Apr

26

Martha StewartOne of my daughters is not very experienced at handling money, so my wife suggested that she buy some stocks to put her foot in the water. She chose company names she knew and liked like Netflix and Martha Stewart and American Apparel. "A young person's portfolio," her broker said. On average they are up 25% in the last two months.

In looking at her portfolio, I made a Baconian mistake. I said Martha Stewart is losing money on every sale and the sales are down. Don't buy it. It couldn't be good. My wife said, "She has to learn. Let her do it it." That one's up 40% or so. I am reminded of the time Collab and I were in our first six months of writing. Five of my daughters or siblings came to me over a weekend with requests to start or fund an Internet company. As I said at the time, "if so many people are coming to me, down on my luck and fortune, why imagine what the supply and backlog must be among the real players. It's about to burst." One has similar thoughts about my daughter's good fortune.

Sushil Kedia adds his two cents:

netflixMy two cents:

1) In the beginning we always call them lucky only. Too little data to conclude yet. Commonsense becomes more and more uncommon as each of us goes onto accumulate experience and other tools. Let her have her way. Let her find her own victories and lessons.

2) When my daughter would begin trading in some years, I would go short or long against her positions on a paper trading system I will maintain quietly and separately. Once her positions are closed by her, I would share my paper-trading risk management system with her to see where the deviations are. I would let her learn from my mistakes and wins against her rhythm, without pulling her away from her own. 

Michael Cohn shares:

american apparel"The Junk Rally & Quants: guru Matt Rothman says both quant and fundamental metrics continue to struggle in the 'junk' rally as Valuation remains 'largely irrelevant'. His models continue to show that stocks with variables such as the high short interest, weak b/s, highest beta, continue to significantly outperform. So how long can the junk rally go? The current low quality rally started March '09 is among the longest such rally on record, but, the underperformance of 'Quality' stocks is still only now a 'moderate' (9%) versus (10-18%) u/p of similar periods since the 1950s."

This seems to be a widespread issue according to Barclays.

Ken Drees adds:

Always jump on beginner's luck if you can.


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2 Comments so far

  1. Andrew McCauley on April 26, 2010 8:40 pm

    Borges, Goldstein, Ortmann, & Gigerenzer (1999) found that a share portfolio based on simple name recognition alone may yield better returns than index.

    Other academics have downplayed the effectiveness of this recognition heuristic as a way of producing edge over index returns.

    Like most forms of market analysis it probably has a time & a place.

  2. Steve Leslie on April 26, 2010 10:08 pm

    31 years of investing in stocks and 24 of them as a financial advisor compels me to address this question. You state that one of your daughters is not very good at handling money. Does this mean she has a difficulty in managing a budget Does she state that her checking account cannot be overdrawn she still has checks left? If this is the case, I suggest she watches Suzie Orman on TV. Ms. Orman has some surprisingly good advise. Although I have not read her books, I understand they are easy reads and quite helpful

    Also Kiplingers magazine is an excellent periodical to subscribe to.

    If it is a case of investing, I would recommend she starts getting Invsstors Business Daily. It is well suited to the neophyte. And by purchasing the newspaper, she gains access to the online paper. A once a week trip to the library gains free access to such newspapers as Barron's, and a host of magazines. She can then work her way down the road to books such as Peter Lynch One up on Wall Street. Ralph Wanger A Zebra in Lions Country is another excellent introductory book.

    Then she can graduate to trading stocks. I suggest a hypothetical portfolio that she can open at Scottrade and she can trade a portfolio with hypothetical money. Then hopefully she can graduate to higher levels of thinking and books and periodicals. I have a few more recommendations if she is interested down the road. She can feel free to contact me. I would be excited to hear from her. You know how to reach me or she can look me up on facebook.

    Caution. I agree with you wife. Let her find her own way. She will be harmed by your intrusions into this journey. It is easier and better for her to receive counseling from a third party. A broker is now always a good choice as an advisor. I have written on the dirty secrets of the brokerage industry on this site in the past.

    Good Luck.

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