13 items found for your search. If no results were found please broaden your search.
(10/03/07 12:00pm)
A recent article "The Dirty Secret of Campus Credit Cards" by Jessica Silver-Greenberg in BusinessWeek detailed the agreements between colleges and banks to offer and market affinity credit cards to students, professors and alumni. These affinity cards commonly display the university name and picture a building or design from the school. The agreements, while not necessarily directly through the college but rather through alumni associations, present concerns about whether the wellbeing of the students is being taken into account when these deals are made.
While these agreements may be common and unsuspecting, what is shocking is the exorbitant fees the colleges collect from them.
According to the article, many colleges have multi-year contracts worth up to $20 million. For example, the University of Tennessee signed an agreement that could total $10 million in revenue for the school with Chase (part of JPMorganChase) over the course of the deal. These deals include revenue for the bank's right to student lists and marketing on campus. They also include royalties in the form of a fee for each card issued to a student, as well as revenue for the amount of spending done on the cards.
But if it appears that the colleges are raking in the money, the banks also have much to gain. For example, a University of Chicago College & University Alumni Card listed on Chase's Web site offers a 0 percent APR for the first 12 billing cycles, with a minimum 14.24 percent APR afterwards. It also has significant penalties for default or late payment.
The default APR is 32.23 percent and the late payment fee is $39 for balances of $250 and over. Furthermore, a Cornell University Student Card listed on Chase's Web site offers 0 percent APR for the first six billing cycles before increasing to 18.24 percent. The Cornell card also has a further enticement: Chase will make a contribution for every purchase made on the card to support scholarships and alumni programs for Cornell.
These fees are at the expense of the students who apply for the cards, without having much experience in their terms or in independent money management. According to a Nellie Mae Survey, of the students surveyed, 46 percent claimed they received their first credit card while they were a freshman in college. Moreover, the survey found that college seniors had an average credit balance of $2,850.
According to the article, some colleges have attempted to defend themselves against the controversy surrounding this issue. Virginia Polytechnic Institute and State University said that its affinity credit card agreement was conducted with the alumni association of the college, which is separate from the college. The University of Tennessee said that the revenue from its credit card agreement is mostly used for private scholarships.
It is clear that some college affinity credit cards are marketed at alumni. These credit cards include the title of the Alumni Association. However, other cards are more broad, including the school's name and pictures of an on-campus building or design, which could conceivably be marketed and attractive to students.
In general, credit card companies have also come under fire for their practices in providing credit to college students. There have been cases of card companies providing students with no income with high credit limits, in some cases as high as $10,000.
Congress has also caught wind of the relationship between credit card companies and college students and the credit card companies' questionable lending practices. Hearings on this issue are planned. Legislation restricting the amount of credit that could be offered to students is also pending.
However, one thing is certain - banks are doing very well. JPMorganChase's net income rose to over $14 billion in 2006. Bank of America's net income rose to over $21 billion last year. Both banks have extensive affinity networks with colleges.
Information from: "Credit Cards Could Trap College Kids if Misused." CBS News. cbsnews.com. Sept. 12, 2007. "The Dirty Secret of Campus Credit Cards" by Jessica Silver-Greenberg. BusinessWeek. businessweek.com. Sept. 6, 2007. "Majoring in Credit Card Debt" by Jessica Silver-Greenberg. BusinessWeek. businessweek.com. Sept. 4, 2007.
(04/18/07 12:00pm)
I know I've recently been writing many columns on stocks. However, the greatest investment you will probably ever make is an investment in yourself - through education. The return on investment in education is astounding. The salaries of college graduates are several times higher than those of high school graduates, and the dividends from work keep coming as you continue to move up the corporate ladder.
Perhaps the only downside to a college education is the high cost. With college tuition increases continuing to outpace inflation, the sticker price of an education won't get more affordable any time soon. Because of this, students are taking on more and more debt in the form of federal and private student loans.
If there's one smart choice you made in your college decisions, it was coming to the College. Instead of taking out loans and breaking the bank of mom and dad to the tune of $40,000 a year, you are only paying around $20,000. This makes a large difference when you consider the amount of interest that's going to be accrued on your loans.
The loan companies make it very easy for you to delay making payments. While, with most loans, you do not have to make payments until graduation, many companies now allow you to spread payments over 15-20 years. But that's a serious mistake. While you may not be concerned about your loans right now - after all, they are probably just pieces of paper to you now and your living expenses are minimal - you are going to get a rude awakening when you graduate.
When you've got student loans, it's like having a huge weight on your shoulders. And this feeling seems to drive people into deferring or extending the payments on their loans. However, the loan companies are not giving you the option to do you a favor.
They have a vested and highly profitable interest in the enterprise. The interest meter is running from the inception of your loan to its payoff. Now, those of you with loans probably have some form of federal subsidized loan with a very low interest rate.
But, if you don't pay it off in a timely manner, the compounding of interest, at even 5 percent, will double the principal on a loan in about 12 years. You have to be responsible with your loans because they can follow you for the rest of your life. In fact, the federal government recently prevented people who declare bankruptcy from relinquishing their federal student loan liability. Yeah, not even bankruptcy will clear it up. It's important for you to be careful what loans you take out while you're at school.
Recently, I have seen many students taking out private student loans ranging from $2,000 to $10,000 to subsidize their lifestyle. Try not to take out these private student loans. The companies are more than happy to extend you credit because the interest rates on these loans are ridiculous. Even if one of you defaults, the interest the company will make off others will more than then make up for it.
Also, like I advocated in my last feature, keep your credit history clean. If you do need a loan, at least you will have a good chance to get one at a decent interest rate because of that high credit score. Before you graduate, you want to decide how you are going to pay off that loan. If it's for $10,000, I don't think it's necessary to live in poverty to pay it off. But when you've got loans in magnitude of $50,000 or even $200,000, you want to get cracking on the loan.
If not to save yourself thousands of dollars and years of debt, then do it because of the future obligations. A lot of you are going to want to get married and have families. It's going to be pretty hard paying off that mortgage for your new house, your recent $30,000 wedding and the lease on your car. Get the loan out of the way so that you can focus your monetary resources on more important things.
This brings me to another point. Many of you are probably going to want to pursue graduate degrees - if not after graduation, then maybe a few years after that. Let's see, $80,000 in loans from the College and interest, $80,000 in loans for that prestigious graduate degree, plus living expenses since you are not working - this doesn't look so good.
For those of you who are really focused on pursuing higher education, it is extremely important that you plan and manage your loans well, or there's a good chance you'll be drowning in debt for the rest of your lives. Think of it this way: When you are paying off those student loans that you have prolonged over 20 years, you are probably going to have to take out other loans and lines of credit for rent, a house and a car. This is a vicious cycle that seems to leave many college graduates with little or no savings for retirement.
Therefore, I recommend to you high achievers that you be more vigilant in your payments, paying more than the minimum, as well as putting part of your paycheck away for graduate school every month. Also, look into assistantships and student jobs, as those can significantly cut down on your tuition and living expenses.
(04/11/07 12:00pm)
I know I've recently been writing many columns on stocks and finance. You're probably asking me, "How am I going to invest? I don't have the money. And retirement is so far away." All of these comments are true, and this is why I am going to discuss more relevant personal finance issues that specifically concern college-age students.
So, the first personal finance issue I am going to discuss is credit cards. After all, the reason why many of you are so strapped for cash is because you have a big credit card bill lingering over your head, with large finance charges or interest expenses accruing.
Personally, I think it's a bad idea to get a credit card as a college student. While there are some positives to having a credit card, I believe the negatives outweigh them.
First, I think we should discuss the psychology that goes into having access to a credit card, and how it can get you into trouble. The psychology I am going to discuss may not be totally representative, but it probably has some applicability to students.
For example, whenever you go out, you know you have a decent line of credit you can spend. You begin making impulse purchases: a DVD here, a magazine there, an iPod accessory here. Nothing holds you back from making these purchases because you know that you won't have to worry about paying them until the bill comes. And when the bill does come, you only have to make the minimum payment.
This is the type of mentality that can get you into serious problems.
When you start racking up significant balances, the credit card companies really make you pay.
First, there are finance charges - the interest you accrue on your balance each month. This is calculated using your APR (Annual Percentage Rate), which is the annual interest rate charged by the credit card company to lend money. And when you don't pay off your credit card in full, you can really start racking up charges because compound interest can work against you, just like it works for you in investing.
For example, according to the bankrate.com credit card calculator, if you had a $1,000 balance and your minimum payment was 5 percent of the balance at an 18 percent APR, it would take you 70 months to pay it off, and you would wind up incurring $382.47 in interest!
Plus, there are late penalties if you miss a payment or go over your limit. The fees are very steep. Late penalties run around $35.
And if you become irresponsible or delinquent in your payments, it will hurt your credit.
Your credit score indicates your credit risk. Your score can range between 300 to 850. A score of 300 means you have a high credit risk while an 850 means you do not.
Your credit score is determined by a credit reporting agency using the credit history it has compiled on you. Three well-known credit reporting agencies are Equifax, Experian and TransUnion. For example, the FICO score, developed by the Fair Isaac Corporation, accounts for such factors as how often you make timely payments, the size of total debt you have and how long your credit history has been established.
Your credit score is extremely important because it is used when you are applying for loans and credit cards. The better score you have, the more likely you will get lower rates, and this can save you thousands of dollars on loans like mortgages. So, irresponsibility with a credit card not only means extra fees on the card but probably also higher rates on other loans.
Therefore, I'd like to give you the following advice about credit cards, if you already have one or decide to get one:
First, be careful how you use your credit card. Make sure you have the money to cover the monthly bill.
Second, make your payments promptly. Do not miss the payment due date because most credit card companies will tack on a late payment fee. If you do miss the payment date, make the payment immediately. Then, call the credit card company and ask if it will take the late fee off. They may take it off - especially if this is your first missed payment.
Third, pay off as much of the balance as possible. It's better to take money out of savings to pay your bill because your bill is most likely at a higher interest rate than your savings account.
Fourth, check your credit score every year to make sure there are no errors concerning your payment history, lines of credit or total debt, as these factors can seriously impact your score. The Fair and Accurate Transactions Act (FACT), passed in 2003, allows people to apply for and receive a free credit report from Equifax, Experian and TransUnion each year. There's no need to pay exorbitant fees to find out your score.
There are some benefits to getting a credit card. If you are responsible, you can start establishing credit early, which will help with your credit score. Credit cards are also helpful in emergencies or when you forget cash. They are also good for record-keeping.
Overall, I think it's worth waiting to get a credit card if you know you are not going to be responsible or will have trouble making payments. After all, you are only going to ruin your credit score.
I think a check card, tied to your bank checking account, is a good alternative to a credit card. You have the convenience and record-keeping ability of a credit card but the safety in only spending what you have in your checking account. Plus, you also have access to the cash in your account via the ATM. There's a danger in the check card of overdrawing your account, so you've got to be careful here, too. However, I think you are much less likely to get in trouble with a debit card.
Information from - msnmoney.com (credit score, FICO, FACT information), bankrate.com, schoolwork.org (APR information)
(04/04/07 12:00pm)
Once I established myself as an investor, I decided to seek out an investing role model, just as amateur sports players look up to the professionals or potential actors look up to movie stars.
I found that the Derek Jeter and Tom Hanks of investing is invariably Warren Buffett - the $50 billion plus investor and CEO of Berkshire Hathaway.
Buffett is the most successful investor in the world. I bring Buffett up, not for a history lesson - albeit he is an interesting fellow - but because his investing techniques can be applied to any portfolio. Learning Buffett's techniques provides you with practical investing strategies that have been used to produce phenomenal returns at Berkshire, propelling its class A stock price from $8,200 in 1990 to $107,900 today.
Buffett originally gained control of Berkshire in the 1970s when it was a poor performing textile company. Through Buffett's astute leadership, Berkshire began purchasing insurance companies and eventually dissolved the textile market. It was no accident that Buffett got into the insurance business. Buffett, who by this time was already a great investor, knew that the steady stream of cash and premium payments generated by Berkshire's insurance holdings could be used to purchase equities and corporations.
Buffett has a clear strategy he utilized for picking equities for Berkshire. Some of this might be a little confusing; I know it was for me for quite some time. However, once you internalize the things I am about to discuss, you will have a better understanding of finance, of the true value of equities and, most importantly, how to invest like Buffett. But keep in mind, there are many ways to value businesses and the one I am about to discuss is by no means the only one.
Buffett, being of the Benjamin Graham school of investing, sought to purchase companies that were trading below their intrinsic value. Intuitively, you may think intrinsic value is a measure of the assets a company has on the books, which are distributable to shareholders - the shareholders' equity section of the balance sheet.
However, Buffett determines intrinsic value by calculating the sum of the future cash flows of the company, minus capital expenditures, discounted to the present. Buffett subtracts capital expenditures from cash flow to arrive at what he calls the "owner's earnings." Buffett has shown us that it is important to factor in capital expenditures, the investments and upgrades a company makes in its property, plant and equipment, because a firm cannot continue to run with making these capital outlays.
While valuing a business is a complicated process, when Buffett is able to confidently determine that the business is trading below its intrinsic value, he scoops up the stock in large quantities, assuming that the stock will eventually increase to its fairly valued level and perform well over the long run.
You may think that with such a strategy, Buffett purchases obscure companies nobody knows about. However, that's far from the case. Buffett likes to buy simple and understandable high-quality businesses that have strong competitive advantages. Buffett also looks for companies that have consistently performed well and have good long-term prospects.
Buffett has purchased stocks of The Washington Post Company, GEICO, RJ Reynolds Industries, PNC Bank, Freddie Mac, McDonald's and the Walt Disney Company.
However, his most famous investments have been in Coca Cola, American Express, Wells Fargo and Gillette.
For example, Buffett started buying Coca Cola stock in 1988. During the 1970s, Coke had a lot of problems and the business had been lagging. During the 1980s, Buffett noticed that the new Coke CEO was making significant changes at Coke that translated into increased profitability. In the 2003 annual report, Berkshire reported that it owned 200 million shares of Coca Cola at a total cost of $1.29 billion and a market value of $10.15 billion.
Buffett views the stocks he invests in as businesses, not simply pieces of paper. He has conviction in the businesses he invests in.
When you purchase shares in your company, you have to say to yourself, "Would I like to be the owner of the business?" Too many times, I see people buying stocks for speculation or obscure businesses that they hope will hit it big. Buffett buys established companies that have already proven themselves and which he feels will be able to continue this success in the future. I think you should do the same.
For decades, Buffett has also been purchasing businesses outright, so his principles in stock valuation apply to valuing whole businesses for purchase. Berkshire's various subsidiaries include GEICO Auto Insurance, Fruit of the Loom, Clayton Homes, The Pampered Chef and Benjamin Moore & Co.
Berkshire Hathaway's stock holding, as of Sept. 30, 2006, included Coca Cola, American Express, Procter & Gamble (P&G purchased Gillette in 2005), along with more recent purchases in Anheuser Busch, Johnson & Johnson, Conoco Philips, Wal-Mart, Nike, Comcast and General Electric.
Now, I'm not necessarily recommending that you purchase the stocks of these companies, but it's worth taking a look at each company to determine its strengths and long-term investments and evaluate whether you think Buffett made a good investment.
I think the final, more general point you should take away is that the value of a business is based upon its future prospects, earnings and cash flows. Buffett uses the past to evaluate the future, but he values the business based upon what he thinks will happen in the future.
Now, some of the finance principles I presented may be a little ambiguous to you, and I am by no means an expert. I think you should take some time and learn the basis for business valuation and financial statement analysis. I don't value my stocks, but I do look carefully at measures that determine the future value of the business, and I do subscribe to the analyst reports at morningstar.com, which value many stocks based on discounted cash flow analysis.
Information from - "The Warren Buffett Way" by Robert G. Hagstrom, investopedia.com and wikipedia.com
(03/28/07 12:00pm)
When I wrote the story about Jim Cramer two weeks ago, I had the feeling that it would not be the last time I mentioned him. However, I'm surprised how quickly Cramer provided me with controversy to criticize.
Cramer has recently gotten himself into trouble after he made comments that could be construed as a discussion of stock and market manipulation on a Wall Street Confidential video segment from thestreet.com.
The video, which was released in late December, started to come under scrutiny when it was posted on YouTube.
Cramer's comments finally came to public attention this week when an article about the incident was published in The New York Post.
In the Wall Street Confidential segment, Cramer seems to discuss methods he used to control the market.
He said, "You know, a lot of times when I was short at my hedge fund - when I was positioned short, meaning I needed it down - I would create a level of activity beforehand that could drive the futures. It doesn't take much money."
Cramer goes on to talk about what he would do if he owned stocks.
"Similarly, if I were long (owned stocks) and I wanted to make things a little bit rosy, I would go in and take a bunch of stocks and make sure that they're higher. Maybe commit $5 million in capital and I could affect it. What you're seeing now is maybe it's probably a bigger market. Maybe you need $10 million in capital to knock the stuff down," Cramer said. He goes on.
"But it's a fun game, and it's a lucrative game. You can move it up and then fade it - that often creates a very negative feel. So let's say you take a longer term view intraday and you say, 'Listen, I'm going to boost the futures and then when the real sellers come in - the real market comes in - they're going to knock it down and that's going to create a negative view.'"
But what is worse than Cramer talking about ways in which he may have controlled the market is what seems like a recommendation that hedge funds participate in this type of behavior.
"I would encourage anyone who's in the hedge fund game to do it," he said. "Because it's legal. And it is a very quick way to make money. And very satisfying."
While I personally think it may be debatable whether this tactic Cramer discusses is legal or whether it is market manipulation, I hope the Securities and Exchange Commission (SEC) investigates Cramer's claims.
Henry Blodget of slate.com points out that illegal stock market manipulation, as defined by the SEC on its Web site, is "intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security . or rigging . trades to create a false or deceptive picture of the demand for a security."
In the online segment, Cramer goes to talk about strategies to make individual stocks like Research in Motion (RIM) decline. He discusses spreading fear about the stock by calling reporters and newspapers.
"Get the Pisanis of the world and people talking about it as if there's something wrong with RIM. Then you would call the Journal and you would get the bozo reporter on RIM and you would feed that Palm's got a killer that it's going to give away."
At least Cramer admits that this type of activity is illegal. "Now, you can't 'foment.' That's a violation. You can't create yourself an impression that a stock's down."
But then he adds, "But you do it anyway, because the SEC doesn't understand it."
I don't think any hedge fund manager would ever want to talk about market manipulating behavior, whether illegal or not. The potential for controversy and scrutiny by the SEC should have been an appropriate deterrent.
Investors don't like market manipulation and that fact alone should have kept Cramer quiet. The stock market is supposed to be a free market system in which money is invested efficiently in the most promising enterprises and the prices of companies reflect all internal information known about them. I have already told you that these two assumptions are not always true, especially in the short run.
But what exacerbates the problem is intentional market manipulation, where the traders and hedge funds use their large capital bases to control the direction of stocks and the market in the short run to make a quick profit.
This type of activity hurts small investors. They wonder why their stocks are going down for no conceivable reason and this creates panic, so they sell. If there's one lesson to be learned from all this, it's that you have to hold on through the volatility because it can just be a hedge fund playing games.
I don't think Cramer should have made the comments. First, he seems to talk about controlling the market at his hedge fund. Second, he seems to advocate this type of behavior by hedge funds.
Some of you criticized me for being too harsh on Cramer in my last story about him. In this story, I tried to present the facts, provide you with a little commentary and give you my opinion. But I encourage you to make your own decision on Cramer.
Information from - Cramer vs. Cramer: "Will his crazy confession destroy his career?" Henry Blodget, from slate.com and partial transcript of Cramer's comments from slate.com
(03/21/07 12:00pm)
Google and Apple are two of the hippest companies around. Both have been successful in uprooting the old establishment and creating innovative products and services that consumers have embraced with open arms - Google with its search engine and Apple with the iPod.
Both companies have successfully monetized their products into cash cows. Their profits have soared. Google's net income increased from a little over $399 million in 2004 to over $3 billion in 2006. That's a 651 percent increase in two years. Apple's net income increased from $276 million in 2004 to $1.99 billion in 2006.
Clearly, investors who held Google or Apple stock from 2004 to 2006 were handsomely rewarded, as the explosion in the companies' stock prices is as amazing as the explosion in profits. Google's stock increased from its initial public offering of $100 in August 2004 to around $440 today, while Apple, trading in the mid $20s during most of 2004, nearly tripled by January 2005, before a 2-for-1 split in February 2005. It has doubled from that point to around $90 today.
The coolness factor and phenomenal growth rates of both companies have made them popular investments. However, I think there's a risk in this popularity for new investors. New investors invariably seem to think that good companies always make good investments. And because Google and Apple's success is so well known, I am afraid that many new investors may be investing in the companies strictly based on these factors.
Remember, a stock's fundamentals and long term prospects are what's important. I think the fundamentals of both companies are sound. Both have hoards of cash, are growing at feverish paces and trading at valuations that I feel fairly encapsulate their near term growth prospects.
What troubles me is the long term prospects of each company. I do not think either company can sustain the growth they have had in the long term. I believe that potential fundamental and business-specific problems could threaten each company's current competitive advantage and success in the future.
Both companies face an environment of technological change and continual innovation by competitors, which seems to be the nature of the technology industry. These two factors could conceivably provide challenges to Google and Apple in the future.
Google has had great success with its search engine. Google created a search engine that was perceived to be better than all the others and it has been able to maintain this advantage. Google has monetized its search engine by selling click-through advertising.
Google makes money every time someone clicks on an advertising link displayed by the search engine, based upon key words or phrases of the search query. Google has also leveraged its brand awareness and market share into other arenas, such as Google Earth, Google Checkout and Google Finance.
However, I think Google's prospects are not as rosy as most people think. According to morningstar.com, Google continues to make almost all of its income from the advertising on its search engine. While its other portfolio of products are certainly neat, they have not produced a significant revenue stream. A company without a diversified stream of revenue from several products is always at risk.
There are three potential threats Google could face in the future.
First, Google's search engine may face obsol-escence, if online technol-ogies and applications continue to advance at record paces.
Second, Google has fierce search competitors in Microsoft, Yahoo and IAC. All already have competitive search engines, and they have the capital and talent to continue to upgrade them. If Google and these other firms continue to produce superior search engines, the technology will probably progress to a point of diminishing returns - where every search engine provides the same results.
This produces an environment where Google would become a commodity. Its main revenue stream, click-through advertising, would be significantly less valuable.
Third is that another competitor designs a superior search engine. Do you remember Ask Jeeves and AltaVista? They were marginalized by companies like Google.
Apple also has potential threats to its iPod.
The iPod is a wonderful device. Right now, Apple has an advantage over its competitors. It offers a highly regarded product everyone knows and its applications and storage capacity seem to offer a better value over its competitors.
However, Apple also has worthy competitors who certainly have an incentive to dethrone Apple. Companies like SanDisk, with their Sansa, and Microsoft, with the Zune, have created products that have many of the advantages of the iPod. The gap between the competitors and Apple will only get smaller.
I also think Apple could have problems with its iPhone. I believe the iPhone's $500 price tag and exclusive contract with Cingular Wireless will hinder its adoption by iPod users.
Apple appears to be safe for now. It still has a significant share of the MP3 and hard drive market. I believe part of this is due to Apple's iTunes, which has provided iPod users with an excellent music and media service for all their iPod needs.
However, in my opinion, the changing technology environment or competitors could eventually prevail over Apple. I don't think Google and Apple's businesses will be threatened in the near future. Regardless, I think it's too early to determine if their products will be around for decades to come. It's very possible that the scenarios I have laid out about each company will never come to fruition.
But there's also the possibility I may be right. Google and Apple must prove they can continue to innovate and meet the needs of consumers by providing superior products. This prospect will take time to determine and until they do I recommend that when investing, you stick with established companies, which have already proven their competitive advantage and success over time.
(03/07/07 12:00pm)
I believe that the large stock market correction - yes, that's what I'm calling it - we experienced this week, beginning with the 416-point slide in the Dow Jones Industrial Average on Tuesday, should not be cause for significant concern.
The correction in the market may be the foreshadowing of the economic slowdown we are supposed to get later this year, and this means you probably should be a little more selective with your portfolio by buying large, well-known companies that can weather a slowdown. However, that doesn't mean you should cash out your stocks and run for cover.
Since the beginning of the year, I have anticipated a correction in the market, not because I believed the market was highly overvalued, but because the market had a nice run-up from the summer into the new year. And what goes up must invariably come down.
I was actually hop-ing for a correction to buy some good stocks at attractive prices. I'm frugal when I purchase stocks - I never want to pay full price.
But for the people fully invested and hoping for another good year, the huge decline on Tuesday was painful. That's why it's important for investors to understand what happened.
The catalyst for the selloff was a 9 percent decline in China's Shanghai Composite index, after Chinese authorities said they would institute measures to curb market speculation.
The China downturn was compounded with weak durable goods data and former Federal Reserve chairman Allen Greenspan's comment about the possibility of a recession. You may remember Greenspan for his famous "irrational exuberance" speech.
The China selloff, weak durable goods data and the words of Greenspan set off a panic, as investors became nervous about the possibility of a global slowdown and fears that a recession may be imminent.
Remember, I said that the market was irrational sometimes. Well, that is exactly what happened on Tuesday.
While fears of a global slowdown and recession are possi-bilities that shouldn't be taken too lightly, the 416-point decline in the Dow Jones on Tuesday was excessive. We got no news on Tuesday that should have made the stock market worth 4 percent less than it was the day before.
But fear and panic are going to happen in the market. Wall Street is finicky, so you have to anticipate that things like this may happen.
I think that psychologically the selloff by investors was also driven by fear that they were going to lose all of their gains from 2006. I think it snowballed from there, as more and more people took the huge dive in the market as invitation to lock in their gains.
So, while this week's selloff was a correction to better reflect the anticipated economic slowdown, it was exacerbated by panic. But market hysteria is not necessarily a bad thing. Personally, times like these allow us to pick up some stocks at discounts.
I really like the market right now - despite the panic and volatility.
Overall, I think the market is undervalued. Many big-cap stocks I've been watching are trading at lower multiples (price-earnings) than they have for the past 10 years. The lower the multiple, the cheaper the stock in relation to its earnings. This tells me that a slowdown is already priced into these stocks, so this week's declines make these stocks even more attractive to own.
The big caps are the ones you want to be owning: companies like Johnson & Johnson, Procter & Gamble, Altria, General Electric, AIG, Citigroup and Pepsi. These are the companies that will be better able to withstand a slowdown because of their size, diversified portfolio of products and global presence. And they are cheap.
Right now, I would be careful with the small caps and midcaps. I don't see them holding up well during a slowdown. I would try picking them up during a market downturn, where they are more attractively priced.
So, while I like the valuation in the market right now, especially after this week's correction, we could see future volatility in the market. And if we do get a slowdown or recession, you want to have a diversified portfolio of quality large caps to weather the storm and maybe even make a little money.
(02/28/07 12:00pm)
I have no reservations about my dislike of James J. Cramer and his antics on his financial show, "Mad Money."
Cramer has become the voice of the finance world, with "Mad Money" becoming the most popular show on financial news channel CNBC. This proposition is a pretty frightening concept when you consider his on-camera behavior - his high testosterone recommendations, his chair throwing and biting the heads off plastic bears - these are only a few of his antics.
The Lightning Round of the show, where Cramer has people call in and ask his personal opinions on stocks, is perhaps the most chaotic and ludicrous. With his multitude of sound effects, including a shotgun and a baby's cry, Cramer tells callers whether to buy, sell or hold stocks, usually making quick judgments off the top of his head.
It's preposterous to assume that even a seasoned stock veteran like Cramer can make proper determinations on stocks in such a short amount of time. And there's strong evidence that his lightning round performance is less than stellar.
On cramerwatch.org, a monkey named Leonard is given the Lightning Round stocks and makes random buy and sell recommendations. The Web site tracks the performance of Leonard and Cramer's buy and sell recommendations against an index to determine who is right about a stock in a 30-day period.
Right now Leonard is edging past Cramer. He is right in his recommendations on the Lightning Round stocks 49.75 percent of the time, with Cramer at 49.23 percent.
Even if you do discount the performance of Leonard - after all, he is the Wonder Monkey - Cramer is still wrong on his Lightning Round recommendations more than 50 percent of the time over the tracked 30-day period.
Cramer and Leonard were in a dead heat this week with 36.84 percent right recommendations and 63.16 percent wrong. I guess everyone has their off days, even Leonard.
In the 30-day period, Cramer beat Leonard 118-113. However, Leonard seems to have the better long-term track record. And again, he is darn good for a monkey.
It is examples like these that make me very skeptical of Cramer's short-term stock picking ability. I am afraid that many of you may be pulled in by Cramer and look to him as your sole investing advice.
Many people take Cramer's advice as if it were the only game in town. Personally, I am sick and tired of hearing recommendations of what Cramer said to buy and sell. I don't care!
There are actually people who sit on their computer with their brokerage account open, ready to execute a trade, as soon as Cramer recommends a stock during his opening segments on "Mad Money." The stocks Cramer recommend usually spike in after-hours trading. People like this are idiots and they deserve to lose their money.
I'll admit that I have been a "Mad Money" viewer. I am also somewhat shamed to report that I read his book, "Real Money: Sane Investing in an Insane World." However, I have developed a more sober view of Cramer and I certainly don't believe he is a stock market genius.
First, Cramer's eagerness and conviction to invest in stocks has also led to a lot of losses for investors who bought in. One recent example is Cramer's recommendation of Daktronics, a maker of scoreboards, on Dec. 11. It went down around 20 percent after the company forecasted fourth quarter results below expectations. The stock has since dropped even more, to $28.36, a far cry from the $36.91 when Cramer recommended it. This is a good lesson to do your own research on the stock market.
No one during the tech boom will forget Cramer's prediction about Internet stocks in a thestreet.com article from February 2000.
"These are the only ones worth owning right now . (These) winners of the new world are the only ones that are going higher consistently in good days and bad," Cramer wrote. According to the revised version of "The Intelligent Investor," $10,000 invested equally across all of Cramer's "Winner's of the New World" would have lost 94 percent and would have been worth $597.44 in 2005.
He couldn't have been more wrong. For anyone who followed his advice, his words turned from those of great foresight and vision to words of destruction and lunacy.
Don't get me wrong: I think Cramer is a smart guy. He graduated magna cum laude from Harvard University and also received a law degree there. He became a successful Goldman Sachs stockbroker during the '80s and founded and ran the hedge fund Cramer Berkowitz for more than a decade, claiming to have averaged 24 percent returns during his tenure.
Cramer's autobiography, "Confessions of a Street Addict," written in 2002 before his Mad Money success, tells the story of his rise to Wall Street fame. By the way, I never did finish the book.
Until he develops his show into a more conservative format, dismantles the Lightning Round and creates a purpose more about education than recommendation, he is going to be bad news. I think stock recommendations are okay, but he is going to have to recommend stocks solely on their long-term merits for them to be good for small investors.
Therefore, don't listen to Cramer. Listen to the education, the research, yourself and, most importantly, Leonard, the Wonder Monkey. Hopefully, Leonard will get his own CNBC show some day - I can dream, can't I?
Information from - "The Intelligent Investor" commentary by Jason Zweig, Collins, 2006.
(02/21/07 12:00pm)
Finally, we have gotten through the fundamentals of the stock market. I have driven home the point of the great benefit of investing in it. Hopefully, I haven't bored you in the process - God forbid. But when you are trying to convince people to do something, especially when it involves a lot of money and time, you better have a good rationale for why they should listen to you.
Now that I have successfully convinced you to open up that brokerage account and put a thousand dollars in there to trade, I better give you a few rules on how to invest so that you don't cash out with less than you started with and then blame me for all your misfortunes.
Again, it's okay if you want to take the mutual funds route or keep your money in a savings account. There's nothing wrong with earning risk-free interest. Just don't expect to become a millionaire by investing in CDs and treasury bonds.
However, for all of you that are not risk-averse, there's a lot of money to be made in individual stocks and I want you to take the journey with me. I am going to try to provide you with my one-and-a-half years of "wisdom" on individual stock investing that has helped me limit my losses and maximize my gains.
Rule 1: Don't invest a single penny into the stock market until you really know what you are doing.
You cannot just have a cursory knowledge of the stock market. You have to really know how the stock market works. Overall, you first must understand that stock prices are driven by supply and demand in the market for that given stock.
Moreover, you must understand how to look at the fundamentals of a stock: the price-earnings ratio, the book value, the return on equity and the profit margin.
Price-earnings ratio is the amount a shareholder pays for each dollar of a company's earnings per share. Book value is the assets minus liabilities and is also called the shareholder's equity. Return on equity is the net income divided by shareholder's equity.
You should also understand that the true value of a company is not its stock price, but its earnings, its tangible assets, its growth prospects and so on.
Spend some time educating yourself before you press the trade button.
Rule 2: Investing in the stock market can be like gambling if you don't make wise decisions.
For example, while there is risk inherent in all levels of the stock market, the risk is greatest in small cap speculative stocks, which have a market capitalization between $300 million and $2 billion, as well as mid-cap speculative stocks, which have market capitalizations between $2 billion and $10 billion. If you bank your entire portfolio on these obscure small caps or mid-caps, you are pretty much gambling.
Rule 3: The stock market is sometimes irrational.
This is especially true in the short run. Sometimes, more often than I like, the directions of stocks may not make a lot of sense. A company may see its share price decline for no reason. Another company may report terrible earnings, but its share price may move significantly higher.
The lesson from this is not to get caught up in the irrationalities of Wall Street. You don't have to follow the herd of idiots.
Rule 4: Diversify! Diversify! Diversify!
I hope the repetition has engrained this concept into your mind forever. You cannot invest your entire stock because it's got great prospects, it's going to be the next big thing or it's going to beat the S&P for years to come. A stock may be great now, and it might have great prospects, but anything, and I mean anything, can happen in the future. Look at Enron. If that was the only stock investors held in their portfolio, they got massacred. The stock's completely worthless today.
Also, you can't just invest in one sector. Think about the tech bubble. Double digit gains turned into painful losses. However, if they had only had a percentage in tech, their entire portfolio wouldn't have been wiped off. Remember, it's hard to start over with nothing.
To be fully diversified, you must invest in several sectors. These sectors should not be correlated to each other. That way, a downturn in one sector may only affect one or two stocks in your portfolio.
Rule 5: Don't take the word of the analyst or the financial pundit as the gospel.
If you invest in a stock just because of a recommendation from a Goldman Sachs analyst or Jim Cramer, you deserve to lose every cent of your money. That is just plain stupid. Would you also jump off a bridge if Cramer asked you to? Don't answer that.
I'm not saying to completely ignore the analysts or experts. They can have good ideas. But they also have some bad ones, and quite honestly, they don't always know what they are doing. That is why you have to do the research to determine if a recommendation merits investment.
Personally, I've gotten some good stock ideas from the analysts at morningstar.com, but I always did my homework before I bought.
Rule 6: When you have significant unrealized gains in a stock in a short period of time, sell it and take the gains.
There's got to be a compelling reason for you to hold on to the stock when you are up 20 to 50 percent in a couple of months. Unless you really have strong reason to believe that the stock is still undervalued, you should sell and be happy with the gain.
I know from experience. My first invest-ment was in Petmed Express. After a few months, I had a 30 percent unrealized gain. I was on top of the world. Then out of nowhere, the stock went from $20 to $10. Boy, did I wish I had sold. If I had known more about stocks and investing - yes, I was also breaking Rule 1 - I would have realized the stock was overvalued. Losses are much more painful than selling a stock before a run-up. Oh well, I guess my mistake is your gain.
(02/14/07 12:00pm)
Before I go into detail on investing in individual stocks, I'd like to give you an idea of how I got into stock investing.
I discovered the stock market about a year-and-a-half ago. One day, I decided to watch CNBC. I became intrigued as the commentators and analysts talked about the stocks of well-known companies such as Pepsi, Google and McDonalds. However, it was not because I truly understood what they were talking about.
I didn't understand market capitalizations, price-earnings ratios or other Wall Street lingo. Nor did I understand the fundamentals of revenue growth or earnings per share growth. But, I wanted to learn.
I have spent the last year-and-a-half dedicating myself to learning about stocks, and I still have only scratched the surface.
The reason I tell this story is not for anecdotal reasons. I want to illustrate that investing is for people that are passionate and interested in finance and stocks. Otherwise, why would you be doing it? You would be better off investing in mutual funds and spend your time doing things you enjoy.
In my opinion, the most successful investors have been passionate investors. They love stocks. Look at Benjamin Graham, Warren Buffett, Peter Lynch - I'll even throw Jim Cramer into the group.
Why are investors passionate about stocks? Because they have an interest in business, and when they buy stocks, they look at them as investing in pieces of a business. Most people don't have the capital to start their own business, but they can invest and share in the success of some of the greatest companies of all time.
Just think about it: You can invest in thousands of great companies in the United States and abroad. It might sound silly, but when you purchase shares of Pepsi, you are part owner of the company. As Pepsi grows, your shares in the company will grow. As a shareholder, you get to share in Pepsi's success.
Let me give you the statistics of some high profile companies that we all know.
In 1970, when Wal-Mart went public, the company had a market capitalization (that's the number of outstanding shares of a stock times the share price) of $25 million. In 2006, Wal-Mart's market capitalization was $195 billion. The company was one of the greatest growth stories ever during this period. And who benefited the most? Its shareholders. One dollar invested in Wal-Mart at its initial public offering would have been worth an astounding $5,809 in 2006.
I can go on. One dollar invested in Home Depot in 1981 would be worth $1,153. One dollar invested in Microsoft in 1986 would be worth $374. One dollar invested in Dell in 1988 would be worth $338. One dollar invested in Starbucks in 1992 would be worth $56.
One point I want to illustrate here is that there are a lot of great companies out there that you can invest in and that can make you money.
But what you should really take away is that the greatest returns come from discovering superior companies in their early stages, or while they are still growing rapidly.
And despite the amazing success of companies and the stock market over the past 100 years, I still think there will continue to be great growth stocks and that the early investors that discover them will be the beneficiaries.
Even recently, there have been some great stocks for early investors. For example, you could have invested in a little known juice and energy company in 2003 called Hansen Natural. I'm sure you know them. They make the oversized Monster energy drink. According to morningstar.com, $10,000 invested in Hansen in 2003 would be worth over $300,000 today.
For full disclosure purposes, I do own shares of Hansen. Unfortunately, I did not buy them until early 2006, but I was still able to make money because the company was still growing at an amazing rate.
You don't have to be the first one in the stock to make money. You just have to get into a stock before the company's true potential and prospects are priced into the stock. For example, if you invested in Wal-Mart during the 1980s or '90s, you would still have made a lot of money.
Anyone has the potential to find the next Wal-Mart, Microsoft or even Hansen Natural. But if you want to discover great stocks, you have to have the passion and drive to find them. You need to be motivated, and maybe more importantly, you have to be well educated in stock investing.
I think you should have some exposure to small, prospective companies, because as I have indicated, there is the potential for huge upside if the company hits it big. But I think that this exposure should be a small amount of your portfolio. I think a significant portion of your stock market gains can come from investing in established companies that have room for growth but are less risky.
Nevertheless, the only way you are going to find the stocks of great companies is to start learning about investing and to start looking. If you're passionate, maybe you could be the next great success story.
Information from - "How to Identify and Invest in the Hot Stocks of Tomorrow"; "Finding The Next Starbucks," by Michael Moe, 2006.
(02/07/07 12:00pm)
While stocks have certainly had phenomenal returns over the past two decades, they have also been volatile and risky at times. As I have stressed before, stock investing is not for the queasy. We will more than likely see bear markets again in the future.
I hope you realize by now that investing in stocks is not easy. It takes discipline, smarts, hard work and a long-term perspective. By hard work, I mean you must take the time to learn about stocks and spend significant time deciding which stocks to buy. For many, this process will be uninteresting and tedious. Furthermore, most people don't have the time or discipline to invest in individual stocks.
If you want to have nothing to do with picking individual stocks, but still want to benefit from the stellar returns of the stock market over the past two decades, then a vehicle such as a mutual fund is probably right for you.
A mutual fund is a basket of stocks, sometimes thousands of them, that are bought and sold by a fund manager. When you buy a share in that mutual fund, you are essentially buying a miniscule ownership in many companies.
By spreading your investment among many companies, you reduce your risk of seeing your portfolio completely devalued from speculative or highly volatile holdings.
However, your mutual funds are probably not going to see much greater returns than any market index because of the amount of stocks owned. Moreover, many mutual fund managers don't beat the market indexes.
Mutual funds also charge expenses that will eat away your annual returns. These expenses are stated as an expense ratio. The average expense ratio is about 1.5 percent. For example, an expense ratio of 1 percent on a $10,000 investment would mean that you pay $100 a year for the managing firm's expenses. $100 might not seem like a lot, but over several years you could pay thousands of dollars, depending on how much you invest.
Don't get me wrong - I think mutual funds are a great way for an investor to have exposure to the stock market. Fund managers like Fidelity's Peter Lynch and Legg Mason's Bill Miller have turned out big gains for their investors - most likely far more than an individual investor could have achieved by themselves.
I just wanted to point out some of their drawbacks to show you why they might not necessarily be the best stock investment, or the best place to park all of your retirement money.
If you are interested in mutual funds, firms like Fidelity, T Rowe Price and Vanguard are good choices for low-expense funds.
There are two other new investment vehicles for stocks that don't encumber the investor with high expense ratios and dismal fund manager performance. In my opinion, both are good alternatives to mutual funds.
The first, index funds, have been around for a while. They, like mutual funds, invest in a basket of stocks that seek to track an index like the S&P 500, Dow, NASDAQ or Russell.
All index funds are not equal.Some funds track averages better than others, but overall you are betting on the stock market and the long term success of companies in the index, not on the stock-picking prowess of fund managers.
Index funds also have the extra incentive of having razor thin expense ratios, so you get to keep more of your portfolio assets and returns.
Another investment vehicle that has been around for a while, but has seen a greater proliferation over the last few years, is exchange traded funds (ETFs). They are similar to index funds in that they just seek to track an index.
However, they are unique in the ability to buy and sell them like stocks in your brokerage account throughout the day. They also trade at very low expense ratios.
I think mutual funds, index funds and ETFs are good places to invest for people who don't have time to actively manage a stock portfolio.
However, you have to do your homework, learn about how funds work and research specific funds before you buy. All funds are not created equal, and there are a lot to choose from. For more information on these and other investment options, go to morningstar.com.
(01/31/07 12:00pm)
Despite the enticing headline, let me forewarn that I won't promise you that you will get rich, and I certainly cannot promise that it will be quick. What I will try to explain is why you should think about investing in stocks.
You won't get rich tomorrow. Long-term investing in the market is a strategy for wealth accumulation that will probably take many decades, so I have more of a "get rich slowly" strategy.
Stocks have proven, over the long run, to be one of the most prudent investments for someone who wants to accumulate wealth for retirement.
Stocks have had compounded annualized returns of 8.3 percent for the last 200 years, according to Wharton School of Business finance professor Jeremy Siegel in "Stocks for the Long Run." Stocks have kept up with inflation, so any money you invest in stocks will probably not be devalued by rising prices.
According to Siegel, $1 invested in the total stock market in 1801 would be worth over $8.8 million in 2001. This calculation assumes that all dividends would be reinvested and compounded.
Investing $100,000 in the stock market when you are 35 would turn into $1,093,588 at a rate of 8.3 percent compounded annually for 30 years. You would be a millionaire by the time you retire, but this calculation does not assume any investment before you are 35.
Even if you started investing a small amount when you were 25, you could eventually accumulate a lot more.
Of course, this calculation assumes that the stock market would return 8.3 percent annually, as it has historically, but unfortunately no one knows what the future returns of the stock market will be.
Stocks have handily beaten the returns of savings accounts, bonds and even gold over the long run. The reason for the discrepancy between the returns of stocks and fixed income investments like bonds is the risk involved in each investment. Stocks are a lot riskier than bonds and savings accounts, so a higher return must be rewarded to the investor to purchase stocks in the open market.
Plus, stocks benefit from the earnings growth of companies. For example, companies in the S&P 500 - an index containing the stocks of 500 mostly American corporations - have had earnings growth in the double digits over the last few years. The robust growth of companies over the past few years, and certainly the past few decades, has benefited shareholders with significant returns.
If you are adverse to risk, stocks may not be the right investment for you. Bear markets - prolonged periods where market prices are falling - do exist, and they have destroyed significant amounts of shareholder wealth. The last bear market, the technology bubble in 2000, not only saw the 70 percent decline of the technology heavy NASDAQ index, but large declines in the S&P 500 and the blue chip Dow Jones Industrial Average after that.
However, this bear market was unique in the rampant speculation of internet stocks that had no earnings and only the optimism and dreams of investors to keep them afloat. This speculation brought with it a relative overvaluation of the entire stock market, where stocks were trading at much higher levels than they had historically.
The stock market is risky, that is why it has been so rewarding to so many investors and so cruel to others. But with a prudent, long term strategy, you could see significant wealth accumulation.
In "Stocks for the Long Run," Siegel calculated that the stock market returned positive compound annual returns over any 20-year period for the last 200 years. That is a pretty damn good track record. Of course, this data assumes that all dividends are reinvested to purchase more shares of stock.
Empirical data like Siegel's shows that a long term stock investor could beat bonds, as long as he does not withdraw his money at any sign of pessimism.
There is also an important caveat for the long term, value-oriented investor. An investor who buys when the market is bearish and buys less when the stock market is fully valued or overvalued will see much greater appreciation in his wealth than someone who sells during a bear market and buys when optimism is at a high - as many people did during the technology boom.
I know retirement is a long time away, and it is something you probably do not want to think about. However, by investing early, you have the greatest potential for significant savings because of the power of compounding.
The same thing goes for investing in stocks, but there is an even greater incentive to save because there is the potential for greater amounts of compound interest. That is why it is important for you to establish 401k accounts and Roth IRA accounts.
The past may not dictate future performance, but what the past shows us is that stocks have been one of the best investments over the last 200 years. In the end, history has to count for something. I don't recommend putting all of your money in the stock market, but you should definitely get at least some exposure.
Information from - "The Only Investment Guide You'll Ever Need" by Andrew Tobias
(11/08/06 12:00pm)
For most people, personal finance is not the priority it should be. Millions of Americans close their eyes to their current financial situations. Instead, these people choose consumption over savings. Immediate gratification takes priority over planning for their future and retirement.
We must get back to the basics of finance and money management. An understanding of these two disciplines will be the only way that people become fiscally responsible and build a future for themselves.
Now more than ever, people must take responsibility for their current and future financial situations.
We are at a crossroads where government welfare and corporate responsibility will no longer be there to take care of us. The government's over-extension of social security and the retirement of the baby boomers will most likely shrink the amount of government funds for future generations significantly. If that isn't enough, corporations are trimming pension plans in an attempt to cut expenses and reduce their future liabilities.
Now is the perfect time to begin financial planning. If you start now, you can develop good money management habits early. You will also be able to put money to work for decades before retirement, building a considerable nest egg.
However, if you do not start early, peril awaits you. I cannot tell you how many adults I have encountered who have no goals or plans for their future, and have no idea when or even if they will retire. No one wants to become like one of these people, but with a sense of complacency and a disregard for responsibility you may.
To become financially responsible, you must first discard the misconception that finance is difficult and hard. This is the mindset of a complacent individual. The ideas of basic finance are actually very easy to attain and understand.
The first thing you must realize is the idea of interest. Banks offer interest on money market and savings accounts because they want to borrow your money. What they do is borrow your money at a rate, such as 5 percent (the rate they are willing to give you for depositing your money), and they loan it out or invest it somewhere else to earn a higher rate, say 7 percent.
Now, you might not be impressed with an interest rate or average percentage yield (APY) of 5 percent. By itself, the interest rates are not particularly provocative. However, when you add compounding to the equation, you can come up with some pretty good returns on your investment. For those of you who don't remember compounding from high school math, compounding is the earning of interest upon interest.
For example, if you invest $100 today at an APY of 5 percent, your deposit will grow to $105 in one year. If you reinvest the $105 for one year, your deposit will grow to $110.25. The 25 cents you earned the second year is the interest earned upon the initial $5.
Because of compound interest, at a 5 percent interest rate, your money will double about every 14 years instead of every 20 years.
Now, let us look at the big picture. If you start saving now and deposit $3,600 at the end of each year, you will accumulate over $239,000 in 30 years. If you increase your yearly deposits to $9,600 you will have over $637,000! While these yearly investments may be difficult right out of college, they are not impossible. You just must be more frugal with your money and understand its underlying value in your future.
In the examples I just showed, you could earn a 5 percent return without any underlying risk. Realize that interest rates will fluctuate based on how the federal funds rate changes. If the federal funds rate goes up, interest will go up, and vise versa.
Right now, you can earn up to 5.25 percent on a money market or savings account at an online bank. If you go to a brick and mortar bank they may offer you 1 percent. Online banks that are FDIC insured are as safe as a brick and mortar bank, but they can provide significantly higher rates because of their low overheads. Two online banks I like are ingdirect.com and hsbcdirect.com.
If you want to try your hands at higher returns, then the stock market is for you. The stock market has well-outpaced the returns of savings accounts. The Dow Jones Industrial Average and the S&P 500 have returned average compounded annualized yields of close to 9 percent for the last 30 years.
There is a great deal of money to be made in the stock market. Think of those people who invested in Wal-Mart, IBM, Microsoft or even Google. A small investment would have paid off handsomely. However, for every Wal-Mart or Google there is a stock like Enron or WorldCom, where investors, in some cases, lost their entire savings.
The only way to limit risk in the stock market is through diversification. Invest in different sectors. Do not buy all technology stocks or all retail stocks because a bad downturn in that sector can wipe off much of your savings. An easy way to diversify is to buy mutual funds or exchange traded funds that track a wide market index or which invest in many different companies.
Once you are ready to get your feet wet in the stock market, you might want to check out a discount broker. Brokers like E*trade, Charles Schwab and Ameritrade offer low investment minimums, and you can make trades for between $10 and $15. Keep in mind that trades used to cost $50 to several hundred dollars. If you are willing to get your research from outside sources, you may want to check out Scottrade or Tradeking. They offer $7 and $4.95 trades, respectively, but they do not provide the comprehensive research offered by other companies.
If I may leave with a departing message, it is that time is on your side. But start as early as possible. Don't wait until you're 50 years old, because by the time it will be too late, and Uncle Sam will most likely not be there to help you out.