Should you be? There are real reasons to fear much further drops in this market laden with credit fears. A lot of companies are going to drop earnings far beyond the wildest analyst expectations and these housing troubles could last for years. Those companies certainly have plenty of reason to be selling far below what they were just three months ago, but what about the others? Almost every public company is feeling the pain in stock prices, but is it really rational?
Fear is rarely rational and I don’t think it is any different now. I’m not calling a bottom by any means, but I am calling cheap. There are more bargains now than there have been for a long while, don’t let them hide behind the red.
Then when you find them, let me know!
In a previous post on Insured Probabilities I posed a few questions regarding the value of insurance: what is that value, how can we calculate it, and how do we know when it’s worth it without just guessing? Then I ignored them and went on. I’m sorry, but I’m here now. Don’t get too excited though, I still don’t have any exact answers.
I do, however, want to provide some interesting ways of thinking about the value of insurance that may aid in determining whether it makes sense to pay for it. Consider car insurance for example. Most reasonable people buy insurance on a new car to cover any damages that may occur either to the car or the driver. The insurance company makes money though because they have the odds on their side.
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I thought I’d take a break from my probability series and focus on something even more essential to investing: picking a brokerage! Since I recently put in the paperwork to change to a new brokerage after a year with E*Trade, I figure now is a pretty good time.
Unless you are trading often there aren’t too many factors to consider other than fees and commissions, but there are a few. If you are trading often, you’ve come to the right place - I will happily cure you of that silly problem.
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This is the second part to Risky Probabilities so if you haven’t read it already, you probably should. I focused narrowly on the problems inherent with splitting your money (wagers) into different areas of investment rather than concentrating on the best one. At the same time, some of the most qualified and respected people in the industry constantly preach that diversification and mitigating risk is crucial for a successful long term portfolio. Even I own portions of eight different companies and hold a significant amount of cash to control my risk, which seems entirely hypocritical to what I previously wrote. But I told the truth and nothing but the truth.
I just didn’t tell the whole truth. Going back to the reality show horse racing example, it may seem like a mistake that Gene bought many additional tickets thereby increasing his expected loss, and in a way it was. There is no getting around the fact that the wagers themselves were costing him money, it’s simple math. It is the same math that he correctly used when trying to sell the original ticket, so why would he possibly turn around and do the complete opposite by buying more? The answer is apparent when we look at the bigger picture.
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Of all the things people misunderstand, there are two that are so basic, so ingrained in our every day life that they continue to baffle me with just how widespread their misunderstanding is. The first is money. It’s obviously a very complicated subject with its own field of academic study, but that does not excuse the way too common belief that there is a finite amount of it and that every dollar someone else has is a dollar taken out of the economy from the rest of us. This is a belief that the economy is zero sum and couldn’t be further from the truth, but that rant is for a post of its own.
Instead it’s the other I would like to focus on. Coincidentally, it often combines with money to provide the foundation for some of the most exploitative and profitable businesses I know: Gambling and Insurance. It seems ironic that they both are so successful; after all, one serves to provide risk and the other serves to reduce it (for ultimate irony, consider the concept of insurance in blackjack!) - and people pay a fee for both! Nevertheless, they underline the second popular misunderstanding: probabilities.
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I don’t intend to commit many posts to stock pitches (I’d rather explain at a higher level), but this is a bit of a special case. Normally I keep my positions equal under the general idea that if my confidence in a company is lacking enough that I think it deserves a smaller portion of my portfolio than my others, I should be looking for a different company altogether. However, as is often the case in investing, I’ve made an exception.
I have exceptional confidence in Activison following its merger with Vivendi Games. To quote myself, as quoted by a related Fool Article (I can fit self-appraisal anywhere) on the merger news:
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I finally managed to get the site programming up to par, the main content pages up, and the layout to my liking and I’m ready to start blogging! If you haven’t already, please read the About page to get an idea of what this is all about. You may also be interested in my performance page, buy/sell history, and my caps profile over at The Motley Fool.
In the coming days I will explain where I’m coming from with past decisions and my rationale and advice for the future.
