down.  First of all, the question is a macro economics question.  Most companies follow the general direction of the economic.  This is true whether you purchase individual or buy an index fund.  Some companies obviously do better than other and some do worse.  I am not a big fan of looking at macro economy.  Measurement of GDP isn't very fascinating to me.  They can be misleading when it comes to buying stocks.  Stocks can be overpriced and could fall in price even if companies are producing better earnings.  This happens when investors pay too much for stock and earnings fall short of expectations.  Certain industries do better during different economic cycles.  Stocks can go down due to negative earnings for several quarters.  This happened during the great depression, and happens in most recessions.

However, with the stock market a simpler view is will their be more buyers than sellers.

The many books that I have read about Warren Buffett have him saying that he could care less about macro economics.

To get back to answering my instructor's question.  It sounds like a good idea for you.  Anytime you feel a sense of uncertainty when it comes to investing in stocks, more times that not it is better to get out.  Here is why...

More often than not...Stocks mover faster down then they move upwards.  We are moving into a great period of uncertainty.  With the upcoming elections it is anybody's guess how people will invest, and whether companies will be more profitable in the short term after the election.

If you look at the last 3 years the SPY (S&P 500 index fund) went from around $91 per share to $132.92 close today.  This is a 46% increase or 15% increase per year (not including dividends).  Most stock brokers tell investors that on average you'll only earn 8%.  This means that if you started investing 3 years ago in the SPY, you would be doing pretty well.  You can also look at the information at the SPDR website.

I recently heard today that a broker told someone that they would be earning 7% on their investment.  It appears to me that the amount of money you can earn in the stock market continues to decreases.  If you look at a country that also has historically low interest rates like Japan, you'll notice that the return on investment for their index is worse than the U.S.

Final thought...I still believe that the stock market the way most people invest is gambling.  If you like to roll the dice, or play blackjack without counting cards...go for it.  Just don't expect to win.  The best thing to do is get educated and make certain you can sleep well at night.  If you want to invest, look at investing locally.  Do your community a favor!

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