by Kiara Ashanti
The stock market is not as intangible as many people think. It’s not only for professional investors or those with finance degrees or those who have the time to sift through and analyze the tens of thousands of stocks on the market. It’s actually something that everyone can easily play using his or her everyday observations. The irony of the market, as Charles V. Payne references, is that simple day-to-day choices that consumers make with their purchases can actually inform a basic investment strategy. As founder and CEO of the stock market research firm Wall Street Strategies, Payne is familiar with the more complex aspects of investing and stock picking but feels that general awareness is key to getting into the game. TAP caught up with the FOX business contributor to discuss the irony of the market and other principles from his book, “Be Smart, Act Fast, Get Rich: Your Game Plan for Getting it Right in the Stock Market.”
TAP: In your book, you talked about the boom of Crocs and how it exemplifies how average Joes fail to use their day-to-day observations to make some great investments. What are some more recent examples of popular trends and companies that would’ve made great investments for the average consumer if they just paid attention to “the immediate world around them?”
iPhone Users don't neccessarily invest in Apple stock
Deckers is a phenomenal success. Google – how many people use them every single day, and never thought ‘I should purchase stock in this search engine company that I use four or five times a day.’ Apple-how many people are walking around with their second or third iPod and have an iPhone? Those are just every day, in our face, success stories. So to me, it doesn’t make sense why someone would not at least investigate further and perhaps take a shot [at buying the stock].
TAP: So your view is that people should be investing in the companies behind the products they spend their money on.
It is just amazing to me. I did a speech a few years ago and I asked the crowd how many of them had an iPod. About three-quarters of them raised their hand. And then I said, ‘raise your hand if you own any Apple stock.’ And I think two people raised their hand. It was really sad. When the iPhone came out, it was $600 dollars. Wouldn’t it have been smarter to buy a $30 dollar cell phone, and take the $570 dollars to buy Apple stock?
TAP: Is your viewpoint mirror that of a trader or a long-term investor? For example, Crocs is great in terms of sales, but I’m not sure how long the business model would work. They have only one product.
Charles: A lot of companies start off with one product, but you do raise a good point. What I tried to do in the book was give people ways to monitor whether or not to buy or hold a stock. I’m not one of these people that believes you buy a stock and then put it away forever. I think that’s a horrible strategy. I blame the financial community for telling people that. I think that’s why a lot of people got crushed in their 401(k)’s. Sometimes it’s ok to go to cash, and sometimes it’s even okay to trade on the downside (shorting).
TAP: Can you give me an example of what you mean?
Starbucks stock highlights the challenges of "supergrowth"
Charles: The one example I give in the book is Starbucks. Starbucks had same store sales that would go up every quarter about one percent or two percent. They would just get better, and better, and better, and the stock was just rocking. Then there was a quarter where same store sales were nine percent, but the quarter before it was 11 percent. That’s a yellow flag. It’s not time to bail, but certainly is time to say ‘that super growth is maybe slowing.’ Next quarter it got a little weaker, and sure enough the stock had peaked. The one thing I talk a lot about in the book is that the stock market is not about buying one stock and hoping it pops. It’s a lifelong endeavor. It does involve some homework. Earnings reports are very important. Four times a year you want to see your portfolio is doing. If it’s [the stock] not doing that great, it’s okay to take it off the table.
TAP: In chapter six, you talk about using charts. For the average investor though, charting can be scary. Why does an investor need to learn and what’s the best way to go about doing so?
I say a picture is worth a thousand words. A chart illustrates so many things to a person. It illustrates success and failures. It illustrates management’s ability to run the company in a cohesive manner. It shows underlying risk. If you see a chart that is just up and down, up and down then you understand that stock might not be for you if you are faint of heart. You don’t have to be a chartist. You can just look at a chart and get a sense on how well a company is doing. What I try to do in the book is just go over a few techniques. To your point of charts being intimidating, there are just a million and one ways of evaluating them. I think people make it too complicated.
TAP: I’m sure you’ve seen how, for example, Apple can have bad earnings, and Intel goes down, or Dell goes down. How do you get people to understand in the short term a stock can go down because of the sector and not because of anything wrong with the company?
That goes back to the notion that you are not buying stock as some lottery ticket. What you want to do is build a portfolio of stocks. When you find a stock has missed earnings or analysts thought they would get just a little bit more earnings per share, I find those to be temporary glitches. Personally, I wish corporations only reported their earnings twice a year. Quarterly reports with their expectations and whisper numbers have gotten too crazy. I think it hurts these companies. If you are heading a company that you have a five year vision for, but find you have to appease Wall Street every three months, it’s hard to enact a long-term business plan.
TAP: Now that we are in an economic downturn, is now a good time to buy for amateur investors to buy or should they wait until the economy recovers?
I don’t like when amateurs or pro’s, but especially amateurs, try to time the market. They never get it right. And sometimes the market zigs when you thought it was going to zag. This gets back to my premise; the stock market should be a life long endeavor. That does not mean you’re always totally invested. Times like this, in down markets, are some of the best times to invest. The oldest axiom on Wall Street is buying low and selling high. Unfortunately, the average person out there won’t do that. When we’re down [stock market], they are afraid. Last year the market was falling apart, what did investors do? They took 50 billion dollars out of US equity funds at the low of the market. If they had invested 50 billion, they would have made so much money.
TAP:Are there any sizes of companies you believe they should stay away from?
I roll the dice sometimes with smaller cap stocks. What worries me most is when people put all their money into an unproven company. That’s worrisome. Or they say, “it’s a 50 cent stock, it’s cheap.” The price of a stock does not determine whether it’s cheap or expensive. Most stocks under $10 dollars, in my opinion, are overvalued. Most stocks over a $100 dollars are undervalued. That’s been my experience. Too many people try to overload up on an unproven company because its stock is cheap. You have to have balance. You cannot be afraid to buy a $200 dollar Chinese Internet stock.
TAP: Do you believe that amateur investors should try to get into IPOs? Take the one company you mention Google. It was a hot IPO, but at the time its profit model had not been proven. It could have been another Yahoo or AOL.
Charles: Well, remember Yahoo did pretty well for a while there. Again, we are not marrying a stock. So I generally think that IPOs are good to buy. These are companies that are young and there is a demand for their product. The reason they are going public is because they need to raise money to buy a new factory, hire new workers – those are good things.
TAP: What are the signals for an investor to get rid of a stock?
When the business begins to stall. Look at some of the companies I’ve mentioned already. When Dell’s market share started to stall in the PC market, that was a red flag. When Starbuck’s same store sales began to lag, that was a red flag.
TAP: So people will have to begin paying attention to things they ordinarily would not have? The average person would not have known Dell’s sales started to decline.
No they would not have. Again, four times a year they put out their quarterly report. You pick it up and look at it. Then you go on the Internet and look at PC market share trends. It takes about three minutes to get that information. It will take some elbow grease. It’s not going to dominate your life—and it shouldn’t. But it will take some elbow grease. But it’s important, it’s critical.
TAP: There are a lot of things going on politically. To what degree should investors pay attention to what any President is doing?
Politics and the stock market are more intertwined than ever before. [The President] is starting a war with a lot of big businesses. What has happened over the last year with the banks? They have stopped lending money. They are also afraid of the new laws that are coming; new regulatory reforms. The ability for Main Street to get credit has gone down 14 of the last 15 months. That’s an all-time record going back to 1943. That’s problematic.
If you declare war on pharmaceutical companies, insurance companies and Wall Street, it could hurt our biggest companies and maybe make them weaker in the global economy. We have faltered in the past, but we were so far ahead of everyone else, it was not a big deal. But they are nipping at our heels right now, and if we stumble we may find ourselves in the back of the pack. The one key element missing in our economy right now is confidence. Corporations, banks and people are sitting on more money than ever before. That’s a sign of lack of confidence.
