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Inside Wall St. Two Arrows

How I Learned to Stop Worrying and Love the Street
by WealthEffect Staff


The previous two commentaries highlighted the dangers in listening to the avalanche of available advice. Whether this advice comes from Wall Street's impressive research analysts and less impressive retail brokers or from the media's on-air hosts and their guests, you are more likely, on balance, to be hurt rather than helped.

Beyond this general rule, however, there are tactics in using these sources which will improve your results with minimal risk. Wall Street spends millions producing in-depth reports on companies — research which will help you in your analyses of possible investments. To make this research work for you, limit your list of potential companies to those which have sustainable competitive advantages, first-rate managements and favorable net cash flows (as outlined in last week's piece, "Playing the Odds").

In this Internet world, the individual investor has access to information which was hard to come by in earlier days. If you have an online brokerage account with a major research firm, such as Merrill Lynch, you should be able to gain access to the firm's research reports without, each time, having to run the gauntlet of an eager retail broker who has other ideas on his/her mind.

Use these research reports to get a clear sense of the competitive environment and the company's potential — give some thought to the factors which might threaten the company's advantages over the next decade or more, not the next quarter or less. Also take advantage of resources such as www.freeedgar.com for financial statements and Value Line (free of charge if you stop by your local library) for a nifty overview of most companies and their stocks.

In addition to research reports, you can make Wall Street work for you, though not in the manner you'd expect. When it comes stock selection, give yourself an edge by placing your bets against the crowd — which is to say, when the consensus of analysts is negative, you should be positive. At www.quicken.com, you can get a snapshot of analyst opinion. After bringing up a stock quote, click on 'Analyst Ratings' — if a stock in which you're interested has fewer Strong Buys than Holds, you can have some comfort that the shares are generally unpopular and therefore more likely to exceed expectations.

The media can be very helpful as well, if you use it selectively. Newspapers such as The Wall Street Journal and The New York Times and publications such as Barron's, Business Week, Forbes and Fortune are terrific sources, both to suggest ideas worth considering and to fill out your knowledge regarding the companies on your wish list. Television is another source of ideas (more than research) and an efficient way to make your own from-the-gut evaluations of the CEOs who are interviewed.

What the media is not is an effective source of advice. Your buy and sell decisions concerning individual stocks should be made based on the analyses you do, on a several decade time horizon and on a willingness to lean against the prevailing consensus. When it comes to timing your moves into and out of the stock market as a whole, my advice (!) is to skirt around that difficult task with dollar-cost averaging (commit a certain amount each year, with some flexibility to invest more when you can find many stocks which look attractive, and less when you can find few).

Don't allow yourself the terrible luxury of relying upon people you don't know and trust to make your investment choices. If you select a money manager, whether through mutual funds or an advisory firm, choose carefully — do your homework concerning their philosophy and their portfolio, and develop some comfort level with them as people (as you would in deciding on a huge stock purchase).

If you receive unsolicited advice from anyone to whom you wouldn't lend money, ignore it. If they are contacting you on behalf of a familiar Wall Street house, ignore it. If they are writing to you as one of a select group, ignore it. If they are calling you just to introduce themselves or calling back just to highlight one profit-making opportunity, ignore it. What you shouldn't ignore, if nothing else, is this paragraph.

Suggestion: Go to Intro to Stocks