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Hello, I'm Paul Kang, a stock market commentator for the Nightly Business Report.
On the NBR, you may have heard me talk about the daily combat between the bulls and the
bears of Wall Street, but as you can see here on the floor of the New York Stock Exchange,
there are no wild animals in sight, only thousands of very human traders who are all here with
one very human objective, to make money.
They do that by trading securities, the stocks and bonds issued by the world's major corporations.
And once you understand the language and some of the concepts used here in the financial
markets, there's no reason why you can't try your hand at investing in stocks and bonds
yourself.
Of course, the securities markets aren't for everyone, since trading in them carries significant
risks and offers no guarantees.
But contrary to what many people think, Wall Street isn't the world's biggest casino.
Unlike a casino, Wall Street serves a vital role in the American free enterprise system,
because it makes it possible for companies to raise large amounts of money, a process
that is known as capital formation, and providing a place where individuals can cash in their
securities on a daily basis, these markets make it possible for you and me to participate.
To find out how the process of capital formation works and the role of Wall Street in it, let's
begin not in lower Manhattan, but thousands of miles away in the tropics.
Miami-based Carnival Cruise Lines carries more people on its ships than any other cruise
line, but it'd like to carry more, so it has five ships either on order or under construction.
Now, to pay the shipyard bills, Carnival first went to the commercial banks for a loan, but
when those banks were reluctant to lend a mass of amounts required, it turned to the
investment bankers on Wall Street for what's known as equity financing.
While we were growing, it was just a question that the numbers were getting very big to
continue the growth as these ships get larger and more sophisticated, the capital costs
for them get bigger and bigger, and the capital markets allowed us to make a quarter of a
billion dollar investment in a single ship.
Carnival first went to Wall Street in July of 87, when it became the first major cruise
line to issue stock to the public.
By selling 27 million shares of stock in its initial public offering, or IPO, at $15.50
a share, Carnival raised $396 million for expansion.
In return, those who bought shares became Carnival stockholders, part owners of the
firm, with the chance to share in the company's eventual profits through payments known as
dividends.
When investors buy stock in a company, they're betting that the company will make increasing
amounts of money, which in turn will benefit the stockholder through either bigger dividends
or an increase in the price of their stock.
But stock prices can fluctuate wildly, and sometimes investors don't want to take a
chance on a company unless they get a specific return, in that case, instead of shares, a
company will issue bonds, sort of a corporate IOU, calling for a fixed rate of return over
a fixed period of time.
On its second visit to Wall Street in June 1990, Carnival chose to issue bonds rather
than stock.
Unlike most bonds, which offer to pay a certain rate of interest every year, Carnival's bond
pays its 7.5% annual interest only at the end of 15 years, making it what's known as
a zero-coupon bond.
It's also a convertible bond, meaning that its holders have the option of converting
it into a certain amount of Carnival stock.
That means that if Carnival stock should take off, the bondholders would also benefit.
Now, just as there are different types of bonds, there are different types of stock
as well.
Carnival, for example, has a Class A stock, which is available to the public, and a Class
B stock, which isn't.
That entire class of stock is held by company founder Ted Erison and his family to block
any outsider who'd like to take control of Carnival from accumulating its stock.
And that's because whoever holds the majority of the stock gets a controlling interest in
the company and the right to say how it should be run.
Jim Wicks, NBR, Miami.
Now, if you're interested in buying stock to take over a company or for any other reason,
chances are you'll be making your deal through the stock market.
Actually, even in just the United States, there is more than one stock market.
Behind me is the New York Stock Exchange, known as the Big Board, and it's home to stocks
of the largest companies, called the Blue Chips.
There's also the American Stock Exchange, located just around the corner.
And then there's the NASDAQ National Market System, a computerized system that brings
buyers and sellers together.
And there are also several regional exchanges around the country.
Scott Gurvey takes a behind-the-scenes look at what goes into a single stock trade on
an exchange.
The buying of stock often begins with a trip to a broker's office.
It can also take place over the phone.
A customer specifies the purchase be made either at the market price or as a limit order,
which sets a limit on the price that can be paid for the transaction.
Paul, the last trade was 20 and a half.
Okay, I'd like to buy 800 shares.
The broker fills out a paper order form.
This will be the key document for recordkeeping.
The information is quickly entered into a complex computer system designed for accuracy
and speed and routed to the proper exchange.
The order for stock goes to the broker's trader on the floor of the New York Stock Exchange.
Depending on whether I have a market order or a limit order and I scan the quote that's
posted on the screen, I either bid for it or offer it or whatever I'm doing and just
try to get the best possible price for the customer.
The trader carries the order to the trading post, the spot on the floor where the stock
is traded.
There he will meet the specialist.
I am presiding here over the auction in various stocks that have been assigned to us as auctioneers.
That involves trying to bring the buyers and sellers together so their customers can accomplish
what they want to do.
The exchange compares the specialist to an air traffic controller.
As the trader announces the order, the specialist knows another trader has stock to sell.
800 Blockbuster, trades at 5.8, there's the seller.
Let's review that.
The trader said he wanted to buy 800 shares of stock at the last traded price of 20.5.
The specialist alerted another trader who had stock to sell and was asking 20.75.
The traders agreed to meet in the middle and exchange 800 shares at 20.5.
The trade was recorded on a computer card and fed into a reader right at the trading
post.
That put it on the ticker tape and announced it to the world.
That's how it happens 70% of the time on the New York Stock Exchange.
Two public orders meet on the floor and compromise on the price.
Exchange members say this makes the NYSE the most efficient market.
If there was no waiting seller, the specialist might have entered the order into an electronic
order book to be filled at a later time.
Or to meet his obligation to keep the market running smoothly, he might have sold the stock
from his own inventory.
Now that the trade has been completed, confirmation is flashed back to the branch office.
The entire transaction can be made in less time than it takes to describe it.
Once you've purchased a stock, the company will send you an engraved certificate, although
most investors now let their brokers hang on to them for safekeeping and easier trading.
Scott Gurvey, NBR at the New York Stock Exchange.
Well, now that you know how a stock trade is accomplished, you may want to try one yourself.
First, you have to find out what price the stock you're interested in is trading at.
Of course, you could always ask a stockbroker.
But if you want to find out on your own, you have to know how to read a stock listing.
If you're looking for a stock that's in the news or actively traded, you're likely to
find it listed on the Nightly Business Report.
And this is what it looked like.
It says that shares of this stock, Carnival Cruise Lines, last traded on the American
Stock Exchange at a price of $13.58, down one point from the close of the day before.
Points are the same as dollars, so it means that one share of Carnival stock cost $13.62.5,
commissions not included.
Because of limited time, the Nightly Business Report can list just a few of the several
thousand exchange listed stocks traded each day.
But yesterday's closing prices for virtually all listed stocks are printed in the business
pages of most newspapers.
Newspaper stock tables are somewhat more complicated.
After you find the appropriate exchange, the stock's listing will look like this.
The first number on the left is the highest price it's traded at during the last 52 weeks.
The second is its lowest price in that same period.
After the abbreviated company name, the next number is the firm's annual dividend expressed
in dollars, in this case $0.48 per share.
The following number translates that into a percentage yield in terms of the stock's
price.
Here, it is 3.5%, somewhat less than you'd get for your money in a bank.
Then we have a number called the price earnings ratio, a measure of the stock's price relative
to the firm's earnings.
It's one way to help determine whether a stock is a good buy since the lower the P.E. or
price earnings ratio, the higher the presumed value of the stock.
As you can see here, Carnival's P.E. is 10.
That's not the lowest among stocks in this market, but it isn't as high as some stocks
that are Wall Street's favorites.
Then we have a record of the stock's sales that day in lots of 100 shares.
It shows that more than 196,000 shares of Carnival traded, making it the day's most
active issue on the American exchange.
Finally, after all that background, we have the daily price range of the stock.
It shows that Carnival traded during the day at a high of 14 1⁄2, went as low as 13 1⁄2,
and ended the day near its low, which, as the final column tells us, was a full point
lower than its close of the day before.
All of that information is intended to help you decide whether Carnival Cruise Line stock
is in your price range and whether it's a good buy.
But even if you've answered yes on both counts, there's another factor to consider before
you place your order, market timing.
You've probably heard the expression, a rising tide lifts all ships.
Well, the financial markets work in that fashion.
A bit of news or even rumor about politics, the economy, or interest rates can move an
entire market up or down, taking with it the prices of individual securities, commodities,
or currencies.
Lois Allen reports.
Okay, Ian.
It's a scene that's common to every trading house.
Traders with both eyes glued to a computer screen and a telephone stuck to one ear.
This enables them to keep in touch with the latest news.
And here in the currency market, the most volatile of all markets, traders devour and
act on information.
The reaction is usually instantaneous.
One has to make a judgment right away, whether it's good, bad, indifferent.
But one has to be able to judge right away what impact this news item will have on the
market and act accordingly.
That means buying or selling of U.S. dollars, Japanese yen, German marks, or other foreign
currencies.
Decisions can be based on fact, perception, and rumor.
One of the major driving forces in foreign exchange markets today is what happens to
interest rates in the United States relative to abroad.
So anytime that news comes out of the central bank, that will move markets.
Even the mere hint of possible action on interest rates by one of the board members is enough
to spur buying or selling.
Two and a half dollars.
While newspapers might have an impact on trading at the opening of the day, their influence
quickly fades.
The cost-breaking news can cause prices to shift in seconds.
Traders rely on competing wire services, which transmit news electronically.
They watch for anything that may affect the economic landscape.
But experts say it's not so much the events that drive markets, but whether they are anticipated.
News contributes to changes in perception and expectations, and these changes in perceptions
and expectations govern the behavior of individuals in the marketplace.
As technology speeds the flow of information around the world, markets will be able to
react to news faster, and experts say that may create a climate for increased volatility.
Lois Allen, NBR, New York.
As stock prices tend to move together, the question investors generally ask is, how's
the market doing?
And the answer to that question almost always focuses on one number, the Dow Jones Industrial
Average, or the Dow, as we call it for short.
Actually, the Dow is an index of the prices of 30 component stocks, and it has a long
history.
To fill us in on that and the other stock indexes, we have with us the man known as
the keeper of the Dow, and he's a frequent market monitor guest on the Nightly Business
Report, Bill LaFay.
Welcome, Bill.
Just how did the Dow get started, and what makes it such a key market barometer?
Well, over 100 years ago, a fellow by the name of Charles Dow and another guy, Edward
Jones, in July of 1884, they had some kind of a customer's letter they put out in the
afternoon, and spasmodically, they would come with some kind of an index, and they kept
refining it, and by the time he got to 1896, they came with 12 industrials.
That's the first time they had an industrial average.
And here they are, American Cotton Oil, American Tobacco Still Around, it's called American
Brands but not on the index.
The only one that's still there after all these years is General Electric.
And of course, there's some others there, National Lead, Tennessee Coal became part
of USX, and US rubber was in the index up until maybe 15, 20 years ago.
All right, we've seen the originals way back when, and we've seen the current Dow 30,
but can 30 stocks really give us a general idea what the economy is doing?
They can go a long way toward it.
At any given time, the total value of those 30 stocks in the Dow is something between
a quarter and a third of the total value of all the stocks in the New York Exchange.
So while there's only 30 of them, they're pretty big companies.
Okay, obviously, US businesses changed over the years, as have stock prices.
How does today's Dow compare to the original one, and how does it keep pace with the times?
Well, the original one was in 1896, the whole thing was worth 40.
Now, it's a couple thousand.
It's been a big move, part of it is inflation, and part of it is in adjusting for all the
changes, they keep changing the divisor, and the divisor is now less than one, so it's
no longer a divisor, it's a multiplier, hence the volatility in the marketplace.
That's why we're seeing these big 20, 30, 50-point swings every, on a normal day almost.
Well, now, besides the Dow, there are many other market indexes, and a lot of them, of
course, we display on the Nightly Business Report.
Now, taking a look at a typical day's roundup, what can you tell us about each one we see
here?
Well, the transports at one time were known as the rails, and you know, there was a theory
that if the industrials made the stuff and their stocks went up, then if the rails didn't
go up and they were shipping it, then it was not a true move.
So the transports, as they're now known because of so many airlines in there and truckers,
this is an important index.
The utilities also is important, it's the latest Dow, and it started in 1929.
That is frequently a proxy for the direction of interest rates.
And, of course, the one last thing we see on this particular display is the closing
tick minus 178.
In this case, at a certain point in time, like the close on that particular day, that
means that 178 more stocks closed lower than their last previous price, than higher than
their last previous, just a trend indicator.
Yeah, a very short-term indicator, though.
Right.
Yeah.
Here we go with the Standard and Poor's indexes.
Now, after the war, after World War II, the Standard and Poor's people came with one,
they took 500 industrials rather than 30 components, they went to 500, and it was 500 stocks.
Also, you have the S&P 400, which is the industrial component within those 500.
And then, of course, there's the S&P 100, which is largely of interest to option traders
because there's a future that's based on that.
And of course, the CRB is a commodity research bureau, that's an index, and it is very helpful
in judging inflation.
Okay.
Let's have a look at some more averages.
Now, the New York Stock Exchange, they came along with one.
Theirs is every common stock on the exchange, and it's something in the order of 1,300,
1,500 different stocks.
And strangely, the Dow and the S&P 500 and the New York Stock Exchange tend to track
each other pretty closely.
There's also the Amex.
They have the American Stock Exchange Market Value Index.
That's largely small oil companies.
There's the Nasdaq Composite, which is a good judge of the smaller companies.
Value Line, another smaller gauge.
And Nasdaq stands for a National Association of Security Dealers Quotation System.
Right.
And Value Line's right there.
And then, of course, the last one is the Wilshire 5000, which is not an index.
That's a total value in billions or sometimes trillions of what the marketplace is worth.
Okay.
Now, there are these so-called chartists who say that history repeats itself in a claim
that by studying the moves of various indexes, it's possible to foretell the course of the
market's future direction.
Do you think there's anything to that?
I think charts help, but you also have to look at the fundamentals.
If you're only going to look at charts, it's like driving your car by only looking in the
rear-view mirror.
In other words, what's happened is right.
That's right.
Okay.
Thanks very much, Bill LaFay.
Appreciate it.
All right.
While the market indexes were originally intended for one purpose, to help investors gauge the
market's direction, many have now become investment vehicles themselves.
Leslie Nicholl reports from Chicago on stock index futures and options and the controversy
over their impact.
Back in the 1800s, Chicago's futures exchanges were founded as a way for farmers to hedge
their agricultural price risks.
In 1982, stock index futures were introduced here for much the same reason, only this time
it was to allow large institutional investors such as pension funds to limit the price risks
in their massive holdings.
The most widely traded futures index is the Standard and Poor's 500 at the Chicago Mercantile
Exchange.
By buying this index, investors can make money if the market as a whole takes a big swing.
Basically, if you hold $1 million worth of stocks and you are concerned about the price
risk if there are tensions in Kuwait or whatever, you could take a short position in about six
S&P contracts to hedge your price risk.
While many investors applaud the index futures, the hedging vehicle has also chalked up a
fair number of critics.
Some complain that the index futures do not generate capital for industry and that they
encourage speculation.
Also, investing in futures can be very risky since it is possible to lose even more than
one's original investment.
For that reason, individuals who want to hedge frequently turn to options on stocks or options
on stock indexes, the risks of which are limited to the amount one invests.
There are two kinds of options, call options and put options.
A put option gives the investor the right to sell at a certain price and at a certain
time.
A call option, the right to buy at a certain price and time.
In the case of the S&P 500, if the S&P were at 300 and the investor were to buy a call
option at 310, the investor would have the right to buy the index at 310.
So the investor would make money on that call if the S&P were to go up to 320.
If the S&P were to go down, say, to 290, the investor would simply not exercise the call
option and the investment would be worthless.
You use an option to manage the short-term volatility of longer-term holdings in the
market.
Meanwhile, stock index futures and options have paved the way for the relatively new
phenomenon of program trading, the practice of using computers to exploit the price spreads
that can arise between the stock index futures and their underlying stocks.
Critics say that program trading has led to increased volatility in stock prices, but
traders defend the practice.
Well, if any market gets out of line, individual speculators or position traders are going
to come into the market and attempt to take advantage of the fact that there's a disparity
in prices.
That tends to level things off.
Consultants say that perhaps one of the most important things for the individual investor
to remember is that the futures and options markets are dominated by large institutional
investors and can quickly make sharp moves up or down.
And while the individual can make a handsome profit investing in this way, those who choose
to do so should be aware of the risks since 100% losses are possible without any chance
of a turnaround.
Leslie Nichol, NBR Chicago.
You may have heard talk about the markets being rigged against the small investor.
Like any place where a lot of money is at stake, Wall Street has its share of greedy
and unscrupulous individuals.
But Wall Street does have rules which apply to everyone who does business there, as Helen
Whelan reports.
Ivan Boski and Dennis Levine were once Wall Street's biggest movers and shakers, but they
went to jail and paid millions in fines because they broke the rules prohibiting a practice
known as insider trading.
The U.S. Securities and Exchange Commission is Wall Street's policeman, regulating securities,
stocks and bonds, and ensuring accurate reporting by corporations.
The aim is to keep the market honest and ensure fair play for all investors.
The SEC has the power to halt trading of a stock if it thinks anything illegal is going
on.
It also confines individuals and corporations for attempting to manipulate stock prices,
falsifying corporate records, and generally making ill-gotten gains.
But the chairman of that commission says when it comes to protection against fraud, investors
should not rely solely on the government.
Most cases where they're offering a deal that's too good to be true, it is too good to be
true.
It isn't true.
And the investor, notwithstanding all we will do to keep the market clean, can do a lot
to protect himself.
In the case of insider information, inside usually means confidential information that
is used in advance of the public knowing it.
In the past, the SEC has prosecuted even printers of financial publications who traded on stories
yet to be publicized.
In search of this kind of illegal activity, the SEC tracks the stock market for unexplained
price moves, as do the various exchanges.
Also, an industry group, the National Association of Securities Dealers, and state securities
commissions have their own rules regulating stock offerings and brokers.
And you can ask for information about the broker dealer and about the particular broker
to see what their disciplinary history may be, if any.
Probably the best advice of all is that given by SEC Chairman Richard Breeden, who says
investors should ask for written information, read what they get, understand what they're
doing before investing in the stock market or talking to a broker.
Helen Whalen, NBR, Washington.
Now that we've explained the basics of how the financial markets work, it's time to consider
your place in them and whether it's a good idea for you to invest your hard-earned savings
there.
To discuss that, we have with us Theodore Miller, editor of Changing Times Magazine
and the author of the best-selling personal finance guide entitled Make Your Money Grow.
He's also working on a new book entitled Kiplinger's Guide to Successful Investing.
Our other guest is Craig Corkman, editor of the Davis Zweig Futures Hotline and Bond Fund
Timer, two of the leading market timing services and a frequent market monitor guest on The
Nightly Business Report.
Gentlemen, welcome.
Good day.
Hello, Paul.
Ted, first let me ask you, considering the risks that go along with stocks, why should
individuals consider going into the stock market and who should and shouldn't take
the plunge?
Well, the very important reason to consider investing in stocks, Paul, is that there's
more money to be made there than there is in a lot of other ways.
If you take a look at various investment alternatives going back for about as long as reliable figures
exist, and that's about 1926, and take it all the way through about the end of 1989,
what you discover is that small company stocks have returned on the average of about 12 percent
per year.
Larger, safer, more conservative stocks have returned about 10 percent per year.
And if you drop down into other investment vehicles, you look at bonds, government bonds,
corporate bonds, certainly savings accounts, even gold, none of them have returned really
even half that over that period of time.
And so in terms of long-term steady return, and in fact in some years spectacular returns,
the stock market is a good place for part of your money to be.
All right.
So obviously there are good reasons to go in there, but how do you go about it?
Well, not everyone should be in the stock market, and the first thing you need to do
is to make sure that your financial underpinnings are secure.
By that I mean I think most economic experts would say or financial experts would say that
three to six months take home pay in a safe place where it's earning interest, that would
be a money market fund or short-term CDs where you can get at it quickly, plus you need to
be protected against catastrophe.
That means your health needs to be insured, your belongings need to be insured, and if
your death would cause financial hardship for someone, then you should have life insurance
as well.
Only when you've got these things into place is it time to think about investing in stocks.
All right.
A good strategy, in other words, is what you're saying, plan out that first.
Yes.
Really the strategy should really be the tool of your goals, and if you think about what
your financial goals might be, that in a way begins to help you sort out what kinds of
stocks you might invest in.
For instance, if you're planning to invest for a secure retirement and that retirement
is 10 or 20 or 30 years away, then you'll be looking probably at long-term stocks.
You're not too terribly concerned about whether or not the market goes up and down along the
way.
So that's different, for instance, than if you're within a couple of years of retirement
or if you want to put aside some money to make it grow for your vacation next year,
then you really wouldn't want to be in stocks that might go up and down and be right down
at the place where you don't want them to be when it's time to cash them in to get the
money.
All right.
Well, that's an interesting question, and also we want to present to Craig Corcoran.
Just picking the right stock obviously isn't the secret to it all.
The market is subject, as Ted said, to ups and downs, so political developments, other
unforeseen events.
What can the individual do as far as choosing the right time to be in the market?
Well, Paul, the most important consideration for an individual investor really is patience.
Investors should not be anxious to invest in the market.
Pick the spots, pick the time, but there are also two other big guidelines, big rules
that you ought to follow.
One is don't fight the tape, and the second is don't fight City Hall, which is the Federal
Reserve.
Don't fight the Fed.
Well, these, of course, your associate, Marty Zweig, is famous for these sayings, but you
really believe that these are the two key axioms to follow.
I think so, Paul.
The tape really is the trend of the market.
If the trend of the market, the action of prices of stocks are going down over the intermediate
to long term, don't step in that way.
Don't try to catch a falling safe from the top of a building.
On the other side, the other rule, don't fight City Hall, is don't fight the Federal Reserve.
Interest rate policies are generally more and more restrictive, higher interest rates,
tighter money.
Don't fight that trend as well.
Those are the two most important long term trends in the market.
All right.
Now, you use charts as an aid to get in at the right time and out at the right time,
yet many of your critics would say what stock charts tell you is that what has happened
is right.
How do you counter to that argument?
In other words, you can explain anything once it's happened.
I think that the theory of a random walk where prices of stocks just gyrate unpredictably,
I think that is wrong.
Basically, what you want to do as far as stock selection, investing in stocks that are likely
to continue trending in the direction they have in the past, is look during corrections
in the market.
If stocks upon each downward tick in the market make higher lows, consistently higher low
after higher low, and if their relative strength, meaning if they're outperforming the rest
of the stocks in their industry or the rest of the stocks in the general market, if those
two criteria are on your side, on the bullish side of the bandwagon, I think those are good
reasons to invest in a particular stock.
So the charts are very helpful in making comparisons as to where the strength is in an industry
and where the weakness is.
That's true.
When a market's rising, you want to be in the groups in the stocks that are rising the
quickest.
If the market falls against what you think is happening by being in the strongest relative
strength groups in stocks, you avoid the most pain.
Very interesting indeed.
Ted, at Changing Times, you've discovered eight mistakes that investors make most frequently.
What are they and what can be done to avoid them?
Well, the first and most common mistake is one that we touched on a couple of minutes
ago, and that is failure to have an investment plan.
What this leads to is shooting from the hip.
When you shoot from the hip, you're just moving with the trend, and you may not know exactly
whether or not your stocks are moving in the direction you want them to go or whether they
really fit in with your investment plan anymore.
So failure to have a plan is the single largest mistake.
Second mistake is not keeping yourself informed.
Again, this makes you a sucker for the next salesman to come along.
That's where Nightly Business Report comes in handy.
Indeed.
That's one way to help keep yourself informed.
And you won't fall victim to the latest persuasive sales pitch that you hear.
The third mistake that people make is failing to check the quality of the advice you're
getting.
In other words, you want to know the background of the broker or the publication or the television
show, if you will, that is offering you advice on where to invest and when.
The fourth biggest mistake is investing money that belongs somewhere else.
This is a question of the mistake of putting money that should be somewhere else, perhaps
in a savings account where it's nice and safe and you can get at it quickly into the stock
market where it may be down when you want it to be up and you have to go and get it.
A fifth mistake is being optimistic at the top and pessimistic at the bottom.
This is a very common one.
And it's simply just a matter of catching whatever the current fever is.
If everybody thinks that things are going to continue to go up, you go with that rather
than looking to see what the fundamentals show, whether or not prices, price ratios
are out of kilter and whether or not things are reaching new highs day after day, eventually
they're going to come down.
It's one of the few businesses, in other words, where people want to pay more instead
of less it seems.
That's right.
What goes up must come down and what goes down so far at least has always come up again.
The sixth most common mistake we find is that people fall for hot tips and rumors.
I think it's important that people should understand that there's no such thing as a
hot tip.
I've been in this business now for 20 years and I've never had one and the reason for
that is that somebody knew it before you knew it and has acted on it already.
So don't act on hot tips.
There's really no such thing.
The seventh mistake that we see a lot is that people get sentimental.
They fall in love with their stocks as if they were a house pet or something.
They can't admit that the reason they bought it is no longer valid and that it's time
to sell it.
The eighth mistake is buying low price stocks on the theory that they're going to have
higher percentage gains and higher price stocks.
Well low price is a relative measure.
A stock that costs a dollar and has no earnings is in fact more expensive than a stock that
costs $10 and is paying you a dollar in dividends.
The price earnings ratio of 10 on the second stock makes it a cheaper stock than the price
earnings ratio of infinity on the cheaper stock.
Very interesting and very good points.
Craig, now you've basically told us many of the same ideas and there are times to
avoid stocks but under what circumstances are bonds more attractive than stocks?
Well from a macro or long term standpoint the time that bonds tend to outperform stocks
is during an economic recession.
As corporate profits tend to turn lower in a recessionary environment stocks tend to
underperform bonds.
Now as far as bond selection goes you have to look at the economic environment in terms
of debt.
How much debt is in the economy, how much debt is on corporate balance sheets as far
as determining whether corporate bonds are better or not than treasury bonds.
Now our time is drawing short but if there were just one thing that you could advise
a new investor what would that be?
I think the most important thing for a new investor is not to panic.
The market when it goes lower always tends to rise out of a bottom when the most amount
of pessimism is seen.
Basically a market bottom is defined as a period of excessive pessimism.
Always at a bottom you see excessive pessimism.
I think that an investor should be cold and calculating, following the trends, don't
fight the tape, don't fight the Fed.
Don't get emotional in other words.
Ted, let me direct the same question to you.
What would you advise a new investor if there was only one thing that you could say in addition
to what you've already said?
I'd say one thing that has three parts.
First is don't put all your eggs in one basket be that one stock or stocks themselves, diversify.
Second thing is don't buy anything you don't understand and third don't buy anything you
don't know how to sell.
Very good points all and gentlemen we thank you very much for being with us.
Ted Miller and Craig Corcoran it's been a pleasure.
Congratulations you now know the basics of how Wall Street and the financial markets
work.
Being knowledgeable isn't all that you need to be a successful investor because even the
biggest experts can't say for sure which way prices will go.
But if you do decide to take the plunge and jump into Wall Street keep this in mind.
It doesn't matter whether you're a bull or a bear.
Just don't be a pig and watch out for the sharks.
I'm Paul Kangas.
See you on the Nightly Business Report.
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