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Monthly Archives: March 2012

Penny Stocks? That’s the Best You’ve Got?

I just don’t get it. When I logged on to my computer this morning I opened up my browser and the first thing I see is “How thousands of people are making Fast Money in the stock market.” I wanted a good laugh so I opened the link. The article that opened was titled Penny Stocks Can Mean Huge Returns – If You Know The Right Ones To Buy. When I was 15 I would have loved this article. Now that I’m a little older, a little more educated, it just makes me mad. Here we are in the middle of horrific financial times: we are losing homes, we can’t retire when we plan on it, and we still can’t find jobs (or we took a huge pay cut). At this point in time we can use all the help we can get when it comes to investing, but instead of assisting us by showcasing valuable information they feed us crap!
I think the title says it all. Penny Stocks Can Mean Huge Returns – If You Know The Right Ones To Buy. ANY stocks can mean huge returns if you know the right ones to buy. Heck, I can play the lottery and get colossal returns if I know the right numbers to pick! I love the example they used in the article to help sell their idea. “Now imagine if you bought 20,000 shares of a penny stock at half a cent a share (which would cost you $100), and it goes to a dollar next week…” To that I say “Now Imagine if you bought 20,000 shares of a penny stock at half a cent a share (which would cost you $100), and it stays like that for years so your $100 is tied up. Meanwhile, you lose your job and can’t afford to eat. You try to sell your shares to get that $100 back, but the bid/ask spread is so far apart you end up only getting $20 back!” You might think both scenarios are unlikely, but I think the second is a lot more likely than the first.
Just in case you didn’t know, the bid/ask spread is the difference in price between what someone is willing to buy the stock for and what someone is willing to sell the stock for. It doesn’t play a big role with most normal stocks, but it plays a huge role in penny stocks. If you have a stock that is said to be worth $.01 but people are only willing to pay $.005 for it, you can’t sell it unless you take the lower offer. It works the other way around for buying penny stocks.
With our current economic condition it’s more important than ever for us to be careful with our personal finances. We all want a miracle, but penny stocks aren’t the answer. If it was that easy, everyone would be doing it. It may seem like $100 isn’t that much money. It might be worth the risk to make “fast money”, but if we thought like that all the time we’d be broke. If I haven’t changed your mind about penny stocks do a few things before you invest in them: 1) Look up a few, 2) Check their bid/ask spread (you can use yahoo finance), and 3) Watch them for a while. If you’re still into it, go for the gold.

 
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Posted by on March 8, 2012 in Uncategorized

 

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Stop Paying the “Dumb” Tax

Many of you may already be aware of the term the “dumb” tax, but until last night, I had never heard of this concept. My supply chain management professor was going over shipping processes (which can be extremely complicated and boring). He mentioned that it’s important to know what you’re doing so you don’t make a mistake and pay the “dumb” tax.  According to him it’s a real estate term used for someone that is new to a process. They make a mistake, which loses them money, and therefore they are taxed. If they would have been better EDUCATED on the topic they could have avoided the extra tax.

Now I thought this concept was hilarious. It may be a little insensitive, but I loved the name. The dumb tax, HA. What makes it even funnier, I can look back and recall many times I have paid this tax. I mentioned a few examples in my blog post 4 Mistakes I’ve Made So You Don’t Have To. Almost every transaction I made when starting in the stock market could be used as a perfect example of the dumb tax. The one thing that really stands out to me though, is when I bought my first car. I started out by only wanting to spend $5k on a car. Once I saw I couldn’t get much for that I pushed it all the way up to $10K. I knew I wanted something all-wheel drive, but I wasn’t really sure what else to look for (or avoid). I ended up deciding I wanted a Subaru WRX (turbo). Once I put my mind to it, I had to have that car. In my area, Reno-Nevada, there weren’t many WRXs around. When I finally found one I was so excited I rushed to go buy it (private party). I checked her out. She looked nice enough; after all she was a WRX. So I bought her! Seriously, I worked just like that: I looked at her and two minutes later I bought her. When I look back I wish I could yell “YOU IDIOT! GET THE CAR CHECKED OUT AND DON’T PAY TOP DOLLAR!” I rushed, and I paid the dumb tax big time. I was new to the process of buying a used car, and instead of learning about it I hurried through it and paid the price. After I bought my WRX I found out she needed at least $3K in work done to her within the next 10K miles and she needed new tires. So I ended up paying $14K for a car that was maybe worth $9K. I wish I would have taken the time to educate myself instead of taking a kick in the shorts.

Since the car debacle, I’ve learned a lot about the importance of having patience. When you make a $14K mistake it’s bound to teach you something.  Whether you’re a new investor or buying a new television service take the time to educate yourself. If you’re unwilling to do that then find someone you trust who knows SOMETHING about the topic. I think it’s funny how we all complain about taxes, but the amount of a single tax can be minuscule to the price you pay for paying the “dumb” tax. From now on I’ll take my time to learn about a topic before I make a purchase and skip the dumb tax all together.  

 
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Posted by on March 6, 2012 in Uncategorized

 

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Stocks- No Such Thing as Overvalued

With all these tech companies going public (LinkedIn, Pandora, Yelp ect.) I’ve been hearing the term “overvalued” a lot lately, but what does that term really mean? When someone says a stock is overvalued it’s important to keep in mind it’s just a matter of opinion. People say beauty is in the eye of the beholder. I would say value is in the eye of the beholder.  If you’ve ever watched the TV show Pawn Stars you’ll see continuous examples of this. A customer goes to the pawn shop to sell their grandmother’s shoelaces that are supposedly worth $1000. When Chum (a character from Pawn Stars) only offers them $5 they get offended and leave. The customer is mad because Chum thinks the shoelaces are overvalued at $1000. The thing to keep in mind is Chum has no idea how much the shoelaces will actually sell for. An item’s value is different for everyone.  This is why valuation is one of the hardest subjects to master.

How do we figure out the price on something if its value is different for everyone? Well, generally we go off its market value. It makes sense to me that market value is equal to the intrinsic value (real value plus outlying factors). An example of this is Yelp’s IPO. The real values of Yelp’s shares were evaluated at $15/share, but as soon as the markets opened the price shot up over 60% and closed at $24.58! This happened because the real value ($15) met with the outlying factors ($9.58) to create the market value ($24.58). I think it’s overpriced, considering they have never posted a profit, but just because I don’t see the value of the outlying factors doesn’t mean they aren’t there. That’s why I hate when people give specific stock picks. They have no clue what a stock is actually going to do. That’s why I think it’s better for people to use their own gut instincts when it comes to buying individual stocks. You might be in tune with some outlying factors that others aren’t.

If someone says a company is overvalued it means that they don’t see what the rest of the market see at that point in time. The real value and the value of the outlying factors are continuously changing. This means the stock’s intrinsic value  is always shifting. There is no way of actually knowing if a stock is overvalued, because it’s impossible know the future of its intrinsic value. There are so many outlying factors at work it’s incomprehensible to know them all. The only way you can even get close to knowing is if you are completely in tune with not only the company, but people’s perception of the company and their products. Anything short of that is pure speculation.

That being said, does anyone else feel like speculation is all we have left when it comes to investing in individual stocks?

 
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Posted by on March 2, 2012 in Uncategorized

 

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