Before You Invest One Red Cent..

You don't have to look too hard to find investment advice anymore. Pick any medium you want - you're sure to find someone telling you precisely how to turn your one dime into two. Most are free sources, while some are for pay. None are perfect, and all of them are sometimes wrong. No, there's certainly not a lack of advice.

That, however, can be a problem, especially for a new investor. On the other hand, veteran investors are just as subject to the same risk of information overload. Just look around you. Bookshelves and libraries are crammed with what seems like more than a lifetime's worth of 'how to'. Throw in the daily financial newspapers and the monthly publications, and you don't get direction…you get a mess. The secret to success in the investing world, then, is keeping it simple - a task easier said than done.

The last thing you want to read here is a diversification sermon, or the 'buy low P/E's' rhetoric. If you haven't already, you can pick that stuff up at anytime at your local bookstore, or on the internet. Instead, let's really focus on the key realities any investor should keep in mind before they actually invest one red cent in the stock market. Odds are, these are ideas and lessons you're not going to hear anywhere else. That's ok…they're still true, and still important.

Three Out Of Four Stocks Move In The Same Direction As The Market

It's true…3/4 of publicly-traded companies generally move as a single unit, while the other fourth isn't correlated with the market. However, it's not a static fourth…every stock will eventually move with as well as against the overall market tide. Some may move more than others, but for the most part, you can expect to see returns pretty close to what the market yields.

The implication - especially for new investors - is exactly what you think it would be…you have to get the market right first. If you own the best stock in a bear market, then you still own a bad stock (or own it at a bad time), and are probably going to lose money. As such, when the market is in a downtrend, the best decision is in not owning stocks unless you are absolutely certain the ones you own are the same ones currently disconnected with other stocks.

Flies right in the face of buy-and-hold, doesn't it? Buy-and-hold is a relic, materializing as a philosophy in the 70's and 80's. The timing was the pitfall…in the 70's and 80's, and especially in the 90's when stock ownership became commonplace. In that sort of multi-decade bull market, sure, buy-and-hold makes sense. However, there was no philosophy or preparation for what we saw in the early 2000's. We hadn't seen anything that bad since the late 60's and early 70's, and nobody really thought it could happen again. It did. And, it could happen yet again in the foreseeable future.

The implication is just a dose of reality. The market can and does fall, sometimes for months at a time. If you insist on holding stocks in defiance of significant downtrends, just be prepared for disappointment.

The Economy Isn't The Market

Although advisors and brokerage firms seem to have economic data piped in by the truckload, there's very little evidence of any correlation between the economy's strength or weakness and the market's strength or weakness. The majority of analysts would - and will - argue this point. Fine. Just be sure to ask them for their research that shows the connection between interest rates and stocks over the long-haul (month). It's not there. The fact is, the economic cycle and the market cycle are not synchronized in a way that any investor could consistently rely on. Take a look at the seven most recent 'rising rate' environment, and the effect it had on stocks. It wasn't nearly as bearish as it was supposed to be.

* Feb. 72 to July 74: The Fed Funds rate rises from 3.3 to 12.9. The S&P 500 moved from 106.57 to 79.30. The market lost 25.5% during that time.

* Jan. 77 to June 81: The Fed Funds rate moves from 4.6 to an all-time (modern era) high of 19.10. The S&P 500 moved from 102.2 to 131.21. That's a 28.3% gain.

* Feb. 83 to Aug. 84: The Fed Funds rate moves from 8.5 to 11.6. The S&P 500 moved from 148.05 to 166.67. That gain totaled 12.6%.

* Oct. 86 to March 89: The Fed Funds rate rises from 5.8 to 9.8. The S&P 500 went from 243.97 to 294.87 (and this includes the 87 crash). The market gained a net of 20.8% here, despite the 24% loss suffered over October 16th and 17th of 1987.

* Dec. 92 to April 95: The Fed Funds rate moves from 2.9 to 6.0. The S&P 500 rose from 435.70 to 514.70. That was an 18.1% gain.

* Jan. 99 to July 00: The Fed Funds rate moves from 4.6 to 6.5. The S&P 500 moved from 1279.63 to 1430.85. That's a gain of 11.8%, even though it includes the very beginning of a huge bear market.

* July 03 to mid-2006: The Fed Funds rate rose from 1.0 to 5.25. The S&P 500 has risen from 990.30 to 1280. That's a market gain of 29.3%, and still counting.

Surprisingly, many advisors would still argue the point despite these facts. As an investor, you can't afford to ignore them. You will, however, need an enormous amount of willpower as well as thick skin to trust the facts when all you get from the media is unfounded opinion.

Never Confuse A Company With Its Stock

Many years ago, logic prevailed in the market. Good companies were transparent, and their stock price basically reflected the value of the corporation. Times have changed dramatically, and probably permanently. Now, good companies may make tons of money, while the stock sinks like a rock. Remember, as an investor, you only make money if your shares move higher. The only thing that makes a share move higher is more buyers than sellers. If nobody wants the stock of a great company (and yes, it happens more than you might think), its shares are not going to appreciate in value.

For that reason, it's imperative to analyze charts as well as fundamentals. Charts can tell you what a stock is likely to do in the near future, while consistent fundamentals tell you how that same company's stock is likely to behave in the distant future. Both the technicals and the fundamentals should be part of a prudent stock-picking plan.

Keep in mind that most advisors have either adopted one methodology, or the other. In general, they've sworn off the other philosophy as hogwash. Most books are also just written form one perspective or another, but again, that's a mistake. Use both tools to the best of your ability.

Final Words

Some investors may agree with these notions, and some may not. That's fine, as long as each one of them understands and can explain the reason they may disagree with an idea. Nobody owns the corner when it comes to investing knowledge. Continually learn, and constantly question any advice you get. It's your money, and nobody has a bigger interest in growing and protecting it than you do.