An intelligent stock trading question.

[Dash]

Okay, an intelligent question...

A year ago. I dont have all the exact details, but I bought about the market value of 1,131,31 dollars of IBM shares. (20 shares I believe.)

because of the release of the new xbox 2, ps3, Nintendo Wii consoles.

(IBM had components in every one of these different consoles.)

Anyways, a year passes by.

The PS3 goes on the market. They are sold like mad. Millions of them are sold.

Now, my theory is, I'm going to be in on this. When my stocks rise, in response to the PS3's being sold out. having IBM's components in them. INcluding the nintendo wii's doing great on the market. etc etc.

Thought I would get a piece of the pie.

Well - this does make sense. Its not too far fetched an idea. I thought this is what the stock market was founded on.

Again, I AM a stock market trading noob.

So, a year later. Its feb..They are still exporting and stocking the shelves with PS3's and the stores are still selling them like mad, a month after Xmas and Boxing day. The prices will go down, in a year. But they're still hot off the shelves.

Anyways, to the point..

I called the waterhouse today and asked for a representative. Then I asked them a question.

My share stock value was, at the time I bought it, a year ago, 97.150 a share market value to the total of 1.131.31

I called in to ask what the market value of the IBM stock is today, in comparison to when I bought it, a year ago.

He tells me:

the stock market value price of the share now of the IBM is 100.13 market value price per share.

Thats a difference of 97.150 to 100.13.

Thought that was a big difference?

I ask him, if I sell my shares right now. How much much would I get back?

So, I have paid a grand total of 1.131.30 for IBM shares then, a year ago.

He says I'll get back a grand total of 1.178.00 for all my IBM shares now.

So, I make a grand total of, *the horns toot and the drums roll* 50 BUCKS!

For a whole year of waiting and keeping my 1.131.30 bucks in the stock markets!

WOOHOO!

Okay. Now I'm wondering, why I didn't make any money.

I mean, should i keep my stocks in there, maybe the company will pay a dividend for all the stockholders investing in their company, for all those sold PS3's in the BILLIONS in quanitity?

Is there a set date that the IBM company will do this?

What's the point of investing in a company if the company doesn't pay out anything to its investors,stockholders?

So, should I pull out now and throw in the towel and never invest in stocks again?

I did notice a certain stock that keeps rising and rising and rising.

I know how the stock trading world works now.

You have to find a stock that keeps rising and rising and rising.

and you have yo be a millionaire to invest 10,000,000 in that one company in their stocks that keeps rising so that you get a nice pay off when you sell it.

Thats the only way to make money.

Hence, at one grand, I made 50 bucks.

So, a millionaire, putting in 10,000,000 would make a significant amount more than I did, at one grand.

Thats how I believe the stock trade works.

Am I totally wrong?

Should I pull out and throw in the towel?

Thanks.

 

[great bear]

If you think IBM will be around and profitable for the next ten years hold on to the shares. Long term investing is the way to go.

 

[euripides]

That's almost 5% on a capital gain. That's not bad considering the alternatives. Try investing a little more. 5% of a million dollars is $50,000.

 

[nautilus]

How did IBM as a whole do during that period? Perhaps the money made from that component was merely off setting losses somewhere else.

 

[ed_v]

Now, my theory is, I'm going to be in on this. When my stocks rise, in response to the PS3's being sold out. having IBM's components in them. INcluding the nintendo wii's doing great on the market. etc etc./

Another thing to consider is that most anything you can think of in terms of getting in on a money maker has already been thought of. Most of the time, unless you really know what you're doing (see MichaelZzzz's post) the stock price already reflects any good things to come because the analysts have already thought of it and the market has already reflected it in the price. You can be sure though that if those expectations are not met, the stock price will take a hit.

 

[keeferz]

IBM also paid $1.10 /share dividend in 06, that's almost 2 %

 

[mtl_guy]

IBM has about 1.51 billion shares outstanding.
1.51 billion = 1,510,000,000

You bought 20 shares.

20 / 1,510,000,000 = 0.000000013245


0.000000013245 * 100 = 0.0000013245%

So with your 20 shares you own 0.0000013245% of IBM.

0.0000013245% isnt much. How much do you expect?

Okay, an intelligent question...

A year ago. I dont have all the exact details, but I bought about the market value of 1,131,31 dollars of IBM shares. (20 shares I believe.)


Thats a difference of 97.150 to 100.13.

Thought that was a big difference?

I ask him, if I sell my shares right now. How much much would I get back?

So, I have paid a grand total of 1.131.30 for IBM shares then, a year ago.

He says I'll get back a grand total of 1.178.00 for all my IBM shares now.

So, I make a grand total of, *the horns toot and the drums roll* 50 BUCKS!

For a whole year of waiting and keeping my 1.131.30 bucks in the stock markets!

WOOHOO!

Okay. Now I'm wondering, why I didn't make any money.

I mean, should i keep my stocks in there, maybe the company will pay a dividend for all the stockholders investing in their company, for all those sold PS3's in the BILLIONS in quanitity?

Is there a set date that the IBM company will do this?

What's the point of investing in a company if the company doesn't pay out anything to its investors,stockholders?

So, should I pull out now and throw in the towel and never invest in stocks again?

I did notice a certain stock that keeps rising and rising and rising.

I know how the stock trading world works now.

You have to find a stock that keeps rising and rising and rising.

and you have yo be a millionaire to invest 10,000,000 in that one company in their stocks that keeps rising so that you get a nice pay off when you sell it.

Thats the only way to make money.

Hence, at one grand, I made 50 bucks.

So, a millionaire, putting in 10,000,000 would make a significant amount more than I did, at one grand.

Thats how I believe the stock trade works.

Am I totally wrong?

Should I pull out and throw in the towel?

Thanks.

 

[JohnLarue]

The impact of PS3 s on the total profit of a company the size of IBM is about the same as pouring a cup of water into a swimming pool.
IBM is a good company and probable not a bad hold for a long period of time (3-10 years)
Do yourself a favor- educate yourself prior to putting your hard earned $ into the stock market, Read the Globe & Mail business section every day & also check out this site:
http://www.shareowner.com/index.html
You Will learn a ton.
(I have no personal interest in this organization). In my opinion it is the very best site for retail investors.

You also need to consider trading commissions. Most bank run dealers charge $35 Can to buy a US stock & $35 to sell a US stock.
That is $70 round trip. On a $1,000 investment thats 7%
The long term annual return on the entire market is about 8%. (Without applying commissions). That will leave you with a 1% return
Therefore an investment of > $3,500 makes a little more sense (2%)

 

[C Dick]

The hardest thing (well, at least a hard thing) to understand about stock pricing, is that the current stock price reflects the current information. So a year ago, when you bought your stock, everyone already knew that IBM had contracts for all the consoles, so the stock price already reflected that. Only when things get unexpectedly better should the share price increase beyond the industry average. To really make money in stocks, beyond the industry average, you have to know, or figure out, or guess, something that not everyone knows yet.

 

[xarir]

Your plan to participate in stock growth through indirect investing is generally sound. If you felt though that PS3 etc would sell like hotcakes, then you could have chosen to participate directly by buying Sony instead of IBM.

Lesson - there are many ways to invest.


As you point out, you made about $50 on a $1000 initial investment. That's 5% which on the whole isn't too bad. For example, if you left your $1000 in the bank, how much interest would they have paid you? But let's look at something else - IBM itself. If IBM is worth $x today then how much do you think it could possibly grow in a year's time? Do you think that IBM can magically do something and in only 1 year's time be worth 2x or 3x? Realistically this is not going to happen in 1 year. In 10 years though, IBM will be a different company and likely will have grown somewhat an be worth more than $x.

Lesson - long term investing yields greater returns.


Then again, what does IBM do? How many components does IBM supply to Sony to make the PS3? What is the value of those parts? Let's say that IBM supplies Sony with $100 of parts for each PS3 (an outrageous amount for something that only sells for $600!). If Sony sells 10 million PS3, that means IBM realizes revenue of $1 billion. That's a lot obviously, but relative to what IBM already does, how much more is that really? Well in 2005 IBM reported gross earnings of $91 billion. So that extra amount from the PS3 would amount to a little more than an extra 1% revenue. How excited do you think investors in general will be about 1% growth of revenue for a company like IBM? For comparison, how excited would you be if your boss told you that you were getting a raise of 1%?

Lesson - Take the time to understand the basics of the company you are about to invest in.


Having said all that, you have an unrealized gain of 5%. That's not too bad. You didn't lose money either. And as someone else pointed out, you got a dividend payout as well so your total gain is actually more than 5%. On the whole then, you've done pretty well.

 

[goodtime]

If you felt though that PS3 etc would sell like hotcakes, then you could have chosen to participate directly by buying Sony instead of IBM.

Not a good move as Sony haven't been doing well with Sony pictures, lower than expected TV sales & laptop battery problem.

If company is large, have to look at where most of their money are.

 

[xarir]

Not a good move as Sony haven't been doing well with Sony pictures, lower than expected TV sales & laptop battery problem.

If company is large, have to look at where most of their money are.

Absolutely true. Which leads again to the comment - understand the basics of the company you are about to invest in!

 

[goodtime]

Stocks

You're right. Have to do your own homework.

Timing is important. Emotion usually gets in the way.

 

[Fortunato]

That is classic efficient market theory. Luckily, I learnt that Buffet and Munger disagree with efficient market theory.

Not exactly. Virtually everyone agrees with the weak form of EMT (past prices do not affect future price movements), and most agree with the semi-strong form (all public information is incorporated into the prices)... few agree with the strong form (all information is included). As for Buffet et. al. and whether or not they "agree" with the semi-strong form... well, let's just say it isn't really relevant, because you can safely assume Buffet has better "public" information than you (meaning you are at a disadvantage) at all times. It's funny, but people who manage billions of dollars just seem to find that advantage, somehow....

As an example look at any stock in the SP500, there will be a range of target prices among the analysts. Keeping with the original posters IBM stock, there are 18 analysts from the major brokers tracking the company, they all have the same information, they are all bright and clever men and women, yet they still post a range in their target prices, from $60 to $118, with a median of $105 (IBM closed today at 99.54).

The point of EMT is that no one player outperforms the market on a consistent basis, if prepared with the same information. Ranges of opinions from individual investors/analysts both prove and support it.

And, yes, that also includes the participation of individual investors like you and I... in case I'm not being clear, I'm not knocking fundamental analysis; I encourage you to do it, I certainly do it myself. But it doesn't refute market efficiency... it's what MAKES the markets efficient.

The point of all of this is that if you are tracking a stock and doing your own analysis there will be occasions where the stock is essentially on sale. Sometimes the market gets it wrong or is slow to react, but this takes work and lots of it to spot those buy points.

Perhaps. But true "inefficiencies" are fairly rare, and those who think they can habitually exploit them rarely can. And the process of trying is what makes markets efficient to begin with. In the end, you can expect your reward for your all your hard fundamental work will likely be market performance (adjusted for the level of risk you assume in your investments)... but it's better than the carnage that the lazy and uninformed would experience.

Here is a real time, real life example, DO on the NYSE, closed today $84.47.
After the market closed on Tuesday, January 30 they announced a special dividend of $4.00 per share for shareholders as of Feb 14 (a Valentine's present). The next day the stock opens at $83.52 up only $0.35 on $4.00 of news. This was new information, it was available to all and yet there has not been a corresponding reaction in price. There is a 4.8% one time dividend waiting to be taken if you own the stock on Feb.14.

Why do you consider a dividend "$4 worth of news"? Corporate finance theory tells us the market should be indifferent to dividend policy - the company is simply giving out the assets it has to its shareholders. It's not like an earnings surprise... the cash was clearly displayed on the balance sheet... everyone knew they had it. Likewise, when the stock trades ex-divided, you can count on the price falling by $4 (give or take). The announcement of a dividend may be news, but I don't see why you feel that paying a dividend "creates" any value at all... and the market apparently agrees with me.

(take the case of stock X where the fair value is agreed to be $10 per share... and they announce that they are taking $1 per share of assets out of the company and giving it back to to shareholders in the form of a dividend. Would you would expect the stock to go to $11 on the announcement? If so, why? What value has been created? I would expect there to be no change in price until the dividend is paid out - or it trades "ex dividend" - whereupon it should fall by $1... the value given from the company to the shareholder)

On the other hand their conference call is tomorrow at 10:00 a.m. and I could be completely wrong about their growth prospects and lose far more than the 4.8% dividend.

For me the hardest thing to do is sell a loss. It means admitting I got it wrong, fessing up and getting out before it gets worse. Happens less now then it used to but a lot of money went into that education and it really can't be taught, that is where your emotions kick-in and you start to hope, and the moment hope takes over rational thinking your dead. Just like dating an SP, rational thought this is business, emotional thought she really loves me, guess which one ends in tears.

The second hardest is to sell a winner, again the emotions kick-in, it might go even higher, you must have a game plan with a rational analysis as to why you buy or sell and stick to that plan, deviation from the rational plan is gambling not investing.

Behavioural investing is interesting on a case by case basis, and most people are effected to some degree by the same things you are coping with. For what it is worth, your strategy and conclusion are the best defences against it - set specific targets, and change them only in extreme circumstances. Strict discipline is a virtue in investing.

Best regards and good luck,

F.

 

[Stoo]

Question: Is your RSP maxed out? If not, that's where you will get an immediate return by a tax break... If you have a decent income, and therefore a high tax bracket, you'll "immediately" earn about a 45% ROI. Hard to beat. If you're younger, with kids, an alternative is an RESP... You only have a couple of weeks for an RSP contribution, but if you aren't sure where to invest, all banks have quickie RSP funds where you park the money temporarily to get the tax benefit.

Either way, invest it in something solid... a mutual fund... and forget about it. I am 51, with a decent paying job. I now earn as much in my RSP as I do in my salary...

Of course if your RSP is maxed out, do as others suggested... Buy. Hold. Prosper. (Ya, I know, it's AIC's slogan, but it works!)

 

[C Dick]

I was going to reply to MichaelZzzz but Fortunato did an excellent job. The best example is the $4 dividend, giving it to shareholders benefits them no more than paying down debt or buying equipment, it does not create value. When they announce that they have discovered $4 per share they did not realize they had, that was not on the books, then the stock price will go up, whatever they decide to do with it.

That does not mean that you can not make above market returns, either by being that much smarter (like Warren Buffett and MichaelZzzz), or luckier, or having legitimate inside information.

 

[SilentLeviathan]

If you're going to buy bluechips you have to buy a lot to make money; or hold for the long term. Less risk equals less payout.

 

[21pro]

are these considered blue chips?

Saskatchewan Wheat Pool- bought at $5.67
Abitibi Consolidated- bought at $2.81
Franklin Covey- bought at $1.55
Novell- bought at $2.91
Service Corp- bought at $4.26

none were bought more than 5 years ago and all have made huge gains for me.

i've bought and sold since 2001- KLM Royal Dutch/Air France, HBC...

None of these companies were small ones and all have provided or will provide greater than 100% upside potential in less than 4 years. my portfolio averages close to 25%, so the money on average doubles every 3.9 years...

i tend to think that in some smart situations Less Risk doesn't Equal Less Payout in any way.

so, MichaelZzzz, i guess we can continue to go forth and do the impossible as most people rather disbelieve us than politely show interest in what we've found to have worked.

 

[goodtime]

Absolutely true. Which leads again to the comment - understand the basics of the company you are about to invest in!

Even if good company, what matters is opinion of the street. Which can throw off stock price.

Many these days are chasing quarterly reports & Mergers or IPOs.

The good thing is there's rare bargains that you can get in & out before the Street, which are late to the game.