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I recently signed up for the NMM IPO and was allocated shares. But the stock has gone downhill since it went public on November 13, 2007. NMM was opened at $18 and closed at $19.17 today, a drop of 4.15%.
I have noticed that some IPOs are being put on hold indefinitely. The EnteroMedics and Stewart & Stevenson, Inc. are two that I have seen recently, but I’m sure there are more. This is not a good sign of the IPO market.
The stock market has seen some wild swings recently, the sub prime market is almost devastated, and the real estate market is falling. With so much uncertainty, the best place to park your money is in cash. Cash is safe and liquid.
The stock market index has moved up and down in a huge range over the past few months. The Dow has closed with a spread of more than 100 points 32 times since June 1, 2007. Let’s take a look at the high volatility of the Dow from June 1 to September 11, 2007.
Date Change
9/11/2007 180.54
9/7/2007 -249.97
9/5/2007 -143.39
8/31/2007 119.01
8/29/2007 247.44
8/28/2007 -280.28
8/24/2007 142.99
8/22/2007 145.27
8/17/2007 233.3
8/15/2007 -167.45
8/14/2007 -207.61
8/9/2007 -387.18
8/8/2007 153.56
8/6/2007 286.87
8/3/2007 -281.42
8/2/2007 100.96
8/1/2007 150.38
7/31/2007 -146.32
7/27/2007 -208.1
7/26/2007 -312.22
7/24/2007 -226.47
7/20/2007 -149.33
7/12/2007 283.86
7/10/2007 -148.27
7/2/2007 126.81
6/22/2007 -185.58
6/20/2007 -146
6/13/2007 187.34
6/12/2007 -129.95
6/8/2007 157.66
6/7/2007 -198.94
6/6/2007 -129.79
The Dow Index has rallied as much as 286.87 points on August 6, 2007. A few days later, on August 9, 2007, the market dropped by as much as 387.18 points. That is a spread of 647.05 points in three days. Imagine you are holding a company that trends with the Dow but on a wider scale. You will be seeing some wild movements and it may be difficult to stomach such volatility, especially if much of your money is in there.
I think it’s a good time to have more cash on hand and wait on the sidelines until this “mess” clears up. It will be also be a good opportunity to pick up some stocks for a cheaper price.
I have sold most of my stock positions in August and my money is mostly in cash. I will take this time and opportunity to do some research on companies. I look for solid companies that have a solid track record and great long term growth prospects but the shares are currently oversold. The deeply depressed stock price allows me to buy shares of the company for a discount and gives me a comfort of security. I feel the risk level is very low and at the same time there is great opportunity for reward. This strategy has always worked out well for me. Whenever I buy stocks with little downside to it, I do not have to fear of a big drop and if I’m patient enough, I usually end up reaping huge gains.
One great example is my purchase with the big pharma company, Pfizer. I bought shares of PFE at $21.25 on 12/5/2006. It was a time when shares of PFE were being dropped left and right, but the company was doing well. Around that time PFE also increased dividends. I held my shares of PFE for a little over a year and sold them earlier this year, at $24.85 on 3/6/2007. My gains came in at a nice 17% plus about a 4% dividend, so the total is roughly a 21% gain. Also, because I held my shares for at least one year, I would pay only 15% on long term capital gains tax on the investment.
Another market I like to invest in is the real estate market. The real estate market has risen for the past several years and has finally gone into a down trend. With the sub prime market crushed and home prices depreciating, a good place to park your money would be in cash.
I’m waiting patiently for a good opportunity to enter the real estate market. If I can buy at the right place and at the right time, I can end up with a property that will appreciate greatly over time.
I like being in cash positions because it allows me to be financially flexible. I can move my money in any market at any time. If I think the stock market is the place to go, I can immediately buy shares of stocks. If I think the real estate market has a good entry point, I can immediately shift my money to the real estate for a deposit or down payment. The liquidity is an important factor; it can make or break a deal.
Let’s look at a scenario where liquidity can help or hurt you. Imagine you see a very nice house for a bargain. The owner is trying to sell the house quick and asks you for a deposit. Your money is tied up and you tell the owner you need some time to free up your money. The owner cannot wait and sells the house to another person who can immediately put down the deposit. You have just lost a great investment opportunity.
Liquidity is important. Untied money allows you to pick up bargains quickly and move freely from one market to another to take advantage of opportunities. Cash is king.
The stock market goes up and down like ocean waves. It is impossible to predict the movements of the stock market. How often do we make mistakes in the market by buying higher and selling lower? Greed drives us to jump on a rising stock price and fear drives us to sell because everyone is selling. Because of greed and fear we often buy and sell on the wrong times.
One way to eliminate these emotions is by automatic investing, or emotionless investing. That’s right, we have to admit our emotions are the cause of our mistakes. And to eliminate the mistakes is to eliminate our emotions. We can fight our emotions by setting up a systematic way of investing.
The key is to invest a set amount at a set time interval. That is, put away an x amount of dollars every z period of time. This automatic investing allows you to take advantage of down markets where you can buy more shares of the market at a lower price.
For example, XYZ company is currently worth $10. If you invest $500 now, you will buy 50 shares of XYZ. Assume XYZ goes down to $5 next month. You invest another $500 on the next month, the same amount of money you did on the first month, but on the second month you would be able to purchase 100 shares. And assume, on the third month, XYZ becomes $20, you would only buy 25 shares on the third month. Over time, as stocks generally trend upwards, you will be buying more shares on the dip and end up with more shares than you normally would if you had not set up an automatic investing system.
The automatic investing system is very simple to set up and will be working behind the scenes until you put a stop to it. Say, you earn $5,000 a month. You can decide to put away 10%, or $500 of your monthly gross income for 401k investment every month. A lot of employers allow you set this event up to be recurring. It is simple, just set it and forget it. This leaves you time and energy to focus on other things. The money is transferred to your retirement funds every month behind the scenes and working for you. Over time this $500 a month will add up. Compound it with the average 10% market returns over the long term, you will soon build yourself a very nice nest egg.
This type of event works for non-retirement accounts as well. You can set up recurring deposits with your investment firm. Say, you want to put money away in an index fund with Fidelity every 2 weeks. You can set up an account in Fidelity and have your money transfer to Fidelity every 2 weeks from your bank account automatically.
The automatic investing system saves time and saves you from worries. There’s no more worrying about whether the stock has hit its low. If the stock dips, you simply buy more shares. The truth is nobody knows what will happen in the market. By putting away a set amount of money at a set time interval, you eliminate the factor of emotions and simultaneously apply discipline to your long term investing strategy. In the long run, regardless of how wild the market has gone through, the automatic system will surely make your ride in the market a smooth one.
My cousin wanted to invest some money in the stock market. He had previously opened a brokerage account and traded highly volatile penny stocks and lost most of his investments. It wasn’t a lot of money but it put a huge dent in his confidence and forced him to close his account and withdraw from the stock market.
The main reason for his loss in the stock market was because he concentrated only in penny stocks. He was one of those people that eyes the largest percentage gainers and hopes to get in and ride the stock to enormous gains. In reality, he always bought the pennies stocks at the high and sold them after the stocks has gone south.
He reasoned that the only way to make money was through penny stocks, because they can run up very quickly. I quickly added to his statement that penny stocks can run down very quickly as well. There is tremendous risk playing with penny stocks, especially with over the counter stocks.
After a period of avoiding the stock market, he wanted to get back in. So he asked me what to invest in. I replied that I would need to know more about him as an investor. Generally I start with these three questions to get an idea of the person:
1. What is your investment time horizon?
2. What is your risk tolerance?
3. What is the size of your investment?
The investment time horizon is the length of the period of time you are planning to hold your investments. There is obviously a difference between investing for a house you will buy in two years as opposed to investing for retirement thirty years down the lane. The risk tolerance is to determine how much risk you can stomach. Basically, how much money can you lose without losing sleep? The size of your investment will determine how diversify you can be. Generally, the larger the investment, the more diversification you should take.
My cousin said that his goal is to buy a condo in five years. He has saved up about 20K, and since this money will go towards his down payment, he cannot afford to take much risk. So this gives me a very good idea of which investment path he should take.
Five years is a long way to go and if he invests his money wisely, he could use this period of time to help himself towards achieving the goal.
But first, I have to explain to him about risk tolerance. It is very important to understand the level of risk you can take. I came up with an analogy to talk about the stocks and the stock market. I told him to think of the stock market as the ocean and stock companies as ships. Imagine you’re sailing in the middle of the ocean. Would you want to sail on a big ship or a small one? A big ship in the ocean is like a blue chip in the stock market, and a small ship is like a small company. The big ship is more stable; it generally moves slower but is less responsive to big waves. The small ship, on the other hand, can move a lot faster but can be swallowed by a big wave. Which size ship would you be more comfortable riding? How much excitement do you want? That all depends on the individual investor.
Just like the ships at sea, the companies in the market are susceptible to market waves.
Small companies, like small ships, carry a high risk in the stock market and are more volatile. While investing in small company stocks, or small caps, can double your money, a single bad news can tank the stock. Big companies, like big ships, do not move as fast in the stock market but they are generally less responsive to the daily market fluctuations.
I would advise new investors to start with big company stocks, or large caps. I suggested to my cousin to put his money in large caps if he doesn’t have the time to do his own research. Large caps are less volatile and carry lower risk, which are good points, because he would use this money as a down payment. If my cousin has extra money that he can afford to risk, then he can use the extras to buy small caps. With most or all of his money in large caps, he does not have to lose sleep over his investments. Another point is, you have to be comfortable with your investments so that you can sleep at night. If you’re constantly worrying about a stock’s performance, then you should either reduce your holdings or don’t invest in them at all.
The key is to find your own comfort zone. Once you know your comfort zone then you are on your way to investing. If you are not sure about how much risk you can stomach, start with safer investments, like large caps and move slowly towards higher risk stocks. Even if you can stomach huge risk, it is always good to diversify risk. Have at least one foot on the big ship, so even if there is a huge wave coming, you’ll know that at least one foot will be safe.
http://finance.yahoo.com/expert/article/yourlife/41148
Wow, this is a great article. What he says makes a lot of sense. The companies are still reporting great profits. I believe the market is being driven down by hedge funds, especially with drops like 100+ points in a single day. That’s what happens when you instill panic in a tight crowd. It’s like shouting fire in a public area.
Last Friday, Dow Jones dropped by more than 200 points and all the investors started running to the exit. There was so much selling, the investors got squeezed out and had to sell lower, thus driving the market down.
A very good article on capturing higher long term rates and the author’s prediction of the market in the future. If you have cash sitting around to invest, you may want to bookmark this article.
Profit From Higher Long-Term Rates
The rich countries’ energy watchdog warned on Tuesday of growing tightness in oil supplies in the second half of the year, and urged the Organisation of the Petrolem Exporting Countries to raise its output.
David Fyfe, an analyst at the IEA, said: “We would very much hope that Opec production is at its seasonal low at the moment… We definitely do need more crude oil.”
The IEA now expects demand for oil to rise by 1.7m barrels a day this year compared to last year – an increase of about 2 per cent – and non-Opec oil supply to rise by just 900,000 b/d. That rise in demand is 167,000 b/d more than the IEA had previously estimated, while the rise in non-Opec supply is 97,000 b/d less.
The report estimated that world oil stocks could drop by 1m-1.5m barrels a day in the third quarter, which it said “would push forward stock cover down towards the low levels seen when prices accelerated higher in 2004. That is, by itself, a concern.”
Opec officials have played down the possibility of any increase in production before the next ministerial meeting in Vienna on September 11.
However, speaking to the FT at the beginning of June, Abdalla El-Badri, Opec’s secretary-general, left open the possibility of raising production later in the year, saying the decision would depend on what happened to oil stocks.
The IEA report, though viewed by analysts as supporting the price of oil, failed to prevent it falling during the morning. At mid-day in London, Brent crude was down 41 cents at $69.15 a barrel
It was a good thing I sold RACK two weeks ago. The stock plummeted $3.65 or 18% today after yesterday’s release of earnings report and guidance. Not long ago, on Jan 17, 2007 the stock tanked more than 50% to the low 20’s from the low 30’s. I took advantage of the shortfall and picked up some shares on the cheap and flipped it for a profit. Today, the stock screams to me again for an inviting opportunity.
Today’s volume of almost 20 million shares indicates tremendous downward pressure. The confidence of the shareholders has been seriously shattered. With so negativity, the selling may not be over yet. However, the management is still extremely confident in its ability to deliver more than $500mn in revenue for 2007.
Notablecalls: “RACK looks like a low downside/high upside/very high risk investment. One for longer term investors who can stomach volatility. As for the s-t, stock will probably stay range-bound for a while, as the confidence has really gotten hit. It will take time and hard evidence for the mkt to get more positive on the stock.”
So, here are my thoughts on ways to profit from this stock. One way to play is to short the stock or sell an uncovered call in the short term. I would think this is a good (risky) short term strategy but in the long run, this company should be able to restore confidence in its market. Another way is to long the stock after the selling levels off. But I don’t know where the bottom is. I can buy shares and protect myself with a stop limit or a put. Or I can buy a leap call. Obviously, like Noteablecalls mentioned above, this requires a lot of patience. The other way to play it is to bet on the volatility. Buy straddle/strangle options. This way, I need not to predict the direction of the stock. As long as the stock moves a sizeable amount up or down, I would profit from it.
Trading Strategies:
1. a) Short the stock.
b) Sell an uncovered call.
2. a) Wait until selling levels off. Buy the stock.
b) Buy the stock. Set stop limit or buy a put.
c) Buy a leap call.
3. a) Buy a straddle option.
b) Buy a strangle option.
I’m thinking about buying a leap call and wait until the stock rebounds. What are you thoughts?
Back in June 2005, I made a daring investment goal of making $20,000 profit in stocks over a year period. I went back to my records today and saw that on June 1, 2006, I have made a gain of $11,000. I’ve only accomplished 55% of my goal. Note, I’ve added a total of $50 in my investment account during that one year period. But nevertheless, it was a good attempt.