Paul Kangas, WPBT-TV (Television station - Miami, Fla.)
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TVTranscript
00:00The Nightly Business Report, made possible by Digital Equipment Corporation,
00:22the company that makes all your computers work as one.
00:30The $42 billion Franklin Group of Funds, one of America's major mutual fund organizations for over 43 years.
00:38Franklin Funds are distributed nationwide by investment professionals.
00:43A.G. Edwards, member of the New York Stock Exchange,
00:47serving the investment needs of individuals and businesses through more than 400 offices nationwide.
00:54And by the financial support of viewers like you.
00:58NBR is produced in association with Reuters, the world's largest electronic publisher.
01:08Hello, I'm Paul Kang, a stock market commentator for the Nightly Business Report.
01:16On the NBR, you may have heard me talk about the daily combat between the bulls and the bears of Wall Street.
01:22But as you can see here on the floor of the New York Stock Exchange, there are no wild animals in sight.
01:28Only thousands of very human traders who are all here with one very human objective, to make money.
01:34They do that by trading securities, the stocks and bonds issued by the world's major corporations.
01:40And once you understand the language and some of the concepts used here in the financial markets,
01:44there's no reason why you can't try your hand at investing in stocks and bonds yourself.
01:49Of course, the securities markets aren't for everyone, since trading in them carries significant risks and offers no guarantees.
01:56But contrary to what many people think, Wall Street isn't the world's biggest casino.
02:02Unlike a casino, Wall Street serves a vital role in the American free enterprise system,
02:07because it makes it possible for companies to raise large amounts of money.
02:11A process that is known as capital formation.
02:14And by providing a place where individuals can cash in their securities on a daily basis,
02:20these markets make it possible for you and me to participate.
02:24To find out how the process of capital formation works, and the role of Wall Street in it,
02:29let's begin not in lower Manhattan, but thousands of miles away, in the tropics.
02:37Miami-based Carnival Cruise Lines carries more people on its ships than any other cruise line.
02:42But it'd like to carry more, so it has five ships either on order or under construction.
02:47Now, to pay the shipyard bills, Carnival first went to the commercial banks for a loan,
02:51but when those banks were reluctant to lend to massive amounts required,
02:55it turned to the investment bankers on Wall Street for what's known as equity financing.
03:00When we were growing, it was just a question that the numbers were getting very big to continue the growth.
03:05As these ships get larger and more sophisticated, the capital costs for them get bigger and bigger.
03:11And the capital markets allowed us to make a quarter of a billion dollar investment in a single ship.
03:18Carnival first went to Wall Street in July of 87, when it became the first major cruise line to issue stock to the public.
03:24By selling 27 million shares of stock in its initial public offering, or IPO, at $15.50 a share,
03:32Carnival raised $396 million for expansion.
03:35In return, those who bought shares became Carnival stockholders, part owners of the firm,
03:41with the chance to share in the company's eventual profits through payments known as dividends.
03:46When investors buy stock in a company, they're betting that the company will make increasing amounts of money,
03:51which in turn will benefit the stockholder through either bigger dividends or an increase in the price of their stock.
03:56But stock prices can fluctuate, wildly.
03:59And sometimes, investors don't want to take a chance on a company, unless they get a specific return.
04:04In that case, instead of shares, a company will issue bonds, sort of a corporate IOU,
04:10calling for a fixed rate of return over a fixed period of time.
04:13On its second visit to Wall Street in June 1990, Carnival chose to issue bonds rather than stock.
04:19Unlike most bonds, which offer to pay a certain rate of interest every year,
04:23Carnival's bond pays its 7.5% annual interest only at the end of 15 years,
04:29making it what's known as a zero-coupon bond.
04:32It's also a convertible bond, meaning that its holders have the option of converting it into a certain amount of Carnival stock.
04:38That means that if Carnival stock should take off, the bondholders would also benefit.
04:43Now, just as there are different types of bonds, there are different types of stock as well.
04:47Carnival, for example, has a Class A stock, which is available to the public, and a Class B stock, which isn't.
04:54That entire class of stock is held by company founder Ted Arison and his family
04:58to block any outsider who would like to take control of Carnival from accumulating its stock.
05:03And that's because whoever holds a majority of the stock gets a controlling interest in the company
05:08and the right to say how it should be run.
05:12Jim Wicks, NBR, Miami.
05:15Now, if you're interested in buying stock to take over a company or for any other reason,
05:20chances are you'll be making your deal through the stock market.
05:24Actually, even in just the United States, there is more than one stock market.
05:28Behind me is the New York Stock Exchange known as the Big Board,
05:32and it's home to stocks of the largest companies called the Blue Chips.
05:36There's also the American Stock Exchange located just around the corner.
05:39And then there's the NASDAQ national market system, a computerized system that brings buyers and sellers together.
05:45And there are also several regional exchanges around the country.
05:48Scott Gervey takes a behind-the-scenes look at what goes into a single stock trade on an exchange.
05:55The buying of stock often begins with a trip to a broker's office.
06:04It can also take place over the phone.
06:06The customer specifies the purchase be made either at the market price or as a limit order,
06:11which sets a limit on the price that can be paid for the transaction.
06:14Paul, the last trade was 20 and a half.
06:17Okay, I'd like to buy 800 shares.
06:19The broker fills out a paper order form.
06:21This will be the key document for record keeping.
06:24The information is quickly entered into a complex computer system designed for accuracy and speed
06:29and routed to the proper exchange.
06:31The order for stock goes to the broker's trader on the floor of the New York Stock Exchange.
06:36Depending on whether I have a market order or a limit order,
06:39and I scan the quote that's posted on the screen,
06:42I either bid for it, offer it, whatever I'm doing,
06:44and just try to get the best possible price for the customer.
06:46The trader carries the order to the trading post,
06:49the spot on the floor where the stock is traded.
06:51There he will meet the specialist.
06:53I am presiding here over the auction in various stocks that have been assigned to us as auctioneers.
07:00That involves trying to bring the buyers and sellers together
07:04so their customers can accomplish what they want to do.
07:08The exchange compares the specialist to an air traffic controller.
07:11As the trader announces the order, the specialist knows another trader has stock to sell.
07:16800 blockbuster, trades at 5.8. There's the seller.
07:19400 shares and 23.59.
07:21Edwards, 6.18.
07:22Let's review that.
07:24The trader said he wanted to buy 800 shares of stock at the last traded price of 20.5.
07:29The specialist alerted another trader who had stock to sell and was asking 20.75.
07:34The traders agreed to meet in the middle and exchange 800 shares at 20.5.
07:39The trade was recorded on a computer card and fed into a reader right at the trading post.
07:44That put it on the ticker tape and announced it to the world.
07:47That's how it happens 70% of the time on the New York Stock Exchange.
07:51Two public orders meet on the floor and compromise on the price.
07:54Exchange members say this makes the NYSE the most efficient market.
07:58If there was no waiting seller, the specialist might have entered the order into an electronic order book to be filled at a later time.
08:05Or, to meet his obligation to keep the market running smoothly, he might have sold the stock from his own inventory.
08:11Now that the trade has been completed, confirmation is flashed back to the branch office.
08:16The entire transaction can be made in less time than it takes to describe it.
08:19Hello? Thank you. Paul, we pay 20.5.
08:27Once you've purchased a stock, the company will send you an engraved certificate.
08:31Although most investors now let their brokers hang on to them for safe keeping and easier trading.
08:36Scott Gurvey, NBR, at the New York Stock Exchange.
08:40Well, now that you know how a stock trade is accomplished, you may want to try one yourself.
08:46First, you have to find out what price the stock you're interested in is trading at.
08:50Of course, you could always ask a stock broker.
08:53But if you want to find out on your own, you have to know how to read a stock listing.
09:00If you're looking for a stock that's in the news or actively traded,
09:04you're likely to find it listed on the nightly business report.
09:07And this is what it looked like.
09:09It says that shares of this stock, Carnival Cruise Lines,
09:12last traded on the American Stock Exchange at a price of $13.58,
09:17down one point from the close of the day before.
09:20Points are the same as dollars, so it means that one share of Carnival stock cost $13.62.5, commissions not included.
09:30Because of limited time, the nightly business report can list just a few of the several thousand exchange listed stocks traded each day.
09:37But yesterday's closing prices for virtually all listed stocks are printed in the business pages of most newspapers.
09:45Newspaper stock tables are somewhat more complicated.
09:48After you find the appropriate exchange, the stock's listing will look like this.
09:53The first number on the left is the highest price it's traded at during the last 52 weeks.
09:58The second is its lowest price in that same period.
10:02After the abbreviated company name, the next number is the firm's annual dividend expressed in dollars.
10:09In this case, 48 cents per share.
10:11The following number translates that into a percentage yield in terms of the stock's price.
10:17Here, it is 3.5%, somewhat less than you'd get for your money in a bank.
10:22Then we have a number called the price earnings ratio, a measure of the stock's price relative to the firm's earnings.
10:29It's one way to help determine whether a stock is a good buy, since the lower the PE or price earnings ratio,
10:36the higher the presumed value of the stock.
10:39As you can see here, Carnival's PE is 10.
10:43That's not the lowest among stocks in this market, but it isn't as high as some stocks that are Wall Street's favorites.
10:49Then we have a record of the stock's sales that day in lots of 100 shares.
10:54It shows that more than 196,000 shares of Carnival traded, making it the day's most active issue on the American exchange.
11:02Finally, after all that background, we have the daily price range of the stock.
11:07It shows that Carnival traded during the day at a high of 14.5, went as low as 13.5, and ended the day near its low,
11:16which, as the final column tells us, was a full point lower than its close of the day before.
11:22All of that information is intended to help you decide whether Carnival Cruise Line stock is in your price range,
11:29and whether it's a good buy.
11:31But even if you've answered yes on both counts, there's another factor to consider before you place your order.
11:37Market timing.
11:41You've probably heard the expression, a rising tide lifts all ships.
11:45Well, the financial markets work in that fashion.
11:48A bit of news or even rumor about politics, the economy, or interest rates can move an entire market up or down,
11:55taking with it the prices of individual securities, commodities, or currencies.
12:00Lois Allen reports.
12:02Okay, Ian!
12:03It's a scene that's common to every trading house.
12:06Traders with both eyes glued to a computer screen and a telephone stuck to one ear.
12:11This enables them to keep in touch with the latest news.
12:14And here in the currency market, the most volatile of all markets,
12:17traders devour and act on information.
12:20The reaction is usually instantaneous.
12:22One has to make a judgment right away whether it's good, bad, indifferent,
12:27but one has to be able to judge right away what impact this news item will have on the market and act accordingly.
12:33That means buying or selling of U.S. dollars, Japanese yen, German marks, or other foreign currencies.
12:39Decisions can be based on fact, perception, and rumor.
12:43One of the major driving forces in foreign exchange markets today is what happens to interest rates in the United States relative to abroad.
12:51So anytime that news comes out of the central bank, that will move markets.
12:57Even the mere hint of possible action on interest rates by one of the board members is enough to spur buying or selling.
13:04Two and a half dollars!
13:06While newspapers might have an impact on trading at the opening of the day, their influence quickly fades.
13:12The cost-breaking news can cause prices to shift in seconds.
13:15Traders rely on competing wire services which transmit news electronically.
13:20They watch for anything that may affect the economic landscape.
13:23But experts say it's not so much the events that drive markets, but whether they are anticipated.
13:29News contributes to changes in perception and expectations.
13:33And these changes in perceptions and expectations govern the behavior of individuals in the marketplace.
13:41As technology speeds the flow of information around the world, markets will be able to react to news faster.
13:47And experts say that may create a climate for increased volatility.
13:52Lois Allen, NBR, New York.
13:57Because stock prices tend to move together, the question investors generally ask is, how's the market doing?
14:03And the answer to that question almost always focuses on one number, the Dow Jones Industrial Average, or the Dow as we call it for short.
14:10Actually, the Dow is an index of the prices of 30 component stocks, and it has a long history.
14:15To fill us in on that, and the other stock indexes, we have with us the man known as the keeper of the Dow.
14:21And he's a frequent market monitor guest on the Nightly Business Report, Bill Lafaye.
14:25Welcome, Bill.
14:26Just how did the Dow get started, and what makes it such a key market barometer?
14:31Well, over 100 years ago, a fellow by the name of Charles Dow and another guy, Edward Jones.
14:37In July of 1884, they had some kind of a customer's letter they put out in the afternoon.
14:41And spasmodically, they would come with some kind of an index.
14:44And they kept refining it, and by the time he got to 1896, they came with 12 industrials.
14:49That's the first time they had an industrial average.
14:51And here they are, American Cotton Oil, American Tobacco is still around.
14:54It's called American Brands, but not on the index.
14:56The only one that's still there after all these years is General Electric.
14:59And, of course, there's some others there, National Lead.
15:02Tennessee Coal became part of USX, and US Rubber was in the index up until maybe 15, 20 years ago.
15:07All right, we've seen the originals way back when, and we've seen the current Dow 30.
15:11But can 30 stocks really give us a general idea of what the economy is doing?
15:16They can go a long way toward it.
15:19At any given time, the total value of those 30 stocks in the Dow is something between a quarter and a third of the total value of all the stocks in the New York Exchange.
15:27So while there's only 30 of them, they're pretty big companies.
15:30Mm-hmm.
15:31Okay.
15:32Obviously, US business has changed over the years, as have stock prices.
15:37How does today's Dow compare to the original one, and how does it keep pace with the times?
15:41Well, the original one was in 1896.
15:43The whole thing was worth 40.
15:45Now it's a couple thousand.
15:47There's been a big move.
15:48Part of it is inflation, and part of it is in adjusting for all the changes that keep changing the divisor.
15:53And the divisor is now less than one, so it's no longer a divisor.
15:56It's a multiplier.
15:57Hence the volatility in the marketplace.
15:59That's why we're seeing these big 20, 30, 50-point swings on a normal day almost.
16:04Yeah.
16:05Well, now, besides the Dow, there are many other market indexes, and a lot of them, of course, we display on the Nightly Business Report.
16:11Now, taking a look at a typical day's roundup, what can you tell us about each one we see here?
16:15Well, the transports at one time were known as the rails.
16:18You know, there was a theory that if the industrials made the stuff and their stocks went up, then if the rails didn't go up and they were shipping it, then it was not a true move.
16:28So the transports, as they're now known because of so many airlines in there and truckers, this is an important index.
16:34The utilities also is important.
16:36It's the latest Dow, and it started in 1929.
16:39That is frequently a proxy for the direction of interest rates.
16:43And, of course, the one last thing we see on this particular display is the closing tick minus 178.
16:48In this case, at a certain point in time, like the close on that particular day, that means that 178 more stocks closed lower than their last previous price, then higher than their last previous.
17:00It's just a trend indicator.
17:02A very short-term indicator, though.
17:03Right.
17:04Yeah.
17:05Here we go with the Standard & Poor's Index.
17:06Now, after the war, after World War II, the Standard & Poor's people came with one.
17:10They took 500 industrials rather than 30 components.
17:13They went to 500.
17:14And there's 500 stocks.
17:16Also, you have the S&P 400, which is the industrial component within those 500.
17:21And then, of course, there's the S&P 100, which is largely of interest to option traders because there's a future that's based on that.
17:28And, of course, the CRB is the Commodity Research Bureau.
17:32That's an index, and it is very helpful in judging inflation.
17:36Okay.
17:37Let's have a look at some more averages.
17:39Now, the New York Stock Exchange, they came along with one.
17:42Theirs is every common stock on the exchange, and it's something in the order of 1,300, 1,500 different stocks.
17:48And, strangely, the Dow and the S&P 500 and the New York Stock Exchange tend to track each other pretty closely.
17:55There's also the Amex.
17:57They have the American Stock Exchange Market Value Index.
18:00That's largely small oil companies.
18:03There's the NASDAQ Composite, which is a good judge of the smaller companies.
18:07Value Line, another smaller gauge.
18:10NASDAQ stands for National Association of Security Dealers Quotation System.
18:13Right.
18:14And Value Line is right there.
18:15And then, of course, the last one is the Wilshire 5000, which is not an index.
18:18That's a total value in billions or sometimes trillions of what the marketplaces were.
18:23Okay.
18:24Now, there are these so-called chartists who say that history repeats itself in a claim that by studying the moves of various indexes,
18:31it's possible to foretell the course of the market's future direction.
18:34Do you think there's anything to that?
18:35I think charts help, but you also have to look at the fundamentals.
18:37If you're only going to look at charts, it's like driving your car by only looking in the rearview mirror.
18:42In other words, what's happened is right.
18:44That's right.
18:45Okay.
18:46Thanks very much, Bill DeFay.
18:47Appreciate it.
18:48Right.
18:50While the market indexes were originally intended for one purpose, to help investors gauge the market's direction,
18:57many have now become investment vehicles themselves.
19:00Leslie Nickel reports from Chicago on stock index futures and options and the controversy over their impact.
19:07Back in the 1800s, Chicago's futures exchanges were founded as a way for farmers to hedge their agricultural price risks.
19:15In 1982, stock index futures were introduced here for much the same reason,
19:21only this time it was to allow large institutional investors, such as pension funds,
19:26to limit the price risks in their massive holdings.
19:29The most widely traded futures index is the Standard & Poor's 500 at the Chicago Mercantile Exchange.
19:36By buying this index, investors can make money if the market as a whole takes a big swing.
19:41Basically, if you hold $1 million worth of stocks and you are concerned about the price risk if there are tensions in Kuwait or whatever,
19:53you could take a short position in about six S&P contracts to hedge your price risk.
19:59While many investors applaud the index futures, the hedging vehicle has also chalked up a fair number of critics.
20:05Some complain that the index futures do not generate capital for industry and that they encourage speculation.
20:12Also, investing in futures can be very risky since it is possible to lose even more than one's original investment.
20:18For that reason, individuals who want to hedge frequently turn to options on stocks or options on stock indexes,
20:26the risks of which are limited to the amount one invests.
20:29Sold half a hundred Labor Day beans. We sold those at 8.20.
20:34There are two kinds of options, call options and put options.
20:38A put option gives the investor the right to sell at a certain price and at a certain time.
20:42A call option, the right to buy at a certain price and time.
20:46In the case of the S&P 500, if the S&P were at 300 and the investor were to buy a call option at 310,
20:53the investor would have the right to buy the index at 310.
20:56So the investor would make money on that call if the S&P were to go up to 320.
21:01If the S&P were to go down, say to 290, the investor would simply not exercise the call option and the investment would be worthless.
21:08You use an option to manage the short term volatility of longer term holdings in the market.
21:15Meanwhile, stock index futures and options have paved the way for the relatively new phenomenon of program trading.
21:21The practice of using computers to exploit the price spreads that can arise between the stock index futures and their underlying stocks.
21:29Critics say that program trading has led to increased volatility in stock prices, but traders defend the practice.
21:35Well, if any market gets out of line, individuals, speculators or position traders are going to come into the market and attempt to take advantage of the fact that there's a disparity in prices.
21:48That tends to level things off.
21:50Consultants say that perhaps one of the most important things for the individual investor to remember is that the futures and options markets are dominated by large institutional investors and can quickly make sharp moves up or down.
22:02And while the individual can make a handsome profit investing in this way, those who choose to do so should be aware of the risks since 100% losses are possible without any chance of a turnaround.
22:15Leslie Nichol, NBR, Chicago.
22:18You may have heard talk about the markets being rigged against the small investor.
22:23Like any place where a lot of money is at stake, Wall Street has its share of greedy and unscrupulous individuals.
22:29But Wall Street does have rules which apply to everyone who does business there, as Helen Whalen reports.
22:35Ivan Bosky and Dennis Levine were once Wall Street's biggest movers and shakers.
22:41But they went to jail and paid millions in fines because they broke the rules prohibiting a practice known as insider trading.
22:48I have no comment.
22:49The U.S. Securities and Exchange Commission is Wall Street's policeman regulating securities, stocks and bonds, and ensuring accurate reporting by corporations.
22:59The aim is to keep the market honest and ensure fair play for all investors.
23:04The SEC has the power to halt trading of a stock if it thinks anything illegal is going on.
23:10It also can fine individuals and corporations for attempting to manipulate stock prices, falsifying corporate records, and generally making ill-gotten gains.
23:20But the chairman of that commission says when it comes to protection against fraud, investors should not rely solely on the government.
23:27In most cases where they're offering a deal that's too good to be true, it is too good to be true.
23:33It isn't true.
23:34And the investor, notwithstanding all we will do to keep the market clean, can do a lot to protect himself.
23:42In the case of insider information, inside usually means confidential information that is used in advance of the public knowing it.
23:50In the past, the SEC has prosecuted even printers of financial publications who traded on stories yet to be publicized.
23:58In search of this kind of illegal activity, the SEC tracks the stock market for unexplained price moves, as do the various exchanges.
24:07Also, an industry group, the National Association of Securities Dealers, and state securities commissions have their own rules regulating stock offerings and brokers.
24:17And you can ask for information about the broker-dealer and about the particular broker to see what their disciplinary history may be, if any.
24:24Probably the best advice of all is that given by SEC Chairman Richard Breeden, who says investors should ask for written information, read what they get, understand what they're doing, before investing in the stock market or talking to a broker.
24:38Helen Whelan, NBR, Washington.
24:43Now that we've explained the basics of how the financial markets work, it's time to consider your place in them and whether it's a good idea for you to invest your hard-earned savings there.
24:53To discuss that, we have with us Theodore Miller, editor of Changing Times Magazine and the author of the best-selling personal finance guide entitled Make Your Money Grow.
25:02He's also working on a new book entitled Kiplinger's Guide to Successful Investing.
25:07Our other guest is Craig Corcoran, editor of the David Zweig Futures Hotline and Bond Fund Timer, two of the leading market timing services and a frequent market monitor guest on the Nightly Business Report.
25:18Gentlemen, welcome.
25:19Good day.
25:20Thank you, Paul.
25:21Ted, first let me ask you, considering the risks that go along with stocks, why should individuals consider going into the stock market and who should and shouldn't take the plunge?
25:30Well, the very important reason to consider investing in stocks, Paul, is that there's more money to be made there than there is in a lot of other ways.
25:38If you take a look at various investment alternatives going back for about as long as reliable figures exist, and that's about 1926, and take it all the way through about the end of 1989, what you discover is that small company stocks have returned on the average of about 12% per year.
25:55Larger, safer, more conservative stocks have returned about 10% per year.
25:59And if you drop down into other investment vehicles, you look at bonds, government bonds, corporate bonds, certainly savings accounts, even gold, none of them have returned really even half that over that period of time.
26:10And so, in terms of long-term steady return, and in fact in some years spectacular returns, the stock market is a good place for part of your money to be.
26:20All right, so, obviously there are good reasons to go in there, but how do you go about it?
26:25Well, not everyone should be in the stock market, and the first thing you need to do is to make sure that your financial underpinnings are secure.
26:32By that I mean, I think most economic experts would say, or financial experts would say, that three to six months take-home pay in a safe place where it's earning interest.
26:41That would be a money market fund or short-term CDs where you can get at it quickly.
26:45Plus, you need to be protected against catastrophe.
26:48That means your health needs to be insured, your belongings need to be insured, and if your death would cause financial hardship for someone, then you should have life insurance as well.
26:57Only when you've got these things into place is it time to think about investing in stocks.
27:02All right, a good strategy in other words is what you're saying, plan out that first.
27:07Yes, really the strategy should really be the tool of your goals.
27:10And if you think about what your financial goals might be, that in a way begins to help you sort out what kinds of stocks you might invest in.
27:17For instance, if you're planning to invest for a secure retirement, and that retirement is 10 or 20 or 30 years away, then you'll be looking probably at long-term stocks.
27:27You're not too terribly concerned about whether or not the market goes up and down along the way.
27:32So that's different, for instance, than if you're within a couple of years of retirement, or if you want to put aside some money to make it grow for your vacation next year,
27:40then you really wouldn't want to be in stocks that might go up and down and be right down at the place where you don't want them to be when it's time to cash them in to get the money.
27:49All right, now that's an interesting question that also we want to present to Craig Corcoran.
27:53Just picking the right stock obviously isn't the secret to it all.
27:57The market is subject, as Ted said, to ups and downs, so political developments, other unforeseen events.
28:04What can the individual do as far as choosing the right time to be in the market?
28:08Well, Paul, the most important consideration for an individual investor really is patience.
28:13Investors should not be anxious to invest in the market. Pick the spots, pick the time.
28:17But there are also two other big guidelines, big rules that you ought to follow.
28:21One is don't fight the tape, and the second is don't fight City Hall, which is the Federal Reserve.
28:26Don't fight the Fed. Well, these, of course, your associate Marty Zweig is famous for these sayings, but you really believe that these are the two key axioms to follow.
28:38I think so, Paul. The tape really is the trend of the market. If the trend of the market, the action of prices of stocks are going down over the intermediate to long term, don't step in that way.
28:48Don't try to catch a falling safe from the top of a building.
28:51On the other side, the other rule, don't fight City Hall, is don't fight the Federal Reserve.
28:56If interest rate policies are generally more and more restrictive, higher interest rates, tighter money, don't fight that trend as well.
29:04Those are the two most important long term trends in the market.
29:07All right. Now, you use charts as an aid to get in at the right time and out at the right time.
29:12Yet, many of your critics would say what stock charts tell you is that what has happened is right.
29:18How do you counter to that argument? In other words, you can explain anything once it's happened.
29:22I think that the theory of a random walk where prices of stocks just gyrate unpredictably, I think that is wrong.
29:29Basically, what you want to do as far as stock selection, investing in stocks that are likely to continue trending in the direction they have in the past, is look during corrections in the market.
29:39If stocks upon each downward tick in the market make higher lows, consistently higher low after higher low, and if their relative strength, meaning if they're outperforming the rest of the stocks in their industry or the rest of the stocks in the general market,
29:53if those two criteria are on your side, on the bullish side of the bandwagon, I think those are good reasons to invest in a particular stock.
30:00So the charts are very helpful in making comparisons as to where the strength is in an industry and where the weakness is.
30:05That's true. When a market's rising, you want to be in the groups in the stocks that are rising the quickest.
30:10If the market falls against what you think is happening by being in the strongest relative strength groups in stocks, you avoid the most pain.
30:18Very interesting indeed. Ted, at changing times, you've discovered eight mistakes that investors make most frequently.
30:26What are they and what can be done to avoid them?
30:29Well, the first and most common mistake is one that we touched on a couple of minutes ago and that is failure to have an investment plan.
30:35What this leads to is shooting from the hip. When you shoot from the hip, you're just moving with the trend and you may not know exactly whether or not your stocks are moving in the direction you want them to go
30:46or whether they really fit in with your investment plan anymore. So failure to have a plan is the single largest mistake.
30:52Second mistake is not keeping yourself informed. Again, this makes you a sucker for the next salesman to come along.
31:00That's where nightly business report comes in handy.
31:02Indeed, that's one way to help keep yourself informed. And you won't fall victim to the latest persuasive sales pitch that you hear.
31:11The third mistake that people make is failing to check the quality of the advice you're getting. In other words, you want to know the background of the broker or the publication or the television show, if you will,
31:21that is offering you advice on where to invest and when. The fourth biggest mistake is investing money that belongs somewhere else.
31:29This is a question of or the mistake of putting money that should be somewhere else, perhaps in a savings account where it's nice and safe and you can get at it quickly into the stock market where it may be down when you want it to be up and you have to go and get it.
31:43A fifth mistake is being optimistic at the top and pessimistic at the bottom. This is a very common one and it's simply just a matter of catching whatever the current fever is.
31:52If everybody thinks that things are going to continue to go up, you go with that rather than looking to see what the fundamentals show, whether or not prices, price ratios are out of kilter and whether or not things are reaching new highs day after day, eventually they're going to come down.
32:07It's one of the few businesses, in other words, where people want to pay more instead of less, it seems.
32:13That's right. What goes up must come down and what goes down so far at least has always come up again.
32:18The sixth most common mistake we find is that people fall for hot tips and rumors.
32:24I think it's important that people should understand that there's no such thing as a hot tip.
32:28I've been in this business now for 20 years and I've never had one and the reason for that is that somebody knew it before you knew it and has acted on it already.
32:37So don't act on hot tips. There's really no such thing.
32:40The seventh mistake that we see a lot is that people get sentimental.
32:44They fall in love with their stocks as if they were a house pet or something.
32:47They can't admit that the reason they bought it is no longer valid and that it's time to sell it.
32:53The eighth mistake is buying low price stocks on the theory that they're going to have higher percentage gains in higher price stocks.
33:03Well, low price is a relative measure.
33:06A stock that costs a dollar and has no earnings is in fact more expensive than a stock that costs $10 and is paying you a dollar in dividends.
33:14The price earnings ratio of 10 on the second stock makes it a cheaper stock than the price earnings ratio of infinity on the cheaper stock.
33:24Very interesting and very good points.
33:27Craig, now you've basically told us many of the same ideas and there are times to avoid stocks,
33:34but under what circumstances are bonds more attractive than stocks?
33:38Well, from a macro or long-term standpoint, the time that bonds tend to outperform stocks is during an economic recession.
33:44As corporate profits tend to turn lower in a recessionary environment, stocks tend to underperform bonds.
33:51Now, as far as bond selection goes, you have to look at the economic environment in terms of debt,
33:57how much debt is in the economy, how much debt is on corporate balance sheets,
34:01as far as determining whether corporate bonds are better or not than treasury bonds.
34:06Now, our time is drawing short, but if there were just one thing that you could advise a new investor, what would that be?
34:12Well, I think the most important thing for a new investor is not to panic.
34:16The market, when it goes lower, always tends to rise out of a bottom when the most amount of pessimism is seen.
34:23Basically, a market bottom is defined as a period of excessive pessimism.
34:27Always at a bottom, you see excessive pessimism.
34:30I think that investors should be cold and calculating, following the trends.
34:34Don't fight the tape, don't fight the Fed.
34:36Don't get emotional, in other words.
34:38Correct.
34:39Ted, let me direct the same question to you.
34:41What would you advise a new investor if there was only one thing that you could say in addition to what you've already said?
34:46I'd say one thing that has three parts.
34:48First is don't put all your eggs in one basket, be that one stock or stocks themselves.
34:53Diversify.
34:54Second thing is don't buy anything you don't understand.
34:56And third, don't buy anything you don't know how to sell.
34:59Very good points all.
35:01And gentlemen, we thank you very much for being with us.
35:04Ted Miller and Craig Corcoran, it's been a pleasure.
35:10Congratulations.
35:11You now know the basics of how Wall Street and the financial markets work.
35:15Of course, being knowledgeable isn't all that you need to be a successful investor.
35:20Because even the biggest experts can't say for sure which way prices will go.
35:24But if you do decide to take the plunge and jump into Wall Street, keep this in mind.
35:29It doesn't matter whether you're a bull or a bear.
35:32Just don't be a pig and watch out for the sharks.
35:35I'm Paul Kangas.
35:36See you on the Nightly Business Report.
35:39This program is produced in association with Reuters, the world's largest electronic publisher,
35:46which provides the Nightly Business Report with news, market data and communications services worldwide.
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36:16Franklin has been helping investors reach their financial goals since 1947.
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36:30And by the financial support of viewers like you.
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