How to turn $100 into $9.6 Billion

Go back in time and invest in the very same things Warren Buffet did.

A while back there was a thread. In that thread passive income was mentioned. Investing for the long haul was mentioned. Slow and steady growth was mentioned. Only a few people were interested.

Recently a thread appeared. In that thread INSTANT WEALTH was mentioned. Buying large volumes of "stock" with small investments was mentioned. The whole board went nuts over it.

While the only thing I know about the stock market is that the broker makes money when you buy and when you sell (regardless of whether you made or lost money), I am a good observer. And what I saw is interesting.

It seems to me that most people would rather make a quick buck than go into something for the long haul. Even if the long haul makes more sense or is a "safer" way to go. (matter of opinion of course)

Okay, so this is nothing new. I just found it interesting to see it played out in living technicolor on the one board.

Hmmm.

Michael Ross.

Michael,

Let's turn your specific observation into a general phenomenon.

You touched upon things that are essentially religious.

There are two kinds of expectations and promises.

Steady growth, long-term activity.
Instant rewards, no-time-flat results (every piece of hype is built around this).

Two polarities (produced by our mind)that are in eternal interplay/dispute.

The first one presupposes that we have all the time in the world.

The second is connected with "there is no time left".

Once we realize that the dichotomy is of our mind's making, we understand that something must be wrong with both.

And I am asking for your help here.

Imagine a man/woman that lives his/her life like this:

Supposing that we have only one day left.

What kind of personal/business decisions would you make?

My feeling is that with this mindset the long-term/instant problem is seen in new light:

We achieve long-term success acting "as if" instant wealth/happiness is the only option (there is only one day left).

One thing I am pretty confident in:

Success/wealth/happiness comes from BEYOND the long-term/instant (or left-brain/right-brain) mindset and corresponding actions.

What do you think?

Simon

Hi Simon,

I agree you can make money either way (long term or short term)....

However, I wasn't fully sure what you were getting at.... Could you explain more what you mean?

Dien Rice

Dien,

I was following Michael's observation.
It's about psychological preferences.

Why the idea of immediate wealth/gain/action is more attractive than steady/long-term activity?

My understanding:
People are attracted to immediate/miraculous measures for a very good reason.

I will get back to this reason later under a separate thread.

Simon

Michael, I have to agree with you on this.

> A while back there was a thread. In that
> thread passive income was mentioned.
> Investing for the long haul was mentioned.
> Slow and steady growth was mentioned. Only a
> few people were interested.

When we started investing in straight mutual funds a few years ago, we sat with our investment advisor and decided to invest 50% for the long haul, which meant conservative funds, and the other 50% in high risk funds.

As we became more educated and started learning about options and indexed funds, we did some what-if scenarios and realized that if we had invested the same money in more volatile, short term stocks, we would have had much higher ROI. So, we sold our secure, long term funds that were giving us very modest returns, and moved the money into the more volatile chip, biotech, internet sectors.

The financials have been beaten down, and although they've been a good buy since last year, I still don't own any options in the finanical sector. Too slow moving for us. One of our first experiences losing money was investing in some banking stocks.

One of the the most conservative, long term stocks that I have ever invested in is GE, and I was thrilled when the stock split last summer/fall and I got out. I just could not stand the long wait for the stock to move. I know people who have owned GE for 20 years, and with all the splits over the years, they've got a nice nest egg for their retirement. But personally, this is not my style of investing. I and my husband like the adrenalin rush we get when we can flip options.

> A while back there was a thread. In that
> thread passive income was mentioned.
> Investing for the long haul was mentioned.
> Slow and steady growth was mentioned. Only a
> few people were interested.

> Recently a thread appeared. In that thread
> INSTANT WEALTH was mentioned. Buying large
> volumes of "stock" with small
> investments was mentioned. The whole board
> went nuts over it.

> It seems to me that most people would rather
> make a quick buck than go into something for
> the long haul. Even if the long haul makes
> more sense or is a "safer" way to
> go. (matter of opinion of course)

Yes, and some of us make some pretty stupid decisions as well. With the market performing so badly for the last few weeks, in spite of all the good earnings that are coming out, we are absolutely baffled (and a bit nervous) to figure out what's happening. There was a time when I could not afford to buy a stock option days before rumors of good earnings were due to be announced. This in itself would send a stock flying. Nowadays, good earnings, like those tonight on Nortel are having negative effects on other stocks in that sector. I know about the sympathy thing where if one stock does poorly or well, this can impact all those in that sector. Unfortunately, we hold some of the others in 'that sector' and they're all down??

But, what's going on when earnings are strong and stocks in that sector all trade down after hours. Any explanations or comments, anyone??

Regards,

Eliz.

Elizabeth, I agree, everyone's "investment style" is a very personal thing, and I think it's good in general for people to go with a style that suits their personality....

I've mentioned my good friend who's a day-trader.... We meet at least once a week and discuss stocks, physics, academia (we have all these experiences in common).... :)

I don't try to make him a long-term investor, and he doesn't try to make me a day-trader..... I actually find it fascinating discovering other investment approaches! I do believe that more than one approach works.... :)

> But, what's going on when earnings are
> strong and stocks in that sector all trade
> down after hours. Any explanations or
> comments, anyone??

Here's what I reckon....

Sometimes expected earnings growth is already built into the price of the stock. (This is especially true for stocks with a high P/E -- price/earnings ratio.... The P/E is usually given in stock listings in newspapers or online....) Investors are already *expecting* a certain level of earnings growth each year....

It is then possible that earnings can still grow, but not as high as expected. In that case, the price could go down, since the stock could have been *over-valued*!

For example, maybe many investors are expecting 30% growth in earnings one year, and this has been factored into the price of the stock already (a high P/E is a sign of this sort of thing)....

However, let's say the company releases its financial results, and growth was only 20%. In that case, the price could go *down*, because the current price could be too *high* given the company's performance....

Dien Rice

Dien,
I always hear it said that most good stocks are now priced for 'perfection' and it doesn't take but a smidgeon of negative news to cause a sell off. Down-grades, upgrades or a shake of the head from an influential analyst can cause powerful movements in a stock price.

Also, have you ever noticed how often a stock closes lower on the day it was 'upgraded' early that morning? Many smart cookies feel that the stock will 'gap up' on the morning open on that good news, and then they short the stock after the first few minutes when it is at it's 'high' for the day. Then, at the close of the day (or during the noon lull period) when the daytraders close their positions, the person who shorted the stock covers his position at the low of the day and makes his/her money off that play.

So, people are rushing in to buy on that analyst's 'upgrade' and by the end of the day, the stock is sometimes lower than it was the day before. And the newbie 'investors' are left scratching their head and wondering what happened since they thought they were buying a good stock!

And, sometimes, it seems to be a way that allows for 'dumping of stock' by institutions at premium prices. They know how to take advantage of those 'upgrades' to exit their positions in the flurry of excitement when new investors are rushing in on the news.

Ah, the games that people do play on Wallstreet.
~Amber

> Sometimes expected earnings growth is
> already built into the price of the stock.
> (This is especially true for stocks with a
> high P/E -- price/earnings ratio.... The P/E
> is usually given in stock listings in
> newspapers or online....) Investors are
> already *expecting* a certain level of
> earnings growth each year....

> It is then possible that earnings can still
> grow, but not as high as expected. In that
> case, the price could go down, since the
> stock could have been *over-valued*!

> For example, maybe many investors are
> expecting 30% growth in earnings one year,
> and this has been factored into the price of
> the stock already (a high P/E is a sign of
> this sort of thing)....

> However, let's say the company releases its
> financial results, and growth was only 20%.
> In that case, the price could go *down*,
> because the current price could be too
> *high* given the company's performance....

> Dien Rice

We studied a bit on 'trading for income or cash-flow' and for awhile, it was very profitable to only buy stocks or options quarterly...just prior to their 'earnings run-ups'. For some reason, people love to speculate on stocks just prior to their reporting date -- at least on the tech stocks and the internet stocks.

It used to be that the 'signal' was a pick up in volume on the stock that you wanted to 'play' and the stock would being to move up daily about ten days before the report was due out. It became quite popular for many to 'jump on' stocks and play it for their run-up and sell the stock or option just prior to the report for a tidy profit.

Then, even if the earnings report was good, the stock would sell off anyway as the speculators would sell and move on to the next stock and do the same thing over again. This was a play that only involved the 4 reporting quarters each year and not much time to make a nice sum of money.

However, many soon caught on and the earnings runs weren't as dramatic as they had once been...and people began pulling out of their positions farther from the report date - up to a week before. That allowed a new entry point for those last minute speculators to jump in and ride the stock up for a few more points. But it also caught some of the newcomers to that particular 'play' off guard. Picking the perfect exit point was crucial to lock in your own profits before the stock fell back hard on massive profit taking by all the other speculators.

But, we were told to never hold our stock or options over through the report. If the report isn't good, you'll get killed with after hours trading on the stock and if you are holding options over the reporting, you can't trade them afterhours. So, your option can become worthless overnight before the market opens the next day if the stock is slammed hard after-hours on news of the report.

And even on good news, sometimes it seems as if a stock is punished. But it is mostly the large number of speculators pulling out since they've accomplished what they wanted and aren't long term 'investors'.

We've learned a lot these past years but today's market is for the pro's only. There was over a trillion dollars lost in the spring with the huge drop in the nasdaq.

And, if the nasdaq falls to 2500 before the end of the year... as is expected by many bearish reports I have read to balance out the hype from the Bull camps, there will be a possible entry point, whereever it finally 'bottoms', to ride it back up again. However, the market may also stay in a sideways trading range for quite some time with much less volatility.

It is looking like we aren't going to have an extended 'ride of our life' to the moon again very soon...in a roaring bull market that we've enjoyed for the past few years without a major correction. Almost anyone could make money in what has almost been a straight up market for so long. We got spoiled, I guess.

But people jumping in now to invest for the long haul may be caught holding stocks that won't regain their value for quite sometime IF the scenerio plays out that many of the BEARS are calling for.

In a presidential election year, usually stocks move up. Many I know were counting on this and guess what? They were caught off guard by buying stocks at triple what they are now - and they weren't expecting that, of course.

But, there are many ways to trade for income that don't involve day trading. 'Swing trading' or 'position trading' for short term trades that may last a few days, and aren't as stressful as day trading, are popular ways to generate a little income stream for many folks.

Many stocks trade in predictable 'channels' and you simply buy low and sell at the stock's resistance point and when it pulls back again, you re-enter with a new play. Learn how to do that with 3-4 stocks and become a 'specialist' on knowing everything that there is to know about those stocks.

But this is a crazy market right now and not the time for beginners to try their luck because they may get caught up in another unexpected down-slide as the market continues it's 'correction'. The Pro's are just waiting to take advantage of the uneducated in this environment. Be cautious.

~Amber

Hi Amber,

Wow, interesting post! Yes, all these patterns are quite interesting.... You can make money just knowing the patterns that tend to repeat themselves....

There are also effects due to the months of the year.... One of them is called the "January effect."

To give credit where credit is due, I first learned about this earlier this year I think from my brother Thomas.... :)

Studies have shown that about 1/3rd of the year's raise -- especially for the stock of smaller companies -- tends to occur in January!

They're not completely sure why.... It could partly be due to the more positive feelings of the beginning of a new year....

However, it's an interesting effect to know about....

I learned about it due to the book (which Thomas showed me), "The Winner's Curse" by Richard H. Thaler (who's a Professor of Economics at Cornell University).... Chapter 11 is called "Calendar Effects on the Stock Market".... :)

Dien Rice

I have an idea why the January effect might take place.

Mind you, this is something I thought of, and I haven't really studied it or seen any studies of it recently.

Perhaps the January effect is caused by the actions of large portfolio managers.

There is a tendency amongst Portfolio managers to adjust their portfolios towards the end of a reporting period (end of December in the US, I believe).

That is, if you're a portfolio manager and you've invested in shares that have made a loss or gotten bad press but are still good value, you better sell them and get something that looks better before reports come out!

This is also called "window dressing".

I was first made aware of this practice when talking to a family friend who used to manage a superannuation fund for a large company here in Australia.

Apparently it's quite common.

Another possible reason is tax-loss selling. Let's say I've invested in Company Z and it's gone down 20%. I might want to sell those shares in December so I can have the Capital Loss be deducted from my Capital Gains, and thus pay less tax for that year.

But why not just buy it back straight away? Well, in the US and elsewhere there is a thing called the "Wash Sale Rule" that says if sold shares are repurchased within 30 days, you can't claim a tax deduction for losses on it.

So if you sold in December for tax reasons but still like the company, you can't rebuy the shares until January.

Likewise, if a company has bad press but is still a good company and you're a portfolio manager, subject to public scrutiny, might as well add it back to your portfolio in January.

These are two *possible* reasons for the surge you tend to see in January.

No doubt there are other explanations you could come up with, though. :)

- Thomas.

> There are also effects due to the months of
> the year.... One of them is called the
> "January effect."

> To give credit where credit is due, I first
> learned about this earlier this year I think
> from my brother Thomas.... :)

> Studies have shown that about 1/3rd of the
> year's raise -- especially for the stock of
> smaller companies -- tends to occur in
> January!

> They're not completely sure why.... It could
> partly be due to the more positive feelings
> of the beginning of a new year....

> However, it's an interesting effect to know
> about....

> I learned about it due to the book (which
> Thomas showed me), "The Winner's
> Curse" by Richard H. Thaler (who's a
> Professor of Economics at Cornell
> University).... Chapter 11 is called
> "Calendar Effects on the Stock
> Market".... :)

> Dien Rice