Synopsis :
Book by Byron Christopher
Extrait:
Chapter One: How the Internet Has Changed Investing
This is a book about investing on Wall Street. It's also about investing on the Internet and about investing in the Internet. This book won't make you rich -- at least not in the Bill Gates scheme of things -- but if you've already got a few dollars, it might help keep you from getting poor...as well as help you make your money grow. It should help you to match, or even beat, the broad market averages -- and it may even show you how to have some fun while doing so. It is written from a perspective of thirty years as a financial writer and columnist covering Wall Street, as well as, from time to time, that of an investor.
It is written in the belief that, in numerous and important ways, the advent of the Internet and its graphical offspring, the World Wide Web, have fundamentally changed the way Wall Street operates, tipping the balance of power for the first time away from professional investors and speculators, and toward everyday individuals. Almost anything -- and I mean anything -- that a professional investor, hedge fund manager, mutual fund portfolio manager, or brokerage firm desk trader can do with his $12,000-per-year stock trader's terminal and his $100,000-plus research reports, can now be done by any individual with a personal computer, a modem, and a $20-per-month connection to the Internet.
But don't quit your day job just yet, because there is a second belief that underpins this book -- namely, that no matter how much you wish it were otherwise, the odds are greatly, indeed impossibly, against your getting rich overnight and staying that way for any appreciable period of time. The structure of the market is against you, some of the cleverest card-counters on the planet are against you, the tax laws and technology are working against you, and on top of all that you've got the powerfully disruptive and unpredictable forces of human psychology working against you.
As I write these words in the spring of the year 2000, something approaching a kind of mini-panic seems to have gripped Wall Street. After years of rising stock prices -- capped by six months of an unprecedented further surge that erupted when people thought prices could absolutely, positively go no higher -- the market just as abruptly turned around and started dramatically dropping. It took nearly thirty years for the NASDAQ Composite Average to climb to the 4,000-plus level (and, briefly, 5000-plus) that the index reached by March of the year 2000. Then in scarcely a single sickening week, it lost 25 percent of those thirty years' worth of gains.
Some stocks -- particularly in the technology and so-called dot.com sectors, which people had thought could only go up -- went down so fast it became impossible to sell them. Many stocks lost 25 percent or more of their value in a single day -- not just one day, but day after day after day as the slide progressed.
On the first trading day of the year 2000, ReSourcePhoenix.com, a California-based Internet company with more than 200 employees, sold for $25 per share and was worth $280 million on Wall Street. Investors who held the shares had watched themselves grow rich beyond their dreams, and many had pledged their shares as collateral on loans to buy yet more stock, or put additions on their homes, or take vacations, or buy sports cars. You name it.
Three months later, ReSourcePhoenix.com was selling for $1.65 per share, and the whole company was worth less than $19 million on Wall Street. In other words, 93 percent of its value had been wiped out, and investors have been taken to the cleaners. By the summer of 2001, the price had dropped to a mere one cent per share.
Obviously, no one can know what the future holds. Were it otherwise, the person with that knowledge would, in the end, wind up with all the money. But we can know what happened in the past, which means that, by slow and careful navigation, we can move forward by constant reference to the rearview mirror of life. And in the end, that is all that investing in stocks is about: trying to figure out where we are headed by looking at where we have been. As we'll see later in this book, the most important single lesson history teaches us in that regard is that, over time, stock prices always rise, but that they do not rise, over the long sweep of years, at more than about 10 percent to 15 percent annually. The corollary to that fact is this: When stock prices do rise beyond the norm, the day comes when they fall more than normally, so that, in the end, the growth rate returns to the norm.
This means that the mood of seeming panic that grips the market as I write these words could vanish tomorrow, and stock prices could begin soaring all over again. But any movement of prices -- either up or down -- outside the norm will eventually be offset by a counter-balancing move in the opposite direction.
Trying to anticipate when those moves are about to occur -- in effect, to snatch the money and run -- is what market timing is all about, and the odds are greatly against getting it right.
* * *
The purpose of this book is not only to help you recognize and appreciate the difficulty of trying to time the market -- to anticipate its ups and downs -- but also to recognize other pitfalls and opportunities of the market -- and to exploit them to your benefit. Some of these opportunities and pitfalls were once limited to Wall Street professionals, but thanks to the Web are now open to everyone.
This book will actually take you into the Web itself so you can look at and understand exactly what is being discussed in the text. Throughout this book you'll find what are known as hyperlinks.
Just type these Web addresses exactly as you see them into your computer's Internet browser and you'll be transported directly to the Web site page that is being discussed in this book. Since the World Wide Web is like an enormous global library in which the librarians are constantly moving around the locations of the books and periodicals, some of these links may be out of date by the time you read this book. So just type the following: www.deleteyourbroker.com, and you'll be taken to a Web site that will list updated links for your convenience.
In this book we'll look at the risks and rewards of day trading -- an activity that basically boils down to trying to anticipate minute-to-minute moves in individual stocks on the NASDAQ electronic stock exchange. Day trading has become an extraordinarily popular pursuit among individual investors in the last couple of years, not least because of the almost deafening level of promotion that has accompanied the growth of online investing itself.
Nonetheless, one of the conceits of this book is that you can lose your pants as a day trader, and that you should stay away from the activity. For one thing, the technology of home-based Internet connections just isn't reliable enough to be dependable on a minute-to-minute basis, and in day trading, minutes (and sometimes even seconds) can mean the difference between profit and ruin. What's more, as a day trader an individual gains no advantage whatsoever against professional traders at major investment firms like Goldman Sachs, who have been doing exactly the same thing for years.
Even so, as an online investor you should at least know what day trading is all about and how it works -- if for no other reason than because you can sometimes profit greatly from the pricing distortions created in the market by the day traders. In short, you don't have to be a day trader to make money from day trading, but you do have to understand how it works and what drives it.
Thus, if you were to type the following hyperlink (known as a URL, which stands for something that we don't need to care about) into your browser -- www.daytradingstocks.com/tradinglinks.html -- you'd be taken to a Web site that lists over 100 different further hyperlinks to businesses and firms engaged in one aspect or another of day trading. You could spend the next four hours clicking from one link to the next, but this book will save you the trouble by identifying which links are the best, and why.
This book will also discuss the all-important topic of fundamental analysis. The hyperlinks in those chapters will show you precisely how to find the most valuable, up-to-the-minute information to undertake your own, independent, unbiased such research. Why is this important?
Because for generations fundamental research on individual companies has been the premier investment tool of every major brokerage house on Wall Street. But generally speaking, the highest quality reports have been almost completely unavailable to individuals -- at least until after the investment firms that prepared them have shared their contents with their major institutional clients. This in turn means that the opportunity for individuals to profit from the buy or sell recommendations contained in the reports have all been exploited and leeched away by the brokerage firm's institutional clients by the time individual retail clients ever see them.
All the major brokerage houses have both institutional and individual retail clients (that's you) -- and in every food chain, the individuals rank at the bottom.
In this book, I'll show you how to set up your browser so you will be alerted whenever one of these reports is distributed by an investment firm to its institutional clients.
For example, click on the following URL --
http://www.jagnotes.com
-- and you'll be transported to the sign-up page for a service called JAGNotes. This service costs $9.95 per month and offers an early morning daily commentary on its Web site of just about everything that nearly every major Wall Street firm is telling its major institutional clients about the market, and individual companies within it, that morning. A lot of this information comes to JAGNotes via cable TV and various Web sites, so if you don't want to spend the money for the JAGNotes service, you can set up your computer to do many of the same things the JAGNotes people are doing.
Best of all, I'll show you how to produce your own reports on almost any publicly traded company using exactly the same raw information that the investment firms themselves use. What's more, because you'll be doing the research (which is surprisingly easy), you'll know it is being done correctly -- which is something you cannot always be sure of in the work of investment firm analysts.
The best, most up-to-date fundamental research information on any company comes from its latest financial reports filed with the Securities and Exchange Commission. There's an astonishing array of information contained in those filings -- from how much revenue the company has been collecting to how much it has been paying its top officials in the form of salaries and bonuses. You can even find out if the top executive gets free health insurance or a company car.
All this information, and more, is available for the taking from the forms and reports that publicly traded companies must file with the SEC on a regular basis. There are 10-K forms and proxy statements, 8-Ks and IPO registration filings...a torrent of arcane-sounding material that pours into the SEC every day of the year, covering just about every financial matter imaginable.
Up until about four years ago, you could get these documents in only one of three ways: either phone or write to the investor relations department of the company itself and ask to be mailed a copy (don't hold your breath waiting for it to arrive); go to the public reading room of the SEC's regional office in New York City (or its headquarters in Washington, D.C.) and make a photocopy; or hire a document retrieval and research firm like Disclosure Inc. to do it for you.
Whichever way you chose, you'd have been in for a long wait -- and in one case a major expenditure of money -- before you ever got your hands on a single document. Meanwhile, whatever useful information might have been contained in the reports would assuredly have already been discovered -- and acted upon -- by Wall Street's research analysis, leaving you with nothing in the end but a lot of wasted time and money for your efforts.
Thanks to the Web, you can now get these documents the very instant they are first filed with the SEC -- and you can get them for free. Not only that, you can make watch lists to alert you when specific companies you are interested in submit their documents to the SEC -- and that service is usually free too.
Since May of 1996, these reports have all been submitted to the SEC in computerized form and stored in the SEC's EDGAR database. (EDGAR is an acronym for something, but it doesn't matter what). In any case, you can get instant access to these reports from more than a dozen different Internet-based services, a number of which are now free to the user. Click on the following URL and you'll be taken to one of them: www.edgar-online.com.
But how do we make use of such copious information as investors? What's the difference between income and cash flow anyway -- and does it really matter? What's the difference between short-term and long-term liabilities, and does that matter? Likewise for goodwill and intangibles? What is deferred revenue and why should we care?
These are the sorts of questions that form the grist of fundamental stock analysis, yet for generations on end, Wall Street has so jealously guarded the answers that you'd think they contained the formula for Coca-Cola. An entire vocabulary of befuddlement and confusion has evolved along the way -- a language of obscurantism designed to suggest that only a high financial priesthood has been admitted to its secrets. For example, here is how a stock analyst for the Wall Street investment firm of FAC/Equities at First Albany Corp. described financially attractive investments in the Internet sector in the autumn of 1998:
[those that]...enable and optimize the commerce process for businesses by using technology as an enable.
In this book, we'll demystify the terms -- and the process -- of fundamental analysis, exploring in detail, in everyday language that anyone can understand, how to use such reports without going crazy in the process. You can set bookmarks in your computer to be taken to sites that contain well-prepared, easy-to-use glossaries of these terms. For example, here is the address of one such glossary, maintained for free by Microsoft Corp.:
http://moneycentral.msn.com/investor/Glossary/glossary.asp.
We'll also show you where to find inexpensive -- and even free -- software tools that you can use to automate much of the research process itself. Here's one such link: www.spredgar.com. Click on it and you'll be taken to the Web site of a marvelous little program that will automatically process the raw financial data of any EDGAR-based quarterly filing or annual report into every ratio and chart conceivable. Securities analysts charge tens of thousands of dollars for this sort of thing, but you can do the same thing for the one-time cost of the program, which is $125 for students, and $250 for everyone else.
Yet other chapters in this book are devoted to what is known as technical analysis. Simply stated, technical analysis of stocks is an activity that could not exist in its present form without computers. Yet now that computers are ubiquitous throughout Wall Street, so too is technical analysis. Over the last two decades, this seemingly arcane pursuit has developed into what is arguably the single most important factor affecting the course of the market on a day-to-day basis.
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