Could you watch your stock holdings decline 50%?

[Steve]

Investor Warren Buffett has offered this piece of advice to individual investors. Unless you can watch your stock holdings decline by 50% and not become panic-stricken, you should not be investing in stocks.

That is a very powerful statement and it should give all investors something to think about.

He also felt the individual investor could absolutely find better returns on his money than a institutional investor. When I say an institutional investor, I mean organizations who pool large sums of money and invest those sums in securities, real property and other investment assets.

Why is this the case? Because most institutional investors could not sit out a decline in the market of 50% without behaving erratically. Their collection of individual investors would be losing their minds over such a loss.

You, on the other hand, if you could handle such a dip in the stock market, as long as you made your investment choices based on sound business principles, you could easily come out a winner in the long haul.

Warren felt individual investors are at a disadvantage if they have to sell their stock at an unfavorable time.

So before you buy that stock, make sure you are prepared, mentally and financially to ride out the short-term market fluctuations, because they will come.

[picframer]

I always told people, never invest money in the stock market you can't walk away from. If you are new and sometimes even a seasoned investor and watch your stock by the hour, you will drive yourself insane. I always invested and then checked in every once in the while, I still follow company activity but you will loose if you are trigger happy.

[Steve]

Andy,

What is your view on how people should prepare to invest? It seems logical that you shouldn't invest money that you are not prepared to lose, but are there steps one can take where the money they invest they can lose?

For instance, before they get to the point of investing in stocks, should they set aside money in a bank account? Or what's the best way to prepare yourself to get into the world of investing?

[picframer]

Andy,

What is your view on how people should prepare to invest? It seems logical that you shouldn't invest money that you are not prepared to lose, but are there steps one can take where the money they invest they can lose?

For instance, before they get to the point of investing in stocks, should they set aside money in a bank account? Or what's the best way to prepare yourself to get into the world of investing?

I will offer the same advice I offered my son who is final year University as a CFA.

Set up a bank account that you will not touch, when it reaches $1,000, leave the money there but start a spreadsheet in Excel.

In this spreadsheet start buying and or selling stocks, make sure you record trade/brokerage fees and see how you do.

He did start this around the age of 16, he started into the stock market buying and selling about 18 months ago, his rate of return for last year was 27.6%, just finished his tax return.

Not everyone is going to be able to do this, he does a tremendous amount of research and some of it through his studies. I have been shocked at some of the stocks he has found in their early stages that took off.

One that I will never forget is a company out of Florida and I forget the name. they own the patent to a window glass that works like a solar panel and generates electricity, to the point the building can be 85%+/- self sufficient.

He found it just before the patent was issued then the company signed on a major group of stores for the technology, the friggin stock went from something like $0.65 to over $5.00 in three months. This doesn't happen often, it does in gold exploration type companies but not in general.

Anyhow play with play money to educate yourself then talk to a professional financial planner and go from there.

[Steve]

In this spreadsheet start buying and or selling stocks, make sure you record trade/brokerage fees and see how you do.

What is your view on the frequency of trading? Should you hold stock longer or always be on the look out for a stock that offers a better return on your investment dollar?

[picframer]

What is your view on the frequency of trading? Should you hold stock longer or always be on the look out for a stock that offers a better return on your investment dollar?

That is where education or an advisor comes in, depends not only on how the company is doing, their projections, market demands but also natural desasters which we seem to have every week somewhere in the world

[w0283767]

I think most beginner traders get eaten alive with transaction costs from being too trigger happy and buying small blocks of shares at a time. Its safer and Easier to generate good returns with a long term investment horizon as opposed to trying to day trade.

Speaking of warren Buffett a great book for anyone wanting to learn about investing is The Intelligent Investor. Was written by Ben Graham who mentored Warren Buffett.

[dpld]

there are many ways to veiw what buffet said and he obviously has been very successful so it would be impossible to at least not consider his advice.

but when you are one of the richest people in the world you can afford to lose 50% because even after the loss you still be one rich azz dude.
warren buffet also welcomes losses at this point in the game because it offsets his taxes on his profits from all his other investments.

if anyone of us on this web site lost 50% of our holdings we would be in trouble, none of us could bounce like warren buffet can as well as mr buffet has been living so long being so rich he is jaded and out of touch as to what it would mean to lose 50% of what you have.

i am not a stock wiz, i am a landscaper for gods sake but i have been very successful at that and now i have been interested in how the other half lives.

i have done my research and have slowly over time been trying to educate myself and i have bought your typical mainstream stocks and i have mostly taken a beating on them and the gains are small because they go for a higher share rate so you can not buy as many.

i started getting into the pennystocks a couple years ago and i have found that when i lose it equades to nothing and the gains are quite nice compared to the investment.
i learned a lot more from these stocks then i did from buying the majors and they are far more affordable to lose.

pennystocks are a semi long haul stock but in most cases you don't want to keep them long term.
for example: i picked this one stock that was in a small company with new ways to create ethynol and i bought the stock at .07 cents per share.
i dumped $210.00 in 3,000 shares and over the course of 3 years i seen it drop a couple pennies and rise a few until it got up to .46 cents per share and dumped it for about $1,380.00 with a $1,170.00 profit.

what i like about this type of stock is they are cheap and affordable to where you can buy a few thousand shares for nothing and if you lose it only equades to a loss of having a bad habit such as smoking for a month.

i basicly every month buy about 300.00 worth of these types of stock in all area's with what boils down to fun money each month.
in fact it started with the original stock i bought and sold.
i took that $1,380.00 i got back and bought a few thousand shares each of 6 small stocks like i originally did and then one of the six rose to like 10 times what i paid and i dumped that money back into even more individual stocks with a few thousand shares each.
now i have about 50 different stocks and if they where to have modest returns i would have a good deal of money if i sold them off.
certainly not enough to retire or buy a house but probably close to about 60K and it all started from the $210.00 stock i bought.

people get caught up in the hype of the big stocks like facebook a few weeks ago and even though it is still a considerable sum it is not worth what most paid for it at the initial offering.
guys like us don't have the disposable cash like others do and if you invest in a stock you need to have at least a couple thousand shares to make a splash and a stock going for say $4.00 per share you would need 8 g's and proccessing fees to obtain a couple thousand shares.

most of the people i work for are wealthy and when they sometimes want to look beyond that i am a landscaper and we actually have a real conversation about anything finances they generally reinforce what i allready know and i am slowly finding out that is how the rich get richer by doing their research and invest in these little up and coming technologies that go litterally for pennies a share and spead it out over a ton of different stocks.

none of them by themselves are gonna make you rich but if you have say 50 staocks with a average net gain of one thousand to fifteen hundred dollars each it all adds up to a nice sum.

i am sure i have not said anything most of you don't allready know, i just figured i would add my two cents in my experiences but at the same time i would be the first to say i won't be quitting my day job anytime soon.

[Steve]

What are the pros or cons to investing in penny stocks versus other non-penny stocks?

[dpld]

What are the pros or cons to investing in penny stocks versus other non-penny stocks?

i would probably say some of the pro's are low investment, low risk because they can be had cheap.
some of the cons i guess would be being you are buying something for pennies on the dollar it does take time to grow and paitence is a major factor which i would gather from my short time doing it holds true for any stock big or small.

as i said, i find it is a safe bet for small guys like us who don't have as much disposable income as a wealthier invester and it really gives you a insight to not only how the stock market works but how all stocks essentially start from the bottom.
obviously there are some stocks that start pretty high in the beginning like how a facebook did but in the end how many shares is a guy like you and me gonna buy when they are going for 35.00 per share.
i find from the stocks that i had success with, the lion share of the money i made was due to that they went so cheap i was able to by 2,3 even 5 thousand shares to start with that cost next to nothing.
by doing so all you need is the stock to go up 20 to 30 cents and being you have say 5,000 shares it translates into a nice little return.

i am by no means a savy investor and by no stretch do i have it all figured out and in the grand scheme of things i am a cherry at this and have only been doing it about 5 years with the last 3 years being a little more serious.
i think my total investments are only about 15,000 g's over that span and most of which is the money i made from stocks i sold and rolled over into more stocks.
as i said it is kind of fun money so this way i can afford to lose it and in the mean time get a education on how to do it safely.

the biggest advice i would give is pretty much what was allready said in previous posts in that you should only invest what you can afford to lose as well as let sit and forget about.
i have one stock i bought for 19 cents a share and i purchased 2,000 shares and after 13 months it is up to 1.23 per share.
as i said if you have multiple stocks with multiple shares in each it all adds up nicely.
but that particular stock so far is the best gainer i had but every stock i bought has gained 30% or more since i had it and i have only got slammed so far with one that lost me a whopping 320.00 bucks.

i also find that when you sign up with a broker to where you can be more hands on they require that you buy 2, 3 or even 5,000 shares so the penny stocks make that easier for a little guy as well.

if you are a young guy just starting out in the business i would definitly suggest you invest your money into your business and build it up first because it is a slow proccess with the stocks and it is not like you will hit it big to fast track your own business.

[w0283767]

I think penny stock investing is a horrible idea. I have invested in penny stocks but only a small investment just to speculate. I would never recommend anyone to invest all or most of their capital on these types of stocks.

First of all they are penny stocks for a reason. They are so thinly traded compared to a blue chip company which means a much higher bid ask spread. So for some penny stocks you may need a 10% or more gain just to break even and that is before transaction costs. This is higher than the average stock market historical performance of around 9%.

You run the risk of losing your entire investment because these companies are very weak in terms of financial strength. They usually aren't well capitalized and often are very start up type companies.

There is risk of other investors exploiting the thinly traded nature of the stock and distorting the market by inflating the share price and the selling when price rises. This is called a pump and dump scam. People will buy stock and make up lies about company to get other people to buy. When stock price goes up they dump their shares and the stock plummets because of artificial demand.

Sure you may get lucky and find that biotech company that has a drug approved by FDA and price skyrockets but I can assure you 9 times out of 10 you are investing in duds.

Just my two cents. I work in the industry and have a finance degree do I know a few things about investing. I personally buy strong companies that have been around forever. Im not trying to get rich overnight and plan to slowly build capital base.

[Steve]

I personally buy strong companies that have been around forever. Im not trying to get rich overnight and plan to slowly build capital base.

How should small business owners go about finding strong companies to invest in and how long should they hold their investments without touching them?