Stock Market 101: Timeless Info That Applies to Almost Any Investor
by Marc Lichtenfeld, Investment U’s Senior Analyst
Wednesday, December 1, 2010: Issue #1398
“Dad, can you teach me about the stock market? I want to buy a stock.”
It was music to my ears, given that my nine-year-old son had never taken much interest in his old man’s job before, or asked how the market and stocks work.
It had been a while since I’d given a “Stock Market 101″ lesson, but no matter your level of expertise, stock analysis doesn’t have to be complicated. Like many things in life, keeping it simple is often the best way. Especially for a novice nine-year-old!
Here are a few timeless tips that apply to all investors in their research…
Stock Market 101: The Two Kinds of Analysis You Need
When you buy stocks, there are basically two approaches you can take to your investment research:
- Fundamental Analysis: When I research a company’s fundamentals, I look at sales and earnings growth, cash flow growth and the balance sheet. I certainly do a lot of digging to confirm or reject my investment thesis, but generally speaking, if a company is financially stable and is growing its earnings and cash flow, then there’s a solid chance that the stock will rise over the long-term.
- Technical Analysis: The mere mention of this form of research scares some investors, as they picture all kinds of complicated-looking chart patterns and formations. But again, just keep it simple. When I look at stock charts, I look for trendlines, support and resistance, and basic patterns like head-and-shoulders. I don’t worry about cycle analysis, Gann Wheels, or other arcane indicators. The reason? Because the simple stuff works. After years of study, I’m not convinced that the more complex indicators are any more reliable than a crystal ball.
When I dug into the basics with my son, I started by asking him to think of a company that he thought was doing well. And without a pause, he said Costco (Nasdaq: COST).
Like Father, Like Son
Now, Junior doesn’t read Investment U (although he should), so he had no idea that I wrote a positive review of Costco just one week ago.
His reasoning was that when we go to the store, it’s always crammed with people and that there are many different things to buy there. (Plus, he’s a huge fan of their hot dogs, which are fantastic, by the way.)
But as I mentioned last week, it’s Costco’s excellent management team that sets the foundation for the company’s success. It maintains tight control over its margins and ensures that its employees are happy – and therefore motivated. Not to mention the fact that Costco offers everyday household products at excellent prices.
We pulled up Costco’s five-year stock chart…
To see the chart in its original size, click here.
I asked him what he thought would happen to the stock next. His answer: “No higher than $75.” I asked him why and he said, “Because when it gets close, it stops there.”
Without realizing it, he’d just noted one of the most basic elements of technical analysis – upward resistance. Simply put, this level acts as a barrier to a stock’s continued rise if it hasn’t broken through it in the past.
Conversely, support levels work on the downside, providing a “floor” that a stock shouldn’t fall through before rebounding higher. (Note to self: Add John Murphy’s Fundamentals of Technical Analysis to my son’s holiday gift list.)
Tune Out the Crowd
We looked at other successful businesses, including Whole Foods (Nasdaq: WFMI) and Starbucks (Nasdaq: SBUX). But perhaps unsurprisingly, we zeroed in on a company that most kids love – Walt Disney (NYSE: DIS).
In this case, I mentioned the fundamental aspects of the stock to him, including the fact that it pays a small $0.35 per share annual dividend. But given my contrarian nature, I also told him that the analysts aren’t overwhelmingly positive on the stock and explained that the best way to make money in the markets is not by following the crowd. Instead, going against analysts that are “late to the party” is often the path to profits.
Then it was on to more speculative stocks, given that I spend much of my time researching them…
If You’re Going to Gamble, Make Sure it’s Educated Risk
I explained that with these slightly riskier stocks, the research process is more time-consuming, as you need to be much more rigorous with your analysis.
However, since we’re only investing a few hundred dollars, he can afford to take a little more risk at his age without worrying about a lifestyle-affecting loss. The rest of his money is invested in various mutual funds, so he’ll still go to college!
You never want a loss, of course, but even if one of your speculative, small-cap names takes a dive, make sure you haven’t over-extended yourself on the position. It’s okay to take an educated gamble as long as most of your money is invested in more stable investments, so you can handle any losses.
All investors – whether new or experienced – need to remember that there’s always more to learn about investing. Even if you score a big gain, or enjoy a long winning streak, always stick to disciplined money management.
As for my son’s first stock pick… he wasn’t interested in airlines, pharmaceuticals, or automakers, so we’re still on the prowl. (Perhaps I have a perma-bear in the making.) Your suggestions are welcome in the “Comments” section below. If we use your idea, while I can’t give you a cut of the profits, I can promise that when he starts his hedge fund, you’ll be first on the list. However, he’ll only return client calls after he finishes his homework.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
Any investment contains risk. Please see our disclaimer.
21 Responses to “Stock Market 101: Timeless Info That Applies to Almost Any Investor”
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Marc is a senior analyst at Investment U. His investment career started out at the trading desk of Carlin Equities in San Francisco, CA, where he executed dozens of trades each day for his clients.
Well, their are many to choose from but I’d narrow it down to what is in an uptrend and has huge potential. I would suggest like a junior oil -pie.v, junior uranium -jnn.v, or junior silver- gpr.to, or a more proven like tbe.to- oil, dml.to-uranium, edr.to- silver. My idea is that gold would be a place to be also and tmm.v looks strong for a takeover or production ramp-up. Good luck!
If you want a portfolio to have 100-300% gains don’t look to a Walmart or Costco, but you might consider Liquidation World, LQW.To which can come back into favor with more positive outlook and results.
All are in uptrends and should be bought on weakness in my opinion and will outperform the market given their good fundamentals.
Cheers,
Henk
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Looks like you were already looking at commodities – steer him toward gold, silver, oil, natural gas, uranium, coal… Matt Badiali would be a fun route for him to go – usually a good read too. (Gold & Silver in particular – boys & men like the basic stuff!) SLW, SVM, NAK, FRG, DNN.
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Son there’s no money in these all seats are taking make ya own new table ans seat all your friends astra zenaca way to gobaby the throw ten g init as a small change looksy and judge yaself
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i VOTE for JOYG….
he is young and there is much resources to be dug
up in his lifetime……
I dod NOT buy BUCY when I thought it was good…
shame on me, now bought out..
keep me on the list for his hedge fund…..
maybe I should start one….
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December 1, 2010 5:50pm EST
Mr. Lichtenfeld:
Suggest these high yield dividend stocks to your son for his portfolio:
IVR Invesco Mortgage Capital Dividend: $4.00
NS NuStar Energy L.P. Dividend: $4.30
MSB Mesabi Trust Dividend: $3.64
LMT Lockheed Martin Dividend: $3.00
Write Covered Calls monthly, sell puts 5.00 OTM monthly, and reinvest the quarterly dividends – his portfolio will outperform the S&P 500 Index yield.
Best regards,
Charles Philip Goodie
Pavel Bernd, Inc.
Westphal Levet Bettendorf, L.P.
Washington, D.C.
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McDonald’s Corporation
MCD
Just about every kid’s favorite.
In keeping with a theme that I feel will keep the interest of a younger child, I believe McDonald’s is an excellent choice, not only an excellent company with great long term growth prospects but something that he can identify with.
The stock I know is trading right up against resistance at $80 but this one is just begging to break out of it 76-80 range, and make a move toward the $100 level.
I would say go short 20/30 year treasury buy buying the (TBT)&(TMV) ETF or even long the dollar (UUP) , and short the EURO (EUO) & YEN (YCS), but I don’t know that this would be the something for a younger child to identify with a stay interested in. These are something us big kids might be interested in.
So, McDonald’s is my recommendation. A company that will be around forever. Something he can pass onto his children one day or use for college.
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He may want to consider EGLE.
Best,
Craig
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refreshingly simple advice.An enjoyable read
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I think your first stock purchase should be YUM brands. If you buy what you know, Mountain Dew, Taco Bell, all the other stuff that we kids, big and small, like, then this is a great one! My initial $525 is up 15% so far. Very happy with it.
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I suggest looking at a version of an energy company, more notably a uranium based buy. If your son is looking for a long-term buy, then a stock associated to a commodity based sector would maybe be a transient play. As a Canadian I am biased towards many Canadian companies and as such have a bias towards Mega Uranium (MGA) – it tades on the Canadian and American markets. It has great EPS growth and could be a great long-term buy given that it used to be much more valuable many years ago, and with the world moving towards cleaner energy a good uranium company would be a great long-term holding. If one wants to invest on the safer side then a bank like TD, which now has more branches in the US than in Canada, would be great for the little dividend and the potential growth – this stock definitely has the potential to split over the next 5 years, and it wouldn’t be the first time.
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Since in your letter regarding your son and his indecision as to what stock to invest in, imo, one of the three that you mention in the letter is the one that I’d invest in if an exclusivity clause were in the deal is:
Whole Foods (Nasdaq: WFMI)
John Mackey in the founder and CEO, and his integrity is impeccable. Additionally, the whole foods market is taking off regardless what the naysayers of the organic food industry say about the difference in conventional and organic food costs. As more people demand truly good food that is absent pesticides and toxic farming products, the cost will come down simply because the entire industry of conventional farming will change. When conventional farming transitions into more organic farming, Whole Foods Co. will be known as the prime mover of this industry.
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Look at Express Scripts (ESRX). It’s a Pharmacy Benefits Management company. It helps manage huge drug formularies efficiently for insurers and other large organizations. It doesn’t have the high risk features like a pharmaceutical but it’s the middle man if you will. And in this increasingly cost sensitive health care environment, ESRX is the type of company to invest in for the long term.
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Marc,
As a father of 3 married children, it brought back fond memories of chats with my young kids. It’s nice that he shows interest in your work but more importantly, the special time you have with him one- on- one. Enjoy EVERY minute as time is truly a blink.
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Your conversation with your son is very interesting to me because my son is also nine years old and I am thinking to open a stock account for him and teach him about stock investing!
I’ll say pick COST for him. I will start with COST with my son too.
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I would like to offer Titan. nyse TWI. if you like farm equipment they are the OEM tire for nyse DE. Ask a farmer they love firestone or they have never heard of Titan. Some how the big green tractors/cultivators/planters/mining trucks are using TWI. home grown in the good ole USA.
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Dear Marc,
I always feel your market running like diamond market i.e. the stocks are paid the price because of pride of possession. You experts are also seem least concerned about this aspect and largely ignore it. As a result the market has reduced itself to parking garage of excess liquidity only and seldom in tune with the fundamentals of the company. It is now the chance game like lottery instead investment. I hope you caught my point.
My suggestion to you all experts is to educate the investor public and first to you all that you should focus only on dividend paying stocks… because that is the single most vital parameter indicating stocks earning capacity and management’s confidence of future and willingness to share the profit.
Start recommending only these stocks which are further filtered by your expertise of Fundas and Charts, and see the change for the better it brings.
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forget the GOLD sell the jeans, pans,
picks and shovels….its the TIRES were the money is..
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Individual stocks are kind of risky. Especially starting out. I’d wait until there is a large enough portfolio before making individual stock purchases.
I like the ETF that pays dividends, like VIG.
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As a teacher I recommend mock online trading, for a bit then play with live ammo.
Just like in sports you scrimmage first and then play the game.
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If your son is into action figures and video games get him into WWE. At alittle over $10 a share it has a 10% dividend. The McMahons, who own most of the shares maintain the payout by kicking back most of theirs.
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Paychex!
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