• The inevitable happened, and those wise enough or smart enough to quit while they were ahead made good money in this multi-year economic rising. For the average Joe who let the supposed “experts” handle their money, they lost close to half of everything if not more. This is why I quietly get filled with rage whenever I see mutual fund commercials.
• It is pretty amazing when you sit back and think about all of the corruption that has been going on in the past years that led to this economic crisis. Numerous people are coming out now and speaking about how horribly corrupt things had gotten, yet there was nothing that could be done to stop it. If you had a conscience and wanted out (regardless of what industry you worked in that contributed to this disaster), you were quickly and easily replaced by someone else. If you tried to warn people, as many economic advisers did, you were simply ignored by the public and the media because everyone was too happy making money in the short term.
• I’m quite conflicted as to my own performance for 2008. While I was mostly cash for the entire year (and thus could not gain or lose much), percentage wise my portfolio ended 2008 down roughly 18%. That should be awful news, but in comparison to the S&P 500’s own performance, I could be doing considerably worse.
• In the end, we reap what we sow. Greed and corruption were rampant, and now we’re in a deep recession. However there’s always a positive way to spin something, and I expect this recession to boost our country’s economic and financial conscience for at least another 20 years. Too long has apathy been a characteristic of our nation, and hopefully now people will begin to care.

Happy New Year everyone, and may 2009 bring us a much brighter tomorrow.

Sometimes investing can be incredibly simplified using common sense techniques. Applying common sense to your investing usually results with profitable returns too. The reason that using common sense works is that for some unexplainable reason there is a lack of it used in the stock market. As such, you can use common sense to somewhat predict/anticipate future stock market moves.

As I write this article, the stock market has taken an ugly tumble downward in the past few days. Fortunately for me I haven’t had so much as a penny invested in any stocks right now. The reason why I have my portfolio positioned 100% in cash is because I anticipated a poor start to the new year. How was I able to do it? I used common sense. Here’s how it’s done…

Look at the variables, and “become the market”…

Last year ended on a bad note with stock prices falling heavily. Meanwhile, oil prices were rising, concerns of recession and stagflation were becoming more prevalent, and the real estate crisis just kept getting worse. Despite the fact that many stocks were getting lower in price and looking attractive, I had to take a step back and ask myself some common sense questions. Questions like “Why would I want to be buying stocks right now?”, “What reasons do we have to look forward to a strong economy this year?”, and “Are we just delaying the inevitable recession?” ran through my mind.

Eventually the answer became clear that stocks were not the best choice at the moment. I also knew I wasn’t the only one who saw all of these red flags, so I anticipated that “the market” would feel the same way and wouldn’t want to be buying stocks right now. Going back to basic economics, more selling and less buying means lower prices.

That my friends, is common sense investing.

It feels great to have outperformed the market this year. This year ended with my portfolio up 15.78%, while the three major indices (S&P500, Dow Jones, Nasdaq) finished up for the year 4.24%, 7.24%, and 10.73% respectively. However the most significant percentage is the S&P500’s 4.24%, as the S&P500 most accurately depicts the entire stock market’s performance with its broad range of companies listed within it. With that in mind, I beat the market by over 300%!

For the most part I’m not saying this to brag, I just want my readers to see that I am a successful investor and I am capable of outperforming the market. So how did I do it? I was 100% in cash when two stock market corrections occurred in 2007 and I explain how I was able to do this with my article “How to Avoid Stock Market Corrections and Crashes“. Further, I invested with a list of rules to invest by created by myself, and stuck to investing only in stocks with good fundamentals.

My biggest winning stock of the year was Apple, a stock I horribly regret not holding onto longer. I learned this year that if I believe a stock is great but the economy/stock market looks troubled, I should only sell a portion of my shares. I made the mistake of selling all of my Apple shares because I was too worried about a stock market crash.

It’s funny to me when I think back to the first day I opened an account with Ameritrade and bought my first shares of stock. I knew so little about investing, the stock market, and economics at the time. But I couldn’t care less; I was so enthralled by my fascination for the stock market that I ignored all rationale and dove head first into the stock market like a man into a sea of hungry great white sharks. This is the pathetically humorous story of my introduction to the stock market.

How it started…

It started in late 2005 when during a conversation with my girlfriend she mentioned that she owned some shares of Coca-Cola. I remember thinking it was interesting, but didn’t give it much thought and our conversation quickly turned to other subjects (because I’m a random topics kinda guy). After a short period of time though I began thinking about the stock market and it reminded me of an online video game I used to play that had an economy in it. And of course when I played that game I was incredibly diligent at having the best items and most gold, so I quickly learned the ins and outs of that video game’s economy. So with this in mind, I thought it would be amazing to see what it would be like if I applied that passion to the real economy and stock market.

So I went to the Ameritrade’s website and opened up a brokerage account with them and funded it with the bare minimum. I remember thinking how overwhelming everything was. I was switching between tabs and asking things like “What is a market order?”, “What is volume?”, “What should I buy?” as if I had any idea what I was doing. I played around with the web site for about fifteen minutes and somehow concluded that I was ready to buy my first shares.

Want a free a song? My first shares…

I chose the incredibly successful company known as Napster for my first stock purchase. I really can’t remember why I chose Napster; I never used their paid service, and never thought it was anything worthwhile. Nonetheless I felt like a proud owner, joking with my friends that “I own 0.000017% of Napster, want a free song?”. Of course I didn’t even own that small percentage, because I was doing my calculation based on the daily volume instead of the stock’s market capitalization (not understanding the difference).

I had bought about $800 worth of stock, and became incredibly excited when I saw the share price rise a few cents. I didn’t understand the concept of percentages and was only concerned with the immediate dollar value changes. I eventually went on to sell the stock for a gain of nine dollars.

The bottom line…

I can’t believe how naive I once was and how ridiculous my thought process used to be when it came to deciding what companies to invest in. I would sit and think “Which company will come out with the next iPod?” and then go out and invest in stocks like Nike for no real arguable reason. But I can’t say I regret this since it all got me started on my path to investing properly and investing successfully.

You can take some lessons from this story of my start into the stock market if you are a non-investor thinking about getting into it. If you want to dive head first into investing, trading, and the stock market, just remember there is an incredible amount of ideas, concepts, and terminology that you need to learn. In my story alone I didn’t understand

• Volume
• Order types
• Market Capitalization
• Percentages over Dollar values

And that’s all while not investing without any sort of plan or strategy. If I had to do it all again, I would’ve read all those stock market books before I started buying stock, not while I was already buying stock. The only good part of all of this is that I invested with a very small amount of money that I could afford to lose. So even if I lost every cent I wouldn’t be living out on the streets, and would atleast have gotten an education if I failed.

How did you get started?

How did you start out investing or trading in the stock market and what inspired you? I’d love to hear from everyone what got them started and what rookie mistakes they made. Don’t be shy, leave a comment and tell us your story! It can’t be any worse than me buying shares of Napster (I was being sarcastic earlier about it being an incredibly successful company if you didn’t notice).

E-Trade Financial (Ticker Symbol: ETFC) is showing their appreciation to their loyal customers by offering one full day of commission free trading on Wednesday Dec 19, 2007. This is coming after E-Trade’s stock price recently plummeted on lending troubles followed by rumors of takeovers or bankruptcy.

As you may or may not know, I use E-Trade for all of my investing needs and I’ve always considered them to be one of the best online stock brokerage firms. So I was very worried when this happened, and took whatever money wasn’t invested in stocks out of my E-Trade account and into a more stable bank until the chaos ended.

With all that being said, I am not too impressed by this “show of appreciation”. I am not a day trader and I’m willing to bet that a good majority of E-Trade’s customers aren’t either. So the typical investor won’t benefit from this at all, unless they decide to go buying up stocks on Wednesday. However that is definitely a bad idea since the stock market is looking increasingly bearish and the average investor does not participate in short selling.

So really this doesn’t offer any value to E-Trade customers and I’m assuming that it’s intentional. Their image gets boosted while simultaneously not loosing much in potential commissions fees. If E-Trade really wanted to show their appreciation, they’d offer X amount of commission free trades instead of no commission fees on one specific day.

I’ve been investing very conservatively this year. My intention was to see how well I could in the stock market when I ignored my desire to get rich quick, and embraced the ideals of a value investor. I’ve been very successful off of this mentality, and it’s quite ironic if you think about it. At the same time, it’s a fundamental key to having success in the stock market; invest with a clear mind, not with a greed filled head.

If all goes well for the rest of the year, I’ll finish with much gained and needed confidence. I know next year will be promising after everything I’ve learned in this year. I’ll look to continue my strategy of value investing and short term investing while still being cautious. The only issue I see for next year will possibly be the sub-prime market meltdown affecting the markets, which would ultimately hurt me as I don’t like to short the market. I’ve tried shorting the market without much success, and atleast for now you don’t want to be a bear in these markets. The Fed is fighting with everything they’ve got to keep our economy and our stock market growing.

Aside from that, there are some other significant issues I have with providing stock picks:

Legal issues
I’m not a laywer and I’ve never studied law, but I know that providing stock picks is just asking for legal issues that I don’t have time to deal with. This site is just a hobby for me, it’s not my main source of income, so it’s just not worth the hassle for me.

I change my mind often
Even though I consider myself as a successful investor, I am willing to admit that I can be wrong often. When the market reaches pivotal points where it could rally or plummet, I often change my mind on my feelings towards our short term future in the stock market. It would be incredibly time consuming and confusing to my readers if for example one day they read an article where I explain why I feel like the stock market is poised for a correction, and then the next day I write another article dismissing the former while giving more well thought reasons for my beliefs.

Psychological Reasons
One thing that’s rough for stock market analysts is that you are expected to never be wrong. People look up to you and expect that with your higher knowledge you are somehow infallible. This just isn’t the case. In some cases, analysts who make bold predictions that never come into fruition begin to go into denial. In these cases analysts attempt more than ever to convince people that their original prediction is simply ahead of the market, when in reality it just isn’t going to happen. These analysts go through depression, embarrassment, and all kinds of emotions because of the disappointment and disapproval the readers show for that analyst. As I said before, this site is just a hobby of mine, investing is my main source of income, and the last thing I need is stress from my stock picks leading to me becoming an irrational or emotional investor.

I believe that the chaos and voilatility that the market has been experiencing for over a month is going to finally settle. We have a clear and official stance by the Federal Reserve, and it is the correct stance. The goal is to keep inflation under control, while maintaining moderate economic growth. Now, I will begin to reinvest in the market, but I will do it slowly and cautiously, as there is still the possiblity of big events occuring like the Fed taking action if they see the economy begining to deteriorate due to the subprime lending issues.

Since I just created this blog today, I’d like to quickly recap my portfolio for the year. In February I went on the sidelines (definition) because I felt the market was unstable and had too little reason to climb higher, and two business days later, the market had a correction. My timing was so fortunate, but my reasons for going 100% cash were justified. The DJIA dropped roughly 400 points, and I was able to sit comfortably at my desk and enjoy not having to lose any money. I continued to stay out of the market as there was chaos for about 2 weeks. When the DJIA went down nearly 1000 points and was in the low 12000 range, I re-entered the market, investing in what I consider low risk investments, such as ETFs that mimic DJIA and S&P500 indexes.

As I write this entry, I am roughly up 14% for the year, the DJIA is up roughly 6% for the year, and the S&P 500 is roughly up 3% for the year.