Just like I am only going to *write* about things I understand. I turn the blog over today to Drewski, my in-house investing and “big time finance” guru (he’s also my boyfriend and puppy-daddy). Drewski has over two years of experience as a stock broker in NYC. I want to learn more from him and more about investing, especially since I just opened my first IRA and I have to actively pick what I want to buy (does this scare anyone else but me?). Drewski has a great way of putting things into layman’s terms for the rest of us and as this is just a first in an investment series he will be doing I am excited for everyone to see the start. Enjoy!
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Facebook. Everyone remembers that IPO. Everyone knows Facebook. Everyone and their grandmother uses Facebook. Consequently everyone wanted to buy a share of Facebook. In May Facebook became a publicly owned company and it sold 421 million ownership shares to the public at a price of $38 per share. Today those shares are selling for about $18. Translation-if you bought Facebook at the IPO price you lost more than half of your money…in just a few short months.
Actually…I don’t “like” that people lost their money on the facebook stock.
Now a lot of people bought Facebook stock because they know what Facebook is (The average person isn’t too familiar with ALCOA). And after the rise of stocks like Apple and Microsoft the general idea out there is that to get rich you have to try and find the next big company and buy in early. Facebook is big, this should work out, right?
That is speculation. Trying to ‘time the market’ is speculation. Betting on a biotech or pharmaceutical company to develop the next viagra is speculation.
We want to retire wealthy, we want to invest not speculate. If we are going to throw away money wouldn’t it be more fun to do it at Atlantic City or to spend a few hundred bucks for dinner at Per Se in New York? To figure out how to do that, lets look at the world’s most famous investor-Warren Buffet. This sexy man is worth about $44 billion and he didn’t get there by speculating.
Google “Warren Buffet Is Sexy” in Google Images and this is what comes up. Pure sensuality in a polyester suit.
Buffet only invests in companies that he understands.
We need to be able to understand the business model of the company.
Ford-they make cars.
Coke-they sell soda
ALCOA-they sell aluminum
Facebook-It’s a social networking site.
How does Facebook make money? They sell your information and they place ads. Has anyone out there EVER clicked on a Facebook ad? Me neither. The metals, car, soda markets all work and have been around for a while. No one knows how money is really made by selling your information over Facebook. Translation-I have no idea how they will make money.
Stocks make you money when the company makes money. The price can go up and the company can pay you a dividend, which is actually a portion of their profits. Stocks are part ownership in a company, remember? Since you are literally owning the company, you should understand it’s basic operations.
We can talk about how awesome and amazing dividends are another day. But this is lesson #1…. only invest in companies that YOU understand. And if you want to learn more just google Warren Buffet and his investing principals. Or if you ran out of Lunesta have trouble sleeping at night pick yourself up a copy of ‘The Intelligent Investor’ written by Buffet’s teacher at Columbia, Benjamin Graham. If you want to be an investor and not a speculator(and actually have something to retire on) that will be your bible.
Hi, my name is Lauren but I'm known to those nearest and dearest as L. Bee. After twenty-five years on the planet I have worked in a lot of industries, moved to many different cities, and made almost every money mistake you can make.Join me on my journey as I navigate my twenties and try not to pick my "money tree" bare.
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I tend to avoid individual stocks because I don’t know about most of them. I did, however, invest a little bit in Disney last year because our five year old wants all things Disney princess. At least in a round about way, I am paying myself.
Kim@Eyesonthedollar recently posted..Happy Labor Day, Useless Fact Edition
Great idea. Though there is more to look at than just understanding the product and using it yourself. I can talk about that another day. I’m sure a lot of people invested in Blockbuster because they rented a lot of videos. Although Disney is clearly a different company than Blockbuster in many, many ways.
I like the way Kim thinks. Great tips, Drewski! I don’t currently invest in anything, but I promise to be a smart investor once I start!
Michelle recently posted..Coming Up Roses
Totally agree. I only invest in things I understand too – as in I understand how and why they make money and it makes sense to me! More importantly, though:
1. Who googled the internet for Warren Buffett is sexy?
and
2. Why?!?!
Haha – great stuff
Nick recently posted..When is the last time you bought something new?
L Bee looks up that kinda stuff in her spare time. Warren Buffet makes up the entirety of her celebrity sex list.
Great tips ! It is true, Facebook’s financial income seems a bit confusing. Once I actually have money to invest, I plan on using this “understand what they do” principle for investment.
MoneyAfterGrad recently posted..August 2012 Spending Recap
Great tips, Drewski!!! Went ahead and ordered the book on Amazon. Can’t wait to read!
Currently, I only invest in mutual fund through my 401K. I, also, purchase company stocks through my ESPP.
I would like to start a fund with some stocks that I pick because I shop at those stores. Like Wal-Mart.
SavvyFinancialLatina recently posted..September 2012 Goals
That’s pretty awesome that you’re a stock broker. I avoid individual stocks and lean toward a portfolio approach (mostly of stock-based mutual funds). I like the diversification and it’s just annoying to keep track of so many individual companies.
Jason recently posted..Tragedy Strikes Close to Home: Why You Need to Have Life Insurance
Well I USED to be a stock broker. It’s actually a terrible job and I wouldn’t recommend it to anyone…. It’s a lot easier to diversify with mutual funds, but you end up paying for the convenience in fees. There are so many companies out there with specific funds, but if you’re going to go the mutual fund route, there is nothing better than a broad index fund like SPY.
Drewski,
You don’t sound like a stock broker at all…you sound like a financial planner or investment advisor. Is this what you still do?
Facebook does make a TON of money but their valuation was CRAZY and the reason I stayed far far away:
http://www.myjourneytomillions.com/articles/i-dont-get-hype-about-facebook-ipo/
The question is whether to get into it now or not? Still a high P/E but not as nutty – maybe after the mass exodus that’ll happen next month.
Look forward to all your investment posts!
Evan recently posted..August recap and September Goals
I used to push junk bonds on unsuspecting old people then for a little while I pushed actual equities. I currently work for a test prep company that deals with financial regulatory exams as a tutor while I’m working on my MBA.
Sure Facebook makes a lot of money(not nearly enough to value them at $100 billion…) but their earnings don’t really matter to me. They don’t have any real stability. We think that they are ingrained into our lives but Facebook can easily be replaced by something better. I might be pessimistic on that though, I was convinced that LinkedIn would have gone belly up by now. I’m not buying Facebook primarily because I don’t believe that it sells a viable product. The tech world is changing very quickly and I’m not even going to pretend that I understand how it’s changing. Facebook is trying very hard to be THE social media access point. They want to be the platform everyone uses in 30 years when babies have ID chips implanted into them and everyone wears contact lenses that display a computer screen. Who knows? They might pull it off, or they could go under next year. My point is that I don’t know and that there are plenty of great companies out there that I do understand, that do have staying power and that are making a lot of money(and paying dividends) so I’m not even going to look at Facebooks numbers and speculate about the right time to buy.
Wow that was a mouthful…
I think there is a time and a place for speculation. It shouldn’t make up a majority of your portfolio, but sometimes it’s worth taking a gamble on a stock that has a lot of upside potential. I wouldn’t invest OR speculate on facebook because I just don’t see the upside potential. As you pointed out, it’s relatively unknown how they will monetize all the information and traffic that they have. Not only is it a bad investment, it’s a questionable gamble.
DC @ Young Adult Money recently posted..Would You Work Abroad?
Thank you for recommending this article to me! I’ll definitely be checking out that book. I have a small amount invested in stocks, but I would like to be more proactive about my investments. Great place to start.
Jane recently posted..Insta Tuesday Update for Tomorrow (9/11)
Agree with the facts of your post because I think we have to know all about the things that we have going to do.
This is awesome and well-researched post. Thanks for that L BEE!! I think you have spent so much time on it. Love the comment section too… Keep it up!!
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