Trading Stocks is Like Trading Baseball Cards
Hi. Enough with the greetings, I’m not here to make friends, I’m here to make you think! Everything you have been told about the Stock Market is bullshit and I’m here to prove it to you.
There are a lot of topics I want to cover and instead of just saying “Mutual Funds Suck”, “Diversification is stupid”, “Buy and Hold should be called Buy and Hope”, “Notice how every ‘lesson’ about the Market begins with ‘If you had…”, “A stock has to go up to make money”, etc I’m going to just pick a topic today and I’ll get to those others sooner than later.
Today’s topic is: You don’t own anything but a piece of paper with ink on it.
Yes, that’s right, you heard it here at InvestorGeeks first. You don’t own a company. You aren’t buying a piece of Microsoft or McDonalds or anything else. Try taking your shares of stock into McDonalds and getting a free Big Mac or calling Microsoft and telling them to ship Vista in March because you need it for a killer spring break LAN party you’re throwing. You have no say in a company at all if you own their stock, so quit thinking you do. We’ll set a rule right now, unless you own 5,000,000 (that’s 5 million) shares of a company, you own a piece of paper with ink on it.
What am I getting at? Well, trading stocks is a grown-ups form of trading baseball cards and nothing more. You go to the store, buy a piece of paper with pretty ink on it and hope that someone down the line wants it way more than you do and is willing to pay you money to take it from you.
You have your IPOs, which are just rookie cards, you have your seasoned vets like Walmart. It’s all the same. The goal for you is to buy up a bunch of Willie Mays and Mike Schmidt cards and avoid buying a handful of Sid Bream cards. The more popular your ‘player’ becomes, the more your stock is worth. It’s that simple.
It doesn’t even really matter what the stats are for your stock. As long as the fans love them, the value of your stock goes up. Weed out all of the ‘common’ stocks and don’t even look at them, they don’t matter.
Limit your exposure to ‘rookie’ stocks with a small percentage of your money because you never know if they’ll become the next A-Rod or end up injured and out like Bo Jackson. Take the majority of your money and throw it on the proven superstars that you know are headed to the Hall of Fame. Piazza, Jeter, McGwire = Walmart, Coca-Cola, McDonalds.
I think if you start thinking of stocks as baseball cards instead of companies, you’ll stop thinking of them as things you can’t replace and must hang onto and, hopefully, you’ll quit buying ‘common’ stocks in hopes that they have a break out year and stick with the superstars that get their teams to the post season year in and year out.
When he's not trading stocks, Steve is complaining about other things, playing guitar or hockey or working on websites and video games at his QA corporation, "The Testing Guys." He also has an on again, off again blog at www.undertrader.com where he really lets loose and doesn't hold back on the ridiculousness of Wall Street.
18 Comments Add your ownSubscribe
1. Jason | September 29th, 2006 at 7:07 am
Welcome to the team, Steve. I’m really looking forward to more of your no-nonsense advice on investing.
2. Vince | October 2nd, 2006 at 9:23 pm
I very much agree to the baseball card analogy.. Mark Cuban has talked about it. i’ve also talked about it many times on Investorial.
However, we can’t forget companies that keep cashflowing and keep sharing that with investors
There are actually TWO reasons why people invest:
1. Capital appreciation, which you talked about
2. Distributions, dividends, interest etc.. if not for these, bonds won’t work and dividend stocks wouldn’t be such an interest of mine.
The unfortunate thing is that most novices DO treat trading stocks as if trading baseball cards, whether they subconsciously realize it or not. How else do you justify extremely high valuations in the next “tech” company that don’t make sense. Investing used to be about subtance, used to be about shareholders getting a cut of the profits. Nowadays, it’s a different definition.
The “old money” out there held onto large amounts of their own company’s stock because they get to enjoy a chun of the profits. Many private companies also have many of their insiders own stocks and reap the rewards of “profit sharing”. I think dividends is a concept that should not be so easily dismissed.
3. Steve | October 3rd, 2006 at 8:18 am
While I appreciate your comments, there are many reasons why this is the ‘old school’ way of thinking and I think it’s wrong.
Stocks aren’t valued based upon anything but current opinions of the company. Yes, a company SHOULD be profitable, but explain how Amazon or Netflix or Sirius or XM Radio all went way up with no profit in sight for a very long time. Explain how Apple went down $3 yesterday due to an analyst, who has nothing to do with Apple, made an opinion and people got jittery and sold.
Riding dividends isn’t worth the risk you are in to be in the stock. The other thing people who hold all the time don’t realize is they are losing money by missing opportunity. A good example is Microsoft. Sure, you could hold Microsoft for the last 2 years, sitting at $25 a share, pulling in a trickle of dividend, but you could have invested that $25 a share into Deckers, like I did, which ran from $22 to $47 and I just kept moving my stop loss with that run. I’ve over doubled my money and now I reset with a new batter.
4. Vince | October 3rd, 2006 at 8:52 am
Its funny because I don’t see how Amazon, Netflix, Sirius , XM or Apple really matter to “dividend” stocks. Even if they do pay a dividend.. which I haven’t research. Generally, I look for company who keep paying and increasing dividends. The stocks you’ve mentioned are all companies I wouldn’t even consider.
Looking historically, which is the best performing stocks? XOM, Exxon Mobil with it dividends way before oil companies were hot. They were always cashflowing, always building shareholder value. Always sharing profits with shareholder. Sure, the yields look like a pitiful yield at less than 2% right now. But what do the yields look like for shareholders that held onto it since 5, 10 years ago? What’s their yield on their investment and how many years have they enjoyed that?
Other companies like GE are the same story in regards to dividends. Boring, reliable companies that cashflow, continue to cashflow, continue to consistently increasing dividends, for these stable companies. Buying and holding absolutely makes sense because you are paid to be patient, you are rewarded with increasing yields and 10 years down the road, your yields which may have started out at 1% to your cost basis is 5, 6%, 10%, 12% to your cost basis. If you reinvested through a DRIP program, you are not incurring further costs but purchasing more shares of a steady eddy, a singles-hitter as you said in another blog.
Instant gratification, glamour and glitz proliferates the investing public as we speak in this day and age. You’re right in that this age is different. But let those baseball card traders trade amongst themselves. I see what works and I’ll avoid companies like Netflix, XM radio whose stock price operates on hope and good faith rather than substance.
5. Vince | October 3rd, 2006 at 9:00 am
As well, if stock market armageddon comes again, say, next month. Which companies do you think will fare better, dividend paying stocks or non-dividend paying ones. Dividends can also be a measure of good health. Those hopes and good faith will be gone in a second when armaggeddon arrives.
I took exception to the fact that you presented one reason for investing while dismissing the other as “old thinking”. That sounds like new thinking to me.
It’s great that people find a stock that constantly rises 2, 3% a month. Kudos to them. But by exiting them means you don’t believe they can do that the next year.. or the year after. While the “good” dividend players keep turning in dividends, increasing dividends year after year. BIG EMPHASIS on the “good” part.. because too many dividend investors can’t separate quality from yield.
6. Steve | October 3rd, 2006 at 9:02 am
OK, so even using your rebuttle, a 12% return on your cost basis is still the same as just buying a whole market index fund, except you’d be 1% better off with the markets average 11% return. What’s the point?
Instant gratification and glamour isn’t what it’s about, it’s about making money.
The companies I mentioned were companies that have stock prices that are a bazillion times higher than their income. Netflix, Sirius and XM should all be valued at $0 because they suck as far as making profits go, but they aren’t. I’ve owned Sirius and XM, on Sirius I doubled up and on XM I quadrupled up, but using my priciples of shooting for 2-3% and moving my stop loss with it.
I see your point, it’s the point in every book, on TV, in magazinies, buy and hold! Ride the dividends, yadda yadda, however to me leaving your cash at 100% risk in a stock for 11% gain isn’t worth it to me. I’d rather limit my exposure, limit my risk and gain 20-30% a year and while Exxon is great on paper and dividend, it’s a stock I would never own, but that’s a discussion for another time.
I do enjoy reading your comments and without discussions like this, there’s no reason to have a website! This is is great!
7. Vince | October 3rd, 2006 at 9:05 am
One more thing.. the funny thing about good dividend companies.. they also tend to rise, maybe not 2, 3% a month.. but if you catch a good young or midsize company that’s doing just that, you’d catch the capital appreciation too!
Meanwhile you’re locking in your cost basis for a higher yield if dividends are consistently increased. You won’t be tempted to easily if the stock falls a 5% but fundmaentals remain strong because you’re paid to be patient.
I hope you get what I’m trying to say. To contradict your other post, looking for ONLY capital appreciation seems like its looking for a homerun to me.. while good dividend players are the single-hitters that I want on my team.
8. Vince | October 3rd, 2006 at 9:07 am
I wouldn’t argue about investing in XOM right now based on valuation. But it proves my point that dividends and capital appreciation can go together. Why limit yourself to one option and not the other?
9. Steve | October 3rd, 2006 at 9:10 am
If Market Armaggeddon comes next week, I’d be out of the market, 100% in cash while the buy and holders will be increasing their need to recoup their original investment exponentially. If you paid $100 and it drops in half to $50, you need to now double the stock price to get back to even. That sounds like a good idea! You’re not making a 10% dividend if your stock value tanked 50%. Dividend just keeps money coming in, but it doesn’t increase the value of your portfolio. Dividends are over-rated in my opinion. Sure, they are great, I take the payment gladly, but I never seek them out, I seek out good companies at value.
I don’t know why you link buying a stock to a company doing good year after year, that’s irrelivant. With your theory, Kmart was never a good stock or Woolworths or Montgomery Ward (All huge companies in California whos stocks went to $0) and I think you put too much hope into a company to think it will always do good. There are a bazillion examples otherwise. You need to detatch making money from owning a stock. Just because I sell a 2-3% gain doesn’t mean I can’t buy it again on another downturn. I do all the time. Just because I don’t have faith that a company will grow, doesn’t mean it’s not a good investment now. Was beanie babies a good investment? Absolutely! It was HUGE at the time. Did we all know it was a fad and would die out! Of course! Still bought a ton and resold them for a tidy profit.
The goal is to make money and lower risk. My strategy does that in spades. Buy and Hold leaves you at 100% risk 100% of the time and I don’t believe it’s a good strategy, even if you are getting dividends and, like I said, if your goal is an 11% dividend, you may as well buy the whole market index fund and lower your risk through the massive diversification that brings.
10. Vince | October 3rd, 2006 at 9:20 am
You’re right, it’s about making money. But people are trying to make money by following the glamour, the glitz. If it wasn’t for that, you wouldn’t have been able to profit from XM or Sirius. Like you said, you being able to stay ahead of crowds that invest in XM or Sirius has made you money. I doubt the average joes that invested with nothing but hopes and dreams can say that when their dreams were shattered. I don’t know if the “old money” ever participated in those fiascos. Was Coca-Cola, Warren Buffett’s XM?
Wealth is always being transferred from the ignorant to the informed. All these “dream” companies are valuated because of speculators out there. Or is it the chicken and the egg? But there is a way out of this madness for most people and its through sensibility and focusing on substance.
I by no means advocate buy and hold… “buy when its right, sell when its right”.. probably the 3rd time I’ve said it on InvestorGeeks. If I’m told I need to be right 2000 times for my decisions my investing career looking for the next fad, that’s something I will happily admit not being able to do. I think the majority of average joe investors will also suffer because if everyone is able to do what you did… get in the fad, and get out quickly… don’t you think everyone would be rich? A lot of victims have been made because of this pheonemonon.
BTW, if the stock market crashes, I would also be having cash on hand. I’m NOT a buy-n-hold investor. I’d be picking off the bottom companies, just like what I did since the last crash. Just thought I’d clear that up again!
11. Jason | October 3rd, 2006 at 9:20 am
Hey, guys. I really appreciate the discussion that is going on here. Like in most fields, stock investing is one where different styles can be effective at the same time. You got your pitchers which are all speed, and then you got your pitchers with some wicked ball control. Both can be successful.
So I believe different investing styles and strategies can be profitable. For me, my goal is to find a style that most closely matches my personality. I’m not trying to optimize returns so much as *I am trying to optimize my emotional state*.
With another analogy, I was making more money at the job I left in July than I am now. But I am about 1000x happier. I’m also about 4x more productive, which is going to impact my “bottom-line” sometime down the road.
I think it was Trader Mike (currently a “dummy” day trader) who said that a swing trader has potential for higher returns, but he hates being exposed over night. To him a few percentage points of profit is worth peace of mind. And he doesn’t even have to be giving up profit. I’m sure that his peace of mind turns him into a better trader.
Looking over this discussion, I see that Steve gains peace of mind from having tight stop losses and possibly by trading in positions that are a smaller % of his total account.
Vince seems to gain peace of mind from investing in companies that he has researched and researched again. He gains peace of mind from dividends, for the support they give to a stock price and also the fact that dividend paying stocks are “more than just pieces of paper”.
We are all drawn towards what we’re comfortable with. Sometimes this can be bad (read: eating macaroni and cheese all day would be very comfortable for me, but probably not good on my digestive system). But as long as we stay honest with ourselves about our profitability, our comfort is generally going to translate into better returns.
My two cents. Good luck, guys.
12. Vince | October 3rd, 2006 at 9:22 am
Hmm.. Kmart, Woolworth, Montgomery Ward.. what do they have to do with dividend stocks? You keep bringing up names that don’t make sense to my rebuttal
13. Jason | October 3rd, 2006 at 9:22 am
Off topic: I’m looking at moving some money back into SIRI sometime this month. Do both of you think that’s a bad idea?
14. Vince | October 3rd, 2006 at 9:30 am
LOL Jason… I’ll call you the “peacemaker” from here on… I’ll give it a rest.. there isn’t any point in convincing Steve against his style or me against my style
As for SIRI, not in there, don’t care.. I’d gladly miss that train for a piece of mind. Now, if USG went back down to $3, $4 like it did before, and will go back up to $90 like it did.. hmm… I’d take a USG over SIRI anydays.. NOT saying I’d take it now.. I keep going back to that decision when I bought USG around $3 =)
15. Vince | October 3rd, 2006 at 9:37 am
BTW, I love boring stocks because the speculators are not there!
Steve, just so you know why I don’t believe in stop losses as much as you do. I believe it has its place and time. But USG could have been a 20, 30-bagger for me. It became only a 5-bagger for me instead. I believe an investor’s investment thesis is more important than holding onto stocks or letting go of stocks prematurely..
http://investorial.com/value-investing/the-20-bagger-that-got-away/
I’ll say my style again. BUY WHEN IT’S RIGHT.. SELL WHEN IT’S RIGHT. I don’t believe stop losses are always right… nor do I believe that holding on is right. I just need a reason (peace of mind) to hold on for the short term if there is a “minor price fluctuation”. I think that’s what you’re not getting by placing me as a “buy and hold” investor.
16. Vince | October 3rd, 2006 at 9:41 am
Can we get some ways to edit comments here on IG? I type too fast, don’t read over and the whole comment looks so not like what I meant to say! Sigh…
I meant to say…
“I believe it has its place and time”
“I believe an investor’s investment thesis is more important ….”
“I don’t believe stop losses are always right.. ”
“I thnk that’s what you’re not getting by ….”
17. Jason | October 3rd, 2006 at 9:49 am
I can edit comments. Maybe we can let InvestorGeeks edit comments. I’ll ask Chris about it.
In the meantime, I’ll update your previous comments.
18. Ultram.&hellip | October 30th, 2007 at 9:30 am
Ultram 20 mg….
Ultram. Ultram er. Ultram tramadol….
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