|
Questions, questions, questions. Investors are very inquisitive. We’ve received the following queries in recent months, and thought August, a notoriously quiet time for the investment markets, would be a good month to hazard a few answers. Remember, though, that the answers only represent this columnist's opinion. Before buying or selling any security, investors should do their own research and base decisions on their own analysis.
Question: I think people ought to invest in their own community. I'd like to put together an investment portfolio of San Diego stocks. Does this make sense to you?
Answer: Investing in the community where you make your home is admirable, and in fact it has some advantages. It is easier to know who is running a company and how skilled its leaders are. San Diego has had some remarkable business leaders; Sol Price and Irwin Jacobs among them. Local investors who recognized their skills and invested early in companies like the Price Club and Qualcomm are happy campers. Hometown investors often hear news first, and can easily attend annual meetings to measure the progress of a company.
But there are some serious disadvantages to investing only in local companies. Only a single Fortune 500 company (Sempra) is headquartered here, and a limited range of industries are represented. A portfolio made up of local companies would be poorly diversified in terms of company size and industries. A good alternative would be to buy a few well-chosen local stocks, then to round out your portfolio with companies that have a substantial San Diego presence. For example, you could add airlines and retail stocks and expand the scope of your technology holdings. American Airlines, which serves the county, seems reasonably priced at the moment. Wal-mart has been a reliable investment, and The Limited looks well-priced. Hewlett-Packard, which has a North County facility, presents an attractive opportunity in high technology.
Q: The current market terrifies me, but I need to keep building a long-term investment portfolio and like to buy individual stocks. What’s the best way to do this?
A: Perhaps the surest long-term practice is to follow the old Wall Street adage — "buy on bad news, sell on good." Even when markets are at historic highs, some companies are bad news bears. Negative news drives their stock price down. Microsoft, until recently, was an excellent example of that. As it became increasingly apparent that the U.S. Justice Department and the state attorneys general would bring antitrust suits against Microsoft, the company’s share price slid lower and lower, to a 52-week low of $59. Once all the bad news was out and investors knew that the suits were going forward and what the charges would be, the share price started to rise. During June and July, Microsoft's price rose from $85 per share to $110. Your job is to decide whether the company will overcome the bad news. How do you know? Make certain that your target company has sound fundamentals. That is, its debt level is low, its cash flow is strong and the overall business outlook is positive.
Q: It’s easy for me to buy stocks, but I get attached to my stocks and have trouble selling. Many of my investments have appreciated considerably in the past few years. It seems like I should sell, but which ones, and when?
A: Wall Street has a saying for everything. Try these: "A stock well-bought is half-sold" and "you never go broke taking a profit." The first truism means that if you buy a stock at an advantageous price and the price goes up, you are a winner whenever you sell. As the second adage implies, if you sell a stock and make a profit, it’s a caught bird, rather than a bird in a bush that you may (or may not) be able to catch later. For the most part, you should invest and hold for the long term, but there are exceptions to that rule.
A friend of mine who prides himself on long-term investments recently sold his AT&T stock. He'd purchased the shares a little more than a year ago, and the price had more than doubled. "Any time you double your money in a utility stock in one year, I get nervous," he says. Shortly after he sold his shares, AT&T's price declined more than 12 percent. The moral? The best time to sell an investment is when it’s keeping you awake at night. But if you feel a company’s prospects remain strong and that any price decline would be temporary, stick with it.
Q: Is this stock market being artificially fueled by a constant inflow of money from retirement accounts?
A: The strong and rising earnings of many American corporations have fueled the stock market, but there can be little doubt that swelling pension and retirement funds have had an influence as well. With a record number of Americans holding jobs, we are socking away money in 401(k)s, and the new crop of individual retirement accounts approved under the Taxpayer Relief Act of 1997. The accounting firm of Ernst & Young reports that the aggregate dollar amount for 401(k) plans alone is quickly approaching $1 trillion.
August is a good time for investors to think through the preceding advice, summarize their own research and analyze their portfolios. With adequate preparation, you’re likely to have the upper hand in today’s ever-changing stock market.
Janet Lowe is author of several investment books, including "Value Investing Made Easy" (McGraw Hill) and "Warren Buffett Speaks" (John Wiley & Sons).
|
