Expert: Paul Henneman - 12/28/2005

Question
Hi Paul

Thank you so much for your responce, talk about information ! I have my work cut out for me. let me tell you my situation and how i came about all this. I was watching 60 minutes and saw this stock guy Jim Cramer and started watching his show, I started noting the stock picks he was making and so far over 90% of his picks are making money.Granted its only been a few months since i started. I bought his book and havent read it yet, but will. I watch his show Mad Money on CNBC nightly and its fun to watch. I admit I am new so a lot of the terms are lost on me. But the guy does his research.

Financially i will be in great shape in 2 years, My car will be paid for and I can save around 400 per month to pay off my 2 ( count em ) 2 credit cards. I am about 5 grand in debt and once i get the car paid for i can pay off the cards within a year. It's just getting to that point.

In ten years i will have my house paid off and save 750 a month. of course thats way off. Every year i borrow againt my pension loan and set it up so its paid off every year. Since its only 5% interest im making out well there. I can borrow 4500 a year to fix up my home and pay it off. After a few years I wont have to worry about fixing it up and Im hoping in 5 years i can seriously start socking away the money and help myself.

I have 15 years working as a public employee and can retire with medical after 25 years. Like i mentioned my boss is an idiot and i was never informed that my workplace had a 403b. So i lost out on 10 years of savings. Since then i have joined and take 100 per month to it. I am thinking of adding more to that amount down the road.


The way it sounds, stocks are very tricky and you need a lot of money to really make out in it. The one thing i never know is exactly how long should one hold onto a stock ? But im sure that question will be answered in those references you gave me.

Again, thank you so much for your information !!





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Followup To
Question -
I am new to the stock market and have never owned any stocks. I am 42 and I have to start thinking about my future because i got screwed at my workplace. I was never informed about opportunities and lost out.

I am watching this guy on tv and 90% of his stock picks are making money. I figure i would try to jump in and cash in.

The one thing I notice is that these online trade companies are asking for 1000 minimum and i dont have that kind of cash. Simple question, Cant i just buy the stock outright? Do i need to depost large amounts of cash into some online account?
Answer -
Thank you Richard for your question. It is true that you must create an account with a brokerage firm in order to buy and sell stocks. Most brokerage firms do require an account minimum. Even if you are able to find one that does not have a minimum, if you were to invest less than $1,000 you would have most of your investment taken up by trading costs. I can cost anywhere between $6 and $20 to buy or sell a stock. This means that a good deal of any returns you see would go to covering trading costs.
I would also suggest being very skeptical of someone claiming to have 90% success rate. One of two things are happening if this is what you see with this person. He could be having a run of good luck, it won't last. Or, it is easy to manipulate number to make success seem higher than it is. For example, if this individual has a large number of people following his recommendations, then when he makes a stock pick it will almost surely go up. So many people buy after his recommendation that the price is driven upwards. His performance looks great. But it becomes a contest for all of his subscribers to trade as quickly as possible or you miss out on the performance. This is a contest you cannot win, institutions and high net worth investors have access to trading systems that can execute far before you would be able to. Be carefull! If you try this, do it with a very small amount of money at first.

I understand your frustration. However, there is no easy answer in the stock market. You can just as easily lose your investment as make any gains. There are millions of folks trading stocks, many of whom are professionals and have studied the market their entire professional lives. You will be jumping into this, it is not an easy place to be. That said, carefull investing can set you up for the future. At 42 you are young enough to begin creating a real financial plan. Carefully planning will set you up very well 20 to 30 years from now. I have included my thoughts on how to go about this below, I hope that it is helpful!

I believe that you should think of things in terms of three different categories, and I will offer further specifics on each:  1. Debt reduction to lead to debt elimination 2. Education 3. Action

1. Debt Reduction and elimination of debt:
Start immediately with this. It is key to the financial well being of everyone in the future. People in this country has a very bad habit of running high debt in the form of credit cards, car loans, and all sorts of credit for just about anything.  Credit is so easy to get, it is difficult for many young people to resist. By the time most of us are adults, the terrible cycle of high debt is already established. The first key to a wonderful lifestyle in the second half of life is to resist this.
Most credit cards charge 15% or more in interest. It does not make sense to invest when folks are paying so much extra for each purchase! If you have credit cards and/or car loans, pay them off. This usually frees up hundreds and hundreds of extra dollars each month that normally goes to these bills. This can be used to both invest and improve your lifestyle. If you can't pay cash, you can't afford it! The exception is real estate, as that is 'appreciating asset' that increases in value.  It is a good move to purchase and own a home if it is feasible.
There is nothing worse than paying high interest on a car, then having that car decline so rapidly in value as you use it, possibly the worst of ‘depreciating assets' that exists. Of course we all need cars, but if the money is not there, don't buy an Acura when a Honda will do so to speak. Put as much down as possible, and see about a 3 year or less loan. The goal is to pay it off as quickly as possible, then drive it 'free and clear' for as long as possible. Cars are perhaps the largest things standing in the way of most people having a truly wonderful second half of life.  We are conditioned to buy the most expensive car possible and this is a huge drain on our finances.
Good investors can double their money every five years. Take the $25,000 price tag of an average car these days, go out 40 years, and see how much that car actually costs!

2. Education
Successful investing takes discipline, education, and patience. A plan should be established and strictly followed for decades. My suggestion is to spend the next six months researching. Start with "Investing for Dummies", available at amazon.com and most major bookstores. This will give you the basics on most major forms of investment, and you can do further research on what appeals to you. In general, the higher the possible return of an investment, the more risky it is. As an example, a money market account will earn you about 2% a year; this is a very low gain. But it is perfectly safe and you would get that 2% every year without fail. A portfolio of stocks can earn you on average 20% or more each year. But some years will be good, and others bad. Many investors lost half or more of their worth during the bad markets of 2001 and 2002. However, over a long period of time, the risk evens out and the returns are much more substantial. An average of 20% return each year would double your investment every four years. (Not every five, as you have to account for the growth in the portfolio for the next year returns).  Another good resource here is any of the books written by William O'Neil, founder of Investment Business Daily. Keep in mind this is one approach, but he goes into depth on how he successfully selects stocks and builds a stock portfolio. Always read with a critical mind, no one has the holy grail when it comes to investing. If they claim that they do, it is a scam. There will always be failures, but the idea is find more successes than failures. This is very possible over time.
I believe that the ultimate solution is two fold. First, move slowly. While stocks and other investments can treat you well, they can also treat you very poorly if the wrong decisions are made. Start with a money market, this is a great place to 'park' your savings while you learn more. The one I like best, with the highest returns I have seen and FDIC insured (very important) is www.NetBank.com. Then I suggest mutual funds. Do your research. The book I mentioned above will help, and www.morningstar.com is perhaps the best-known source of mutual fund information available. Lipper is another. When you have more than $5,000 invested, branch out to several mutual funds that specialize in different areas such as real estate, technology, health care, utilities, or others. That way if a specific industry does poorly, you will not feel it too badly.
Only after a few years or whenever you feel confident should you venture into stocks. But start practicing right away. Begin researching possible stocks you would want to invest in (again the book I mentioned will help you learn what to look for).  Track your ideas on a free service such as yahoo.finance.com and see what your stock picks do.

3. Action
When you are finally ready, my suggestion would be to have 20% of your portfolio in safe investments such as bonds and money market accounts, 30% in stocks and 50% in mutual funds.  You will likely not have a large amount to start with, so begin with a mutual fund. Continue to contribute every month, and it should grow further in addition to the returns you get. When you have enough, buy into a second, then a third mutual fund. When you have at least 10 to 15 thousand in mutual funds, begin to think about a stock portfolio. Always hold a basket of stocks, not a single stock, as it is too risky if you are wrong in your decision. For trading services I like www.FOLIOfn.com the best, www.ScotTrade.com is also good.  These are discount brokerage firms that can make trades for you online for very low fees. You could establish an account with a major brokerage firm. I do not recommend this. They charge very high fees that come out of your returns. And their so-called ‘experts' do not have your concerns as their number one priority. Instead they are looking for the fees, and often push stocks or investments according to their organizations best interests, not yours. You will be much better served if you do the research yourself. Of course if you are not interested finance as a topic and the time needed (a few hours a week should do it), working with a full service brokerage may be more attractive.

The most important thing is to STICK WITH IT!! Even with a minimal income everyone in this country would retire wealthy if they avoided debt and planned for the future with at least a small contribution to their investments each month. I congratulate you on your interest and sincerely wish you the best. It takes work, but your finances should become a hobby, learn every chance you get. If I can be of any further service, please do not hesitate to follow up with me!

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


Answer
Excellent Richard, thank you for the follow up! I think that you are very much on the right path. All you need is the determination to stick to your plans for the next few years and I agree that you will be in great shape. A few additional minor things:
It is great that you are watching shows and getting books. Something that may be of great help is Barrons "Dictionary of Investment and Finance terms". It is available on amazon.com and in most major bookstores. I still use mine almost every day and I have been 'in the business' for a long time. You will be able to look up those terms that you are not familiar with when watching Kramer, or any other show.
If you like Cramer, William O'Neil is another investment expert that has a great track record. He started Investors Business Daily newspaper that is well respected, and has a variety of books out. All of the books really cover the same or similar topics, so it is not necessary to buy all of them. Just one would suffice.
Please do not hesitate to keep in touch in the future as you go about this, I am always eager to provide any knowledge or advice that I can!

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