InvestorWords.com
With accurate, easily-understood definitions for over 6000 investing terms, InvestorWords.com is the web's leading financial glossary.

Syndicate / Link to Tomments.com
If you operate a web site and/or a newsletter and would like to make Tomments available to your audience, click here for all the details on our free syndication program.

 

(01/15/02) - A time-tested principle of investing is to zig when others are zagging... if you avoid the herd mentality, you will be better off, on average. The same applies to business itself. In the recent economic downturn, conditions became more challenging for just about every company, but companies that are built to last turned this to their advantage. They found it easier to hire great employees who were being laid off indiscrimately at struggling companies. They found it cheaper to acquire struggling competitors. They found it cheaper to advertise, especially online. And in general, they found it easier to cut more favorable deals, because their partners were desperate. When times are tough, companies with vision look for and find opportunities, and long-term investors can benefit from identifying and investing in such companies.

(01/02/02) - One of the best ways to become a better investor is to attempt to predict what will happen, record your predictions and your rationale, and then look back later to see whether you were right or wrong and why, in order to increase your chances for success next time. The turning of the calendar is a great time to do this, so if you have ten minutes free sometime this week or next, jot down a few predictions on where some of the stocks and indices that are important to you will be one year from now, along with your rationale. You might also want to specify a confidence interval (for example, the range that you are 75% sure the price will fall within)... no one is right all the time, but successful investors are able to judge when they're most confident about a prediction so they can place bigger bets at those times.

(12/20/01) - With the new year coming, you're probably thinking about making some additions and deletions to your portfolio. Here's a useful thought experiment: 1. For every stock you own, pretend that you don't own it. Would you buy it now? 2. For every stock you don't own but are considering, pretend that you do own it. Would you sell it now? The answers may help you separate rational investing from emotional investing. For example, some people hang on to a stock that's fallen because, consciously or unconsciously, they consider selling at a loss to be an acknowledgement of failure. In most cases, the only reasons to treat your current holdings differently than other potential holdings are tax consequences and transaction fees. If you follow this rule you'll have an advantage over investors who are biased by their emotions.

(08/22/01) -Tuesday's Fed rate cut was its seventh since the beginning of the year. In the last 25 years, the Fed has cut rates six or more consecutive times on four occasions: 1976, 1982, 1986, and 1992. Those four years, in the twelve months following the sixth cut, the S&P 500 was up an average of 17.7% and the Nasdaq was up an average of 22.5%. These are encouraging numbers for optimists who are getting impatient waiting for the cuts to have an impact and are starting to succumb to the prevailing gloom and doom.

(07/09/01) - "Online trading activity has fallen about 60% from second quarter 2000 to second quarter 2001, about the same amount as the share prices of the technology and internet stocks that were being traded most heavily. So is the online trading party over? Definitely not. Despite that drop in trading activity, the number of online accounts continued its steady ascent, from 15.9 million in 2Q00 to 20.5 million in 2Q01. In fact, the number of online brokerage accounts has never fallen since researchers started tracking the data, and there's no indication that's about to. Online investing is here to stay, and will continue to grow in popularity, in good times and bad.

(04/09/01) - "The big movie companies are toying with it. But none has yet developed a technique suitable for this revolutionary new medium, whose possibilities, once recognized, will be limitless." Sound like a quote about the internet? Maybe, but actually it's from a 1947 Life Magazine special issue about television. Imagine what that writer would have to say about the internet. The same quote might apply, but with the word 'movie' deleted, in recognition of the fact that the internet's potential dwarfs that of television.

(04/03/01) - In 1999, Forrester Research predicted that 60 million U.S. households would be online in 2003. Now the firm says that number will be reached this year, twice as fast as expected. Contrary to popular opinion, the internet is not falling apart. Many dotcoms are struggling, and many will go out of business, but usage will continue to increase and the long-term opportunities remain intact for those companies that can find business models that work.

(03/16/01) - Oracle CEO Larry Ellison has recently been accused of insider trading after selling almost a billion dollars in Oracle shares shortly before the company's recent earnings warning. How many analysts asked about this in Thursday's conference call? Zero. Conference calls are a useful source of information for individual investors, but reciprocal backscratching between corporations and analysts often prevents conference calls from being the open exchange of information they might appear to be. Don't count on analysts to ask companies any questions those companies don't want to be asked.

(03/15/01) - Has the Nasdaq's year-long slide made you more cautious or more aggressive? An investor's willingness to tolerate risk should largely be determined by the relative likelihood of a gain vs. a loss. Do you think there's more downside potential now that the Nasdaq is at 2000 than there was when it was at 5000? This seems highly unlikely, even given the dramatic downturn in the short-term economic outlook that accompanied the market's drop. Investors who agree that there's now more upside and less downside than there was a year ago but who have become more risk-averse in that period are being driven more by emotion than logic.

(03/09/01) - Although I'm a big fan of long-term investing, it's a mistake to assume that if you wait long enough, the market will eventually go up. The Japanese Nikkei index was just above 39,000 in 1989. A few days ago it crossed below 13,000. That's a 67% loss in eleven years. This should also serve as a warning to those who invest in an index fund out of a belief that this will insulate them from the risks of picking just a few stocks.

(03/06/01) - This morning, brokerage giant Charles Schwab announced plans to increase its number of authorized shares from 2 billion to 3 billion, pending shareholder approval. The most common reasons for increasing authorized shares are for splits, employee benefit programs, and acquisitions. With the stock trading at around $20 a share, a split is highly unlikely. The employee benefit program was probably not the rationale either, as only about 1.4 billion shares are currently issued and outstanding, leaving plenty of room below the 2 billion share cap for additional option or share grants. This leaves acquisitions. Historically Schwab has not been very acquisitive, although it did acquire Cybercorp and U.S. Trust last year. I would not be surprised to see Schwab accelerate the coming consolidation in online trading by buying up one or more midsized online brokers this year.

(03/01/01) - Many investors no longer look to Alan Greenspan as a source of information about the state of the economy. Instead, they compare their perception of the economy's condition to his. When Greenspan has positive things to say about the economy, these investors rush to the exits, assuming the Fed is less likely to cut rates. And when he says something negative, the market jumps, under the belief that a rate cut might be on the horizon. Actions may speak louder than words, but it's irrational to treat Greenspan's opinions as a contrary indicator.

(02/13/01) - In at least one important respect, investing is likely to continue to get harder. If dollars are in general moving from weak investors to good investors (which is necessarily true by definition), the average dollar finds itself in the hands of increasingly good investors over time, making it more and more difficult for you to profit by being on the other side of the trade. (This assumes that investing is a zero-sum game, which strictly speaking it isn't, since the capital is being deployed to productive ends... but the simplifying assumption is reasonable because each trade does have a significant zero-sum component: the more the seller charges, the more the buyer pays.) One mitigating factor is that there is a steady stream of beginning investors with fresh money, but even these folks are more sophisticated than in years past, thanks to the internet.

(02/05/01) - If you make an investment decision that results in a loss, does that mean you made a mistake? No, not necessarily. If someone offers to flip a coin and give you two dollars if it comes up heads but just charge you one dollar if it comes up tails, and you take the bet, you obviously didn't make a mistake, even if it comes up tails. Legendary mutual fund manager Peter Lynch once said that he was only right about 60% of the time, but it would be more accurate to say that he was right about 80% of the time, even if only 60% of his picks turned a profit. Similarly, if you make an investment decision that results in a gain, that doesn't necessarily mean you did the right thing. I'm not suggesting that you ignore how your trading decisions have performed in the past, because this is an essential step toward improvement. But it's a common and dangerous error to read too much into a few profitable or unprofitable picks.

(01/31/01) - What are the next numbers in this series: 1, 2, 4, 8, 8, ...? No, it's not an SAT question, it's annual U.S. internet ad spending for 1996-2001 in billions of dollars (with a consensus estimate for 2001). You could pick just about any internet sector and find a similar pattern. The key to making money in internet stocks is being able to determine whether such a change is a one-time event or the first step in a fundamental reversal of fortune. For internet advertising, and for many other internet sectors, I believe that the current flattening of growth is just a temporary pause, after which the upward trajectory will resume.

(01/12/01) - With Yahoo, DoubleClick and others guiding near-term expectations lower, some have been asking whether online advertising is fundamentally a viable business. The answer is, of course it is. I don't know what kind of growth will occur in the coming year, but online advertising will be much, much bigger in five years. Americans spend about 9% of their media time online, but online only comprises about 2% of overall ad spending, so fourfold growth will be easy. But the internet will play an increasingly vital role in our everyday lives, so the 9% figure is a ceiling that will keep rising. And this is just for the U.S.... let's not forget the other 95% of the world's population. If you're a patient, long-term investor, the time to get in is when everyone else is running for the exits.

(01/09/01) - Following Amazon's announcement yesterday that its fourth-quarter revenues were slightly below expectations at $960 million, three influential brokerages revised their ratings on the stock. Robertson Stephens changed from 'long-term attractive' to 'market performer', Goldman Sachs from 'trading buy' to 'market outperform', and Salomon Smith Barney from 'buy' to 'outperform'. Confused by the terminology? You're not alone. As I described in Tomments 2, analyst rating terminology is intentionally vague and non-standardized, because this enables them to avoid accountability. My advice: ignore the analysts, go straight to the source (Amazon's press release) and decide for yourself whether to be impressed by the results. The analysts have their opinions, and I have mine, but yours is what matters.