Are Stocks & the Stock Market Right For You & Your Family?

Beloved, I pray that you may prosper in all things and be in health, just as your soul prospers. (3 John 1:2 World English Bible)

Are stocks and the stock market right for you and your family? Here’s a primer to help you decide:

Over the long haul, stocks have proven to be one of the best performing asset classes. You can make a lot of money in the great years and lose a lot of money in the lousy years, with up years nearing 40-50% and negative years at 40-50%. The long-term returns of the S&P 500 index (over the past 45 years) has been about 12%. A word of caution is in order: If you decide investing in stocks is the right choice for you and your family, make sure you have a long-term time horizon.

Warren Buffet puts it,

The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do.

My warning to you is to enter the investment arena with caution. I can definitively tell you the stock markets will go up, they will go down, they will move sideways, and they will fluctuate. If you can figure out when each of these events will take place, you can make a bundle.

So, what exactly is a stock?

It is a “share” representing ownership in a corporation. If you buy a stock in a publicly traded company, you become a shareholder. As such, you are a partial owner and have a claim to your proportional share of the corporation’s assets and earnings.

For example, say a company has 100,000 shares of stock outstanding, and you purchase 1,000 shares. You now own 1% of the company. Pretty neat, huh? You can own a fraction of some of the greatest companies in the world and share in their profits, growth, and revenue.

Stocks are normally categorized as either growth or value, as if life were really that simple!

Growth stocks are expected to have above average increases in revenue, earnings, and business expansion. They are growing at a fairly rapid rate, which implies that increasing profits will follow. A few examples of growth stocks are Stamps.com, NVIDIA, and Facebook.

Value stocks, on the other hand, are perceived to trade at a price below what they should based on their financial conditions. In other words, they appear to be trading at a discount or as undervalued. Value stocks are typically considered to be less risky than growth stocks.

It’s not risky to buy securities at a fraction of what they’re worth. –Warren Buffett

Here is the biggest point to take away from this newsletter: Your success or failure in the stock market, or any other investment for that matter, is directly proportional to the price you pay. If you overpay for your stock, it might take years to make a profit. If you buy your stock on sale at a deep discount, you have potentially less downside risk and more upside probability.

Yahoo shares make a great example. If you bought Yahoo in January of 2000, you paid a hefty $237 per share. Fifteen months later, Yahoo was trading at $11, a 95% decline—ouch!! It might take a couple of lifetimes to break even on this not-so fortuitous trade. If, on the other hand, you purchased Yahoo when it was trading at $11, you would have had a 600% gain in less than five years! Same stock, different purchase price, completely different outcome.

What is smart at one price is dumb at another. –Warren Buffet

Put bluntly, buying securities at extraordinarily high prices is economic suicide.

Thanks and blessings!