Monday, May 27, 2013

Why Harry Dent is Wrong About the Dow Going to 3,300

I just saw an advertisement noting that Harry Dent, who is some sort of stock expert is predicting the Dow 30 will drop to 3,300.  It is important to note the Mr. Dent made that prediction sometime in 2011, when the Dow was some 2000 points lower than the 15,303 it stand at now.  At least if this happens, the drop will be even more dramatic and Mr. Dent may be even more successful at selling whatever it is he trying see on his website.

But, IMO, it's not going to happen, and here is why.  The Dow isn't traded on it's own.  It's made up of 30 stocks that are traded individually.  And if the Dow is to drop by 80%, then those stocks would have to drop an average of 80%.

So, McDonald's would have to drop from 100 to 20, AND Exxon would have to drop from 91 to 18 along with all the other Dow stocks, or some other crazy combination that would drop the Dow an average of 80%. 

Which, BTW, unless those two stocks dropped their dividends, would mean they would have a dividend yield of 15% and 13% respectively.  Nope, not gonna happen.  The great crash of 2008 cut the Dow by only (?) 50%.  This would have to be much worse.  And unless McDonald's is hiding billions of dollars of bad hamburgers off it's balance sheet, there is no reason to even comtemplate a crash of that size. 

Just be upbeat, keep investing in good companies like those mentioned above, and don't worry about a crash.  If prices decline, you will still own companies that make money. 

I don't own any stocks mentioned in this article. 

Monday, May 20, 2013

Buying Facebook for the Long Term

There isn't likely a more controversial stock in the market right now than Facebook (OK, maybe Apple)

Facebook's share price is around $26 now, making the company worth (market capitalization) of $62 billion dollars.  It's down from it's initial offering price of $37 and up from it's 52 week low of $17 and change.

None of that means anything to the upbeat investor.  What's important is what does a share of stock buy you?  Facebook pays no dividends, so the only return you will get is from capital appreciation.  The price/earnings ratio (P/E) is currently 559 according to Yahoo! Finance.  Which means at the current rate of income, you will get your money back in 559 years.  Past the year 2525, if man is still alive.

Clearly, no one would buy a stock on this metric.  The only reason to own Facebook is if you believe those earnings will increase, and in this case, increase substantially.

Now, you may love Facebook, you may use it all time, and think they will be able to make a lot of money through selling ads and other forms of monetization.   But everything will have to go right for them to make enough money to justify that price.  And things rarely do.

Upbeat investor call:  Definitely "don't like"

The author has no current position in any of the stocks mentioned in this article, and no plans to purchase any in the next 48 hours.

Introduction to Upbeat Investing

If you are interested in investing, you can find hundreds of magazines and newspapers, as well as multiple television networks offering advice on what stocks to buy, when to sell and how to market time.  Do you want to invest in options?  There are load of blogs and websites that say they help you select just the right investment or trade.  

There are newsletters that you buy, websites you can subscribe to and lots of other ways to obtain advice from people who tout themselves as experts.  

Maybe they are experts.  It is likely they do know more about the market than you or I do.  But, they don't know what's going to happen tomorrow.  If they did, they wouldn't tell you for just about any amount of money.  

What the Market is Really About

What people seem to forget is what the stock market really is.   It is a place to buy ownership shares in companies.  Companies that make things, or provide services.  These companies, mostly, are able charge enough for their services to make a profit.  That profit is passed along to the owners, in the form or dividends or higher share prices.   

There is a lot more to it of course. The markets are highly liquid.  It is easy to buy and sell, and some people are in business to make money by trading the shares, without any regard to what they own.  Good for them, if it works.  (Although it rarely does, over the long term.)

Upbeat Investing

As long as companies can make a profit, the value of shares over time will increase.  Therefore, the key to profitable investing is to own companies that make money, and not to pay too much for them.  There's a lot more to be said about that.  The goal of upbeat investing to buy great companies and be happy when they generate a profit.  As a owner, some of that profit is yours.  Enjoy it.