Expert: Paul Henneman - 5/12/2007

Question
Hello Paul,

I know your description specifies your expertise is primarily long term investments, but I would like to attempt submitting my question.

I'm 26 years old and want to start investing increments weekly into an investment for the next 12-24 months to gain some capital to move into an apartment.  

I would like to take a risk and have focused on a particular stock AAPL, but also observing and tracking others like Altria, Proctor & Gamble or Johnson & Johnaon, Boeing, General Electric, Exxon Mobil, Encana, Amgen or Celgene. My only concern is it has been suggested to me by a family member who has been burned by various stocks that I need to allocate in a mutual fund which isn't placing your investments in one single stock.  

I wanted to get your thoughts because it seems that mutual funds are dedicated to a longer window than a few years, and since they are a portfolio of many different stocks the percentages of shares in stocks are actually very small values.

I'm looking to take a risk because I would like to make the largest possible gains to my investment, but I also am skeptic because its a short term investment and I don't want to get burned like I have been warned can happen while mutual funds take a conservative approach.

Thank you for any assistance,
Mike

Answer
Thank you Mike for your question!
Yes, this is perhaps the one absolute truth that almost no one would argue about regarding investments: the higher the returns you are seeking, the more risk you have to take. There  simply is no way to earn a high return in a short time without risk.
Your family members advice is right, if you try to do this, you very well may get burned. It is also always possible that you will do well. But let me try to give what I think are reasonable expectations.
You mention AAPL. This is a huge company, and if things go your way you may see at most a 20 to 30 percent return over the next year. Likewise you could also lose money.  I could be mistaken, but from the tone of your question it seems to me that you are looking for much more than a 20 to 30 percent return in the next year or two. The only real way to do this would be to invest in a very small, aggressively growing company, commonly called 'micro cap'.  The stock price should be less than $5, and the overall market cap of the company should not be over a few hundres million, perhaps much less. These are the types of companies that can see quick growth and rapid increase in stock price. I do not recommend this, just trying my best to provide some information for you. Keep in mind that the reverse applies, these companies can also see a dramatic decrease in stock price.  The best advice I can give is to consider an investment like this a gamble. The worse your odds, the more the payoff, but you stand a great chance of losing most of your investment.
There are some books out there that can help. Perhaps the best known are the books by William O'Neill, the founder of Investors Business Daily (IBD). Any of his books will do, he describes a detailed strategy to identify companies with rapid earnings growth, and has strategies to minimize your losses if things do not go your way so that you can try again.  It is not easy, you may find the material a big over whelming at first. But this is what is needed unless you really want to take a shot in the dark. O'Neill's books are available in most major bookstores and on www.amazon.com

I also strongly urge you to pick up a copy of "Investing for Dummies".  This will give you the basic knowledge and familiarity with terms and the various data that investors look at, you will have an easier time with O'Neill's books if you read this first.

I hope this helps! Please do not hesitate to follow up with me if I can be of any additional service,

Sincerely,
Paul Henneman
President
ValuEngine Inc
www.ValuEngine.com