Expert: Ren Richardson - 8/21/2007

Question
QUESTION: I'm new to investing, in fact so new that I haven't invested yet. But I want to
start.  So here's my first question.  I was looking around and noticed some
penny stocks on the OTO exchange that recently have gone up between
2000
and 9000! does that mean that If i had purchased that just a hundred
dollars worth of stock in anyone of those companies I  could have actually
walked with a few thousand times my initial investment?

ANSWER: Orlando,

Yes, if a stock has gone up 2000%, it means it has increased 21x over. However, I have to tell you that if you plan on investing in penny stocks, plan on throwing your money away. For every penny stock that increases dramatically (and there is no shortage of newsletters and brokers touting those stocks) there are hundreds that wither away into nothing. Even with exceptional gains like that, the odds are definitely not in your favor.

If you are just beginning your investing career, start on a solid base. Focus on building your portfolio. The core of your portfolio should be in safer and well diversified stocks. Down the road if you want to get speculative, do it with the marginal money that you can afford to lose, money that you won't be overly emotional about. (Even then, if I were your portfolio manager, I wouldn't be using any of your money for penny stocks. There are more effective ways to get aggressive.)

I know it is tempting to look in hindsight at stocks like that and think about how much money you could have made. But approaching any investment decision in that way will only lead to excess emotions (greed, regret, fantasy, etc.) and to lost money.

Best regards,
Ren Richardson
Principal
Bridge Asset Management, LLC


---------- FOLLOW-UP ----------

QUESTION: Thanks for your prompt response. Do you pick up clients though these
exchanges?  I just have so many questions. I feel I may actually need some
professional assistance.
ANSWER: Orlando,

We have started working with individuals through this forum but that isn't my objective in participating here. (Our firm is high risk money management suitable for sophisticated investors; we don't offer investment advice as a company.)

It is natural that you are going to have a lot of questions as you start to invest. But don't let that deter you from gaining as much information as you can. And it may be that you end up using some professional advice. But I am a big proponent of getting individuals informed and educated when it comes to their investments, even if those investments are managed by professionals.

So my two pieces of advice as you get started:
1. Don't rush into things.
Take your time as you make your decisions. Better to deliberate and weigh your options than to jump into an investment without knowing why or what your plan is. Remember, there are never any shortages of opportunity in the market; opportunities to make money will always be ready when you are.
2. Get advice that is unbiased.
For now, try to get advice from people who know what they are talking about but aren't trying to sell you or push you into something. This is as good a place as any to start. Personally, I don't mind if you ask me a dozen questions. Use the other experts here as well. Just be sure that you put your own knowledge before making money. The latter always flows from the former. : )

Best regards,
Ren


---------- FOLLOW-UP ----------

QUESTION: Thanks again! I can't tell you how thrilled I am to have the opportunity to ask
a professional such as yourself some questions.  The internet doesn't feel
quite so impersonal now.

Assuming a stock grows at a steady 7% over the year, how does it compare  
to a money market account or whatever with similar growth in regards to
compounding interest?
It seems to me that if your intial investment of $1000 has grown to $1100
and the stock goes up another 10%  you now stand at $1210 because it is
now 10% of $1100. Am I correct or should i go back to high school?  haha.

Also I plan on investing heavily in nanotech. (i will diversify of course) I
strongly believe that over the next ten to 20 years the growth will be
substancial across the board from building materials to medicine. Do you
beleive that this exponential growth of technology that we are witnessing will
very likely translate into an exponential growth of the market? In other words
are the directly proportional?
ANSWER: Orlando,

Good questions both. As to your first question, compounding interest pays interest on the principal plus accrued interest at each interval the interest is scheduled to be paid. The more frequent the intervals, the better the compounding. The difference is that with money market accounts, for example, the interest rate and schedule are set beforehand. With the stock market, there is no schedule. Stocks, of course, have higher risk than money markets and have historically paid higher returns. But you are correct with your example. If you put $1000 into a stock and it grew 10% the first year, you would then have $1100. If it grew 10% the second year, you conventionally calculate off the $1100 balance since we are talking about yearly returns. So it would now be $1210. If you referred instead to the total return since the beginning of your investment, you would be up 21%.

As far as building your portfolio, there is always a place for cash and money market accounts (you always need to maintain some degree of liquidity as an investor). But the bulk of the core of your portfolio should be diversified in stocks. Over time, no money market accounts will be able to match even the conservative returns of the broad market.

Now about nanotech: Investing in an upcoming industry with a lot of promise is always tricky. If there were a way to invest in an index of just the technology and how widely it is adopted, that would be ideal. I'd do it myself. Unfortunately, it's not that easy. The tough part is that a lot of "pure" nanotechnology companies don't end up making great long term investments. Think of most "pure" companies at the beginning of any new promising industry....most do not succeed. The ones that do succeed can become highly successful but most of the new industry's benefits accrue to established companies that learn how to incorporate the new technology into their existing strategy. Whether the industry is the Internet, alternative power, or nanotechnology, these technologies usually end up making good investments out of those companies that develop great strategies around them. Remember, you can't sell nanotechnology per se. However, you can sell an anti-viral medicine, for example, that uses nanotechnology. And therein lies the difficulty. It's easy to spot the pure nanotechnology companies. It's not so easy to see the myriad of ways that nanotechnology can be used to bolster a company's profits for shareholders. And when it comes to what makes a great stock, it isn't the nanotechnology but in how a company uses it to translate it into growth, revenue, and profits.  

Let me know if you have more questions about this.

Best regards,
Ren


---------- FOLLOW-UP ----------

QUESTION: Is it possible to have trouble selling a stock?  I know that there has to be a
buyer, at least that's what I gather.  I just don't want to get stuck with
something I need to sell.

and about buying:
Also how do you know the minimum amount of shares that are required to
purchase a stock?

Answer
Orlando,

Yes, it is possible to have trouble selling a stock if it does not have much liquidity. Liquidity simply refers to the availability of buyers and sellers in a market. A very liquid market means that you always have buyers and sellers willing and ready to transact. It also means that there is little time in between transactions and that the spread (the difference between the prices bid by the most willing buyers and the prices offered by the most willing sellers) is small. A market with little liquidity means that getting a buyer when you want to sell is a more difficult proposition (and note that an illiquid market adversely affects sellers more than buyers).

However, a lack of liquidity usually affects stocks that you shouldn't be putting your money into in the first place, especially as a new investor. Just look for stocks that have an average daily volume of 500,000 shares or more (this is an easy thing to find with most stock quotes). If a stock is trading hundreds of thousands or millions of shares per day, you won't have trouble getting executions on your orders.

As far as minimum share requirements, that is determined by your broker but many brokers now don't impose minimums. Bear in mind, however, that fixed transaction costs will increase your cost basis more than what is acceptable when buying a small number of shares.

Best regards,
Ren Richardson