[note: the following is only geared to those who are inclined to invest in individual stocks.] natrol melatonin

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When you need to buy something like appliances or other household products, do you just go out and buy it?  Of course not; you do research into the features of a particular model, compare it with the features of similar products made by other manufacturers, check the warranty that comes with it, and possibly read up on consumer reviews.  Well, I can tell you that investing is the same way, particularly when investing in individual stocks where the resources available for doing research are abundant.  The same principles go into shopping the same way for investments as they do for a new kitchen appliance.

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If you like a particular stock, the first thing you do is read up a little on it.  You try to find out as much about the company as possible: historical returns, price history, relative volatility, strength or weakness, insider trading trends, expert analysis, etc.  You compare the stock to others in the same industry and market capitalization.  If you are capable, you even examine the company’s financial statements to get a better idea as to the sustainability of growth and the ability to continue its existence.  You do your due diligence to ensure that you are making a wise decision.

When making a decision to purchase items such as appliances or household goods, your first inclination is to check out products made by those companies with whom you have previously had good experiences.  If your Whirlpool dishwasher lasted twice as long as you had thought, you are most likely going to first consider another Whirlpool, if your Sony television was the best you have ever owned and lasted what seemed like forever, your first inclination would be to look into replacing it with another Sony.  The same theory applies when shopping for stock.  If you have experience using a company’s products and know that they are quality, reliable, useful products that is a good sign.  It also helps ease the nerves when you are more familiar with the company and its products rather than simply investing in a company that you’ve never heard of much less its products.

When you read the Sunday ads and see a great product on sale, do you think that it is selling for a reduced price because it suddenly isn’t worth as much as last week?  Probably not.  It may be that other stores are marking the same product down because it is a high-margin item and they can afford to make less on each unit while making up for it in volume.  A similar concept applies to stocks as well.  When a company or two in a particular industry is doing poorly, it sometimes affects others within that same industry, however unfair it may seem.  Related stocks seem to have a positive relationship when it comes to share price: when one goes up the others tend to as well, and vice versa.  One of Jim Cramer’s most important rules is:

Buy broken stocks, not broken companies.

What that means is that there are some companies that are guilty by association so when they are in the same industry as a broken company the negativity tends to rub off them as well.  Today’s market is an example.  Are there some broken companies?  Sure, but are they all broken, of course they aren’t.  It just so happens that there are massive amounts of broken companies, which is turning some very good ones into companies with broken stock.  Obviously, the broken companies are the ones who have filed, or are exploring bankruptcy protection, but it takes some time to research and find the ones that are just down due to the overall climate affecting the market.

It goes without saying that this only applies to those are investing in individual stocks.  But you should ask yourself one question if you do: After you do all of your research and are confident in a particular company, and like it at a specific price, wouldn’t you like it even more at at a discount, regardless of whether it is 5% or 20%?  I doubt that anyone would say no if it was a quality refrigerator from a reputable manufacturer, so what is the difference between that and the stock of a reputable company with strong financial that just happens to be caught in the market’s downturn?

This entry was posted on Friday, December 12th, 2008 at 11:13 am and is filed under general. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.