Please explain the stock market to me

Discussion in 'Off Topic' started by Dovster, Apr 15, 2011.  |  Print Topic

  1. Dovster
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    Dovster Gold Member

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    I am especially interested in why a stock may jump (or fall) quite a bit in a day or two when there is no objective reason that I can find anywhere.

    Case in point: Conagra Foods. I bought it 3 days ago. It dropped a bit on the first day but in the following two days went up over 4.5%. This increase is substantially more than the DJIA experienced (about 3 times as much).

    I have looked for any explanation but with no luck. Can anybody tell me why Conagra jumped so much or, for that matter, why a stock suddenly shoots up or down, far beyond what the market as a whole does, when there is no news which directly impacts it?

    (BTW, I started investing about 18 months ago, buying stocks whenever they seemed low and selling them when they seemed high. To date, after taxes, my portfolio shows a 67% profit. I am apparently doing something right but I can't figure out what.)
     
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  2. Casey Friday
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    My understanding is that the price of a stock at any given moment is related to the activity of the buying and selling of said stock, as well as the total volume (number of shares traded over a given period).

    The DJIA doesn't directly affect Conagra, but it can indirectly affect it. If people seeing the DJIA going up, and in turn, they buy Conagra, the value of Conagra will (most likely) go up. There are a ton of variables here, but that's the basic idea. If people are buying like crazy (for whatever reason), the price goes up. If they are all selling, price goes down.

    There are also stock options, where you buy the ability to buy/sell a stock at a later point in time, for a fixed price. Another vehicle is futures/derivatives, where you "bet" on the success/failure of the stock. If you have seen a derivative on a graph, you're literally betting on the derivative of the stock's "performance curve". That's a slippery "slope," and it's how the "financial meltdown" of 2008 happened, in a VERY brief nutshell.

    Take these explanations with a HUGE grain of salt, as I am not a professional financier of any sort, and feel free to correct me! (I do, however, enjoy trying to explain things in layman terms.)
     
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  3. Dovster
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    Agreed, but that does not explain why Conagra goes up out of proportion to the DJIA. As of this moment, for example, the DJIA is up 0.58% for the day but Conagra is up 2.11%.

    (Merck is up 2.39% but I can see why -- it settled a law suit with J&J. I can see no reason for the Conagra jump.)
     
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  4. Cholula
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    Dov, in general and just from my experience, food (including restaurant) and airline stocks are usually poor investments. The only exception I've ever found in the food category is Starbuck's (if you can call that a food stock) and I made quite a bit of money on that well over a decade ago. I'm guessing it increased in value 500% or more before I eventually sold it.

    I worked for Con Agra for almost 25 years and received a lot of stock via my 401K, bonuses and incentives. And I don't think the stock ever went up or down much if I recall. It seemed to always be in the mid-high 20's.

    Not to say you can't make...or lose...a quick buck by buying and selling any stocks at the right time. But I'm a buy and hold type and look for stocks that will (hopefully) appreciate over the long haul and that pay healthy dividends.

    As to why CAG stock might not mirror the market, remember they are heavily dependent on commodities like corn, wheat, soybeans, sugar and the like. If there is a shortage or over-abundance of these commodities folks might think that'll have an effect on their profits and buy/sell the stock accordingly.

    Other companies such as BP, GM, GE and the like are impacted by dynamics other than commodities and so if corn prices are shooting up that's going to hurt CAG but have little or no effect on GM.

    But there are lots of other reasons why a stock might advance or decline out of sync with the market and I'm sure some folks here will weigh-in on them.
     
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  5. Dovster
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    I have been working on "look for stocks that are near their lows and pay healthy dividends" basis.

    Conagra's low for the past 12 months was 21.02. I bought it at 23.70 three days ago. It pays, based on its current price of 24.69, 3.86% pa in dividends. I was planning on holding on to it for a while but if it gets to 25 I will sell it. That will make it too close to its high for the year of 25.42. I will then search for another good stock which seems to be selling too low.
     
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  6. Cholula
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    Joseph Kennedy, the patriarch of the Kennedy clan, said he made much of his fortune by selling his stocks "too soon". While everybody was holding a stock trying to wring every last dollar out of it, Joe was happy to make a modest profit and move on to the next stock.

    Do that thousands of times and it starts to add up to serious money.

    You seem to have the Joseph Kennedy mind-set when it comes to investments (but not politics :) )

    Maybe 20 years from now we'll be talking about you in the same breath as the Kennedy’s, Warren Buffet, Bill Gates and the Rockefellers.
     
  7. Dovster
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    I think the odds are damned good that in 20 years I will be pretty much the same as Joe Kennedy and John D. Rockefeller -- dead.
     
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  8. Casey Friday
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    The DJIA is an average. As a whole, the market is not moving much (hence DJIA up only 0.58%). Conagra might be moving 2.11%, but if the majority of all other stocks are flat-lining, the DJIA will reflect the whole market, which will be relatively low-movement.
     
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  9. Gargoyle
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    He is supposed to have said "only a fool holds out for the last dollar".
    Especially if the UIG finds out about your peccadilloes.
     
  10. jbcarioca
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    Common stocks are much like roulette, but with the odds more in the houses favor. I have invested for over forty years, never with much clue about what I was doing.I have been extremely lucky. Never have io been able to discern rational explanations. Black-Scholes did not. LTCM proved Nobel prizes do not engender good decisions. Nobody can begin to explain why a given security moves as it does, although most pundits claim to know.

    Just look at it as gambling and hope you make good bets. Otherwise do what you're doing, follow Benjamin Graham.
     
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  11. Dovster
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    It jumped too much for a single day today and I decided not to hold off until it hit 25. I sold it at 24.91. That gave me a $333 profit for an 11 day investment. I can live with that.

    (I will probably buy it again if it dips to 23.70.)
     
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  12. MSPeconomist
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    What was your profit after the transaction fees?
     
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  13. Dovster
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    The $333 was after my transaction fees ($9.99 to purchase and another $9.99 for selling).
     
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  14. MSPeconomist
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    You did well on this one, but how's your overall portfolio doing on average?
     
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  15. Dovster
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    I lost money on two or three stocks, but am doing well overall.

    I opened my account on Sept 24, 2009, and it is now worth 63% more than I invested (and that is after paying taxes on my gains and dividends).

    I am getting concerned about how high the market is and am now being more conservative. I have sold quite a few stocks recently and am currently invested in 8 companies, all long-established, and all paying decent dividends. Based on today's prices, the lowest annual dividend is 2.66% and the highest 5.19%. The average of the 8 is 4.02%.

    Of the 8, four are utilities, one is a food processor, one manufactures personal hygiene products, one is a fast food chain, and the remaining one is a major retailer.

    Additionally, 26% of my account is currently in cash -- leaving me some room to start buying if/when the market goes down.
     
  16. Cholula
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    I'm still waiting for the market to top 14,000 again so it gets me back to where I was three years ago.
     
  17. Dovster
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    I don't care what the market was like 8 years ago, I would like to get me back to where I was then -- spending a month in Savannah with the BAG.
     
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  18. sobore
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    sobore Gold Member

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    A strategy I have used on a stock as it runs up is to grab a small profit by selling half of the initial investment.
    So if you bought 200 shares at $25, three months later the stock is trading at $33, sell 100 shares for an $800 profit minus fees and taxes. Hold the 100 shares and possibly do the same thing with 50 shares if it moves high enough.
     
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  19. MSPeconomist
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    You're doing very well. There are arguments that six stocks can suffice for diversification if they span different industries and are carefully selected.
     
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  20. jbcarioca
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    I never have understood what was meant by diversification. It seems mostly to mean avoiding understanding anything much. I am allegedly very conservative but the returns don't seem like a conservative result. There is no substitute for understanding the fundamentals. Unless, of course, it is gambling.
     
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  21. MSPeconomist
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    It's just a sophisticated way of saying "don't put all your eggs in one basket." Don't have your entire wealth invested in one company (as Enron's former employees learned the hard way), one industry (airlines), one region (northeastern Japan or New Orleans), or a bunch of companies having returns expected to be correlated (automakers and auto parts/equipment/tire manufacturers).
     
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  22. jbcarioca
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    Sophisticated = overly complicated explanations IMHO. I admit to a very strong Benjamin Graham bias. It has served me well.
     
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  23. MSPeconomist
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    It can be complicated and there are academic arguments about how to measure it, but the basic concept is almost common sense. A lot of problems can be avoided to not having a portfolio that is obviously not diversified, while there can always be some exotic risk in the future that we never would have considered but that negates current ideas of what's sufficiently diversified.
     
  24. DLroads
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    I am generally (maybe being multi national, or just a frequent traveler) enver liked the one-zone investment. For the same reason, I never liked the airline's investment (I just think the fixed cost is too high for a protfolio of a stand-alone person... if I were a big investment bank I may have looked into it differently).

    The one thing I never understood is people investing in luxury product companies (especially, at the retail section). These are always the first ones to fall with the modest sign of crisis
     
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  25. MSPeconomist
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    However, luxury retail can do very well during good times; stocks with this pattern of earnings do indeed belong in a portfolio, which shouldn't consist entirely of stocks that do well during a crisis. Otherwise, you're probably giving up some earnings on average.
     
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