"How do I start investing?"

Question:

Hi. I'm new to the market and I'm interested in investing.
How do I start?

Answer:

Congratulations on wanting to get involved in the stock market and investing!

All investors need to start somewhere, and books are a good way. I would recommend starting with "Investing for Dummies" by Eric Tyson and "Personal Finance for Dummies" by Eric Tyson.

Once you learn the basics of investing and the stock market, you can continue reading more books including the recommended books in this link.

In addition, you can start watching former Hedge Fund Manager Jim Cramer, on his CNBC show "Mad Money." While his antics may seem crazy to some, he has a lot of substance and has a good message. He had a very impressive record as a hedge fund manager. He even has a loyal following among Generation Y.

Continue to read magazines and newspapers such as "The Wall Street Journal", "Money", "Smart Money", and even "Barron's" or "Investors Business Daily".

Once you are ready, you can start choosing a brokerage account. Two popular ones are:

1. E*Trade
2. TD Ameritrade

They offer many kinds of accounts, and you buy and sell stocks, and mutual funds. The minimum to open each account is $1000.

Mutual Fund Route

If you choose to go the mutual fund route, look through your brokerage mutual fund list, and only choose mutual funds that have no-load or no transaction fee. You can then visit Morningstar.com and look for 4 or 5 star mutual funds.

In order to have a diversified portfolio, you can have three mutual funds:
1. Diversified International Mutual Fund
2. Large Capitalization USA Mutual Fund
3. Small Capitalization USA Mutual Fund

If you don't have that much money to start with, you can start with one mutual fund. And as you have more money to invest, you can start investing in another mutual fund, and so forth until you have three mutual funds.

You can also choose index mutual funds. The advantage is that the fees that you pay (called the expense ratio. You don't really notice it, but it is taken out automatically from the price of the mutual fund. Morningstar.com shows you the expense ratio) is much lower than an actively managed mutual fund. Also, advocates of Indexing such as Vanguard founder John Bogle say that Index funds outperform a great percentage of actively managed mutual funds so why not invest in Index funds with a lower expense ratio?

Exchange Traded Fund (ETF)

Exchange Traded Funds, or ETFs are essentially mutual funds, most of which are indexed rather than actively managed, that trade in the stock market just like stocks. For example, the DIA ETF represents the 30 stocks in the Dow Jones Industrial Average. You pay commissions to buy and sell, just like a regular stock. You can buy them from many brokerages out there.

One of the largest ETF companies out there is Barclays iShares.

Investing in Stocks and ETFs

If you wish to invest in stocks and ETFs, congratulations. You are saying that you have the time, and the inclination to study stocks. I would recommend reading lots of recommended books I mentioned, and continue learning about the market.

Also, continue to live life. Sometimes, the best investment ideas you have are in areas you already know. Maybe you see that Chipotle Mexican Grill (CMG) is always full, or that everyone seems to be shopping at Gamestop (GME).


Good luck to you, and I hope you enjoy the journey, and make lots of money in the process.


Info on Getting Started investing a sum of money.

High Yielding Savings Accounts

If you aren't getting at least 5% on your Savings or Money Market accounts, you are throwing money away.

To find the best accounts with the best rates, you can use the online resource: BankRate.com.

Each Savings account has special rules and minimum balances, so do be careful. In general (read the fine print carefully!), these Savings accounts are FDIC insured. You normally link your Checking account (from your current Bank, for example) with the Savings account, and use the internet interface to transfer money back and forth.

While you can make unlimited deposits, these Savings Accounts have limited number of electronic transfers out of the account. Most have a limit of six electronic transfers out of the account per month.

Some of these accounts have additional features such as having an ATM attached to the account, so you can withdraw money using a normal ATM (many have unlimited withdrawals per month).

Be careful about minimum balances and fees. While most may have no minimum balance and no fees (outside of a possible ATM withdrawal fee), some may have maintainance fees if your balance falls below a certain amount.

Here are a few recommendations ranked from the best:

• HSBC Direct. Currently yielding 5.05%. FDIC insured. No monthly fees, no balance minimums. Free linked ATM card. Has a hidden feature: In some states, such as in California, you can use a Wells Fargo ATM and not get charged a fee. High reliability.
  
• E*Trade Complete Savings Account. Currently yielding 5.05%. FDIC insured. No minimums or account fees. High reliability. You can also open many other accounts here such as IRAs or Brokerage accounts.
  
• Emigrant Direct. Currently yielding 5.05%. FDIC insured. "No Fee Savings Account". They have a Mastercard 1.40% cash back offer. During maintainance periods, site can be unavailable.
  
• GMAC Bank. Currently yielding 5.30% APY on balances over $500. There is a maintainance fee if your balance goes under $500. Minimum open deposit is $500.
  

Yields can change at any time, but at this moment, there are many ways to get a great deal on a 5% or greater Savings or Money Market fund.

Simple Diversified and Fully Invested Stock Portfolio Strategy

Many investors (especially new ones), may have a difficult time deciding when to sell a stock. These investors may also try to time the market or time sector rotation, but often end up buying and selling stocks at the wrong times, all while making their broker rich through all the commissions they pay them.

Is there an easier way for a (new) investor?

Here's a possible strategy to make things easier:

1. Always stay fully invested whether the market goes up or down. On average, stocks go up more than they go down, and average around 10% per year over a long time period. Even legendary investor Peter Lynch (in his book, "One up on Wall Street") says to stay fully invested.
   
2. Stay diversified by choosing one stock per sector. There are around ten sectors, so that means you will be holding a portfolio of ten stocks.
   
3. If you choose well, you should be choosing a stock that should outperform its sector.
   
4. When do you sell a stock? It's easy. If there is a better stock in the same sector, sell the stock that you are holding and buy the better stock.
   

By staying fully invested, and fully diversified, with the strategy mentioned above, the individual investor can outperform the market, with low turnover and risk.

Jim Cramer and Generation Y: The Perfect Storm

Why are so many college aged students and those in Generation Y crazy about 52 year old, balding, former hedge fund manager Jim Cramer? When Jim Cramer's CNBC "Mad Money" show goes on a college roadtrip, he is often greeted by a great number of screaming, adoring college fans.

According to a Boston Globe Article, Joanna Weiss says that "Cramer has a penchant for madcap props -- he has eaten cereal drenched in soda pop and worn diapers to drill in a point -- and he presides over a busybox of noise machines, pushing buttons like a crazed suburban father. His bulging-vein energy, along with his ability to move markets with yelped suggestions, has drawn the ire of Wall Street traditionalists."

In the same article, Joanna Weiss mentions that Jim Cramer's 22 year old nephew Cliff Mason, helps Jim Cramer make the Mad Money show hip and appealing to Generation Y, a generation that is 2nd in number only to the Baby Boomers.

But there is more to Jim Cramer's appeal to Generation Y. Jim Cramer is benefiting from the Perfect Storm.

In a 2006 Gen Next Survey, the top two goals in life for those in Generation Y is "To Get Rich", and "To be Famous." 81% of all those in Generation Y who responded listed "To Get Rich" as their first or second goal in life. Compare this to those 26 years and older, who ranked "To get rich" as their first or second goal in life 62% of the time.

When asked about their most important problems in life, 30% of Generation Y in the survey listed "Money/finances/debt." To those 18-25 years old, this ranked as their top problem in life (school/education was their second choice). Compare this with those 26 years and older who ranked "Money/finances/debt" as their first problem 27% of the time, and "Health", or "No problems" 15% of the time.

When asked about who they admire, Generation Y admired a "Teacher/Professor/Mentor" 12% of the time (compared to 2% of those 26 years and older), and Entertainers 14% of the time (compared to 11% of those 26 years and older).

When we put all this together, we have the perfect storm. We have Jim Cramer, who has the credibility to make people rich (having a very good record during his time as a Hedge Fund Manager) and also has the energy and presentation skills of an entertainer. We also have Generation Y, who want to get rich, get famous, and whose top problem in life is money, finances and debt. Jim Cramer offers Generation Y an entertaining show that educates, and this coincides very well with Generation Y's goals to be rich and famous, and their admiration of teachers and entertainers.

Generation Y: The Big Opportunity

According to the Business Week article, Generation Y (or Millenials), are those born between 1979 and 1994 (As of 2007, they would be 13 to 28). In terms of numbers, they are the 2nd largest group in the United States after the Baby Boomers.

Some numbers:

1. Baby Boomers (est: 1946-1964): 72 million
2. Generation X (est:1965-1979): 17 million
3. Generation Y (1979-1994): 60 million

With 300 million people in the United States, if we add Baby Boomers and Generation Y, these two groups make up 44% (132M/300M) of the United States population.

Much attention has been given to making money on the Baby Boomers. But if we are to truly profit, we need to look at the demographics and profit from Generation Y as well.

How to Play: Am I Diversified (Diversifying your Stock Portfolio)

In Jim Cramer's CNBC TV show, "Mad Money", Jim Cramer has a segment where callers call in and mention their top five holdings. Jim Cramer then analyzes the stocks, and determines whether or not the caller's portfolio is diversified. Many other people on the social networking site Stockpickr.com ask the same question. But is there a way to determine on your own whether your portfolio is diversified or not? Definitely!

Sector Diversification

The main focus of "Am I diversified?" focuses on sector diversification. Many companies and analysts may have some variations, but there are around ten major sectors:

1. Basic Materials: These include gold, copper, composite material, chemicals, industrial metals, mining, forestry and paper companies such as FCX (Freeport McMoran), and ATI (Allegheny Technology).
   
2. Consumer Discretionary: Consists of General Retailers, Media, Travel and Leisure, Food and Drug Retailer companies such as TGT (Target), DIS (Disney), BBY (Best Buy), and SBUX (Starbucks).
   
3. Consumer Staples: Consists of Household Goods, Beverages, Food Producers, and Tobacco. Some others (such as those at ishares.com ) would include Automobile Parts, and Leisure Goods. Examples include PEP (Pepsi), MO (Altria), PG (Procter and Gamble), and SLE (Sara-Lee)
   
4. Energy: Consists of Oil & Gas Producers, Oil Equipment and Services, Coal, and Alternative Energies (such as Solar). Stocks include XOM (Exxon-Mobil), SLB (Schlumberger), and BTU (Peabody Energy).
   
5. Financial Services: Consists of National and Regional Banks, General Financial companies, Brokerages, Exchanges, Nonlife Insurance, Real Estate, and Life Insurance Companies. Examples include WFC (Wells Fargo), GS (Goldman Sachs), NYX (New York Stock Exchange-Euronext), AMTD (Ameritrade), PGR (Progressive Corp).
   
6. Healthcare: Consists of Pharmaceutical, Biotechnology, Health Care Equipment and Services, Healthcare Insurers. Examples include PFE (Pfizer), JNJ (Johnson and Johnson), MDT (Medtronic), GILD (Gilead Biotech), UNH (United Health Group), ISRG (Intuitive Surgical)
   
7. Industrials: Consists of General Industrials, Aerospace and Defense, Support Services, Industrial Engineering, Industrial Transportation, Electronic and Electrical Equipment, Railroads, and Construction and Materials. Examples include GE (General Electric), BA (Boeing), CAT (Caterpillar), UPS (United Parcel Service), UNP (Union Pacific Corp), DE (Deere), WMI (Waste Management), FLR (Fluor Corp), MDR (McDermott), and TEX (Terex).
   
8. Technology: Consists of Hardware, Software, Semiconductor, Internet, Networking, and General Technology Companies. Examples include MSFT (Microsoft), CSCO (Cisco), GOOG (Google), AAPL (Apple), IBM (IBM), INTC (Intel), NOK (Nokia), and RIMM (Research in Motion).
   
9. Telecom: Consists of Fixed Line and Mobile Telecommunication Companies. Examples include T (AT&T) and VZ (Verizon Communications)
   
10. Utilities: Consists of Electricity, and Gas, Water and MultiUtilities. Examples include EXC (Exelon Corp), TXU (TXU Corp) and DUK (Duke Energy).
    

How to Sector Diversify

So what you can do is look at each stock in your portfolio, and categorize them into one of the sectors above. After you go through your entire portfolio, you may find that some stocks may be grouped into a single area. For example, you may hold NYX (New York Stock Exchange-Euronext) and GS (Goldman Sachs). While one is a Stock Exchange, and the other is a Broker, both are grouped in the Financial Services Sector.

There are some companies that may be difficult to pin down to any one sector. For example, AMZN (Amazon). Is it Consumer Discretionary or is it Technlogy? Use your best judgement. If you want, during your analysis, you can put 50% of Amazon under Consumer Discretionary, and 50% of Amazon under Technology.

Sector Diversification is the main form of diversification preached by Jim Cramer.

Other forms of Diversification

Sector Diversification is not the only form of diversification. There are many other forms of diversification.

Market Capitalization Diversification

Companies have different market capitalizations. Some are very large companies (large market capitalization) like GE (General Electric), while some others, are small or mid capitalization companies such as NTRI (NutriSystem). Stocks of different market capitalizations behave differently from each other.

Growth and Value Diversification

Some stocks are considered Growth Stocks. Investopedia defines a Growth Stock as one whose "Shares in a company whose earnings are expected to grow at an above-average rate relative to the market."

Some other stocks are considered Value Stocks. According to Investopedia, a Value stock is "A stock that tends to trade at a lower price relative to it's fundamentals (i.e. dividends, earnings, sales, etc.) and thus considered undervalued by a value investor. Common characteristics of such stocks include a high dividend yield, low price-to-book ratio and/or low price-to-earnings ratio."

So within a portfolio, you can further diversify by holding different styles of stocks from growth to value.

Peter Lynch, in his Book, One Up On Wall Street, further groups stocks into six categories:

1. Slow Growers
   
2. Stalwarts
   
3. Fast Growers
   
4. Cyclicals
   
5. Turnarounds
   
6. Asset Plays
   

International and US Diversification

Another way to diversify your portfolio is to hold stocks that are based in the United States, or based internationally. With international stocks, you can further group them into Developed International Markets such as Europe, Japan, and Australia, or into the Emerging International Markets such as Taiwan, Korea, China, Brazil, India, Eastern Europe, Africa, Middle East, and Russia.

Speculative and Non-Speculative

In his books (such as "Real Money: Sane Investing in an Insane World") and his shows, Jim Cramer preaches that up to 20% of a (discretionary, not retirement) portfolio could be allocated to more speculative stocks. This is yet another form of diversification.

Conclusion

So in order to have a diverisfied portfolio, be sure to diversify across several industry sectors as mentioned above. You can also choose to diversify in other ways as well such as market capitalization, growth vs. value, speculative vs. non-speculative, US vs International Diversification.

Health Care Plans: By the Numbers

In this article, we look at different Health Care Insurers (targets of Michael Moore's "Sicko" movie) and look purely at the raw numbers. (Data taken from Yahoo Finance on Friday, June 29, 2007):

Symbol	Stock Name	MyPEG	Forward PE	5 yr growth	Yield
HUM	Humana	0.23	12.69	18.33%	0%
AET	Aetna	0.35	13.07	15.56%	0.10%
MOH	Molina Healthcare	0.46	14.46	13.00%	0%
CNC	Centene	0.48	12.03	15.50%	0%
HS	HealthSpring	0.49	12.46	13.60%	0%
AGP	Amerigroup	0.56	10.96	14.40%	0%
HNT	Health Net	0.56	12.75	13.71%	0%
WCG	WellCare Health Plans	0.59	16.70	16.90%	0%
UNH	UnitedHealth Group	0.65	12.98	16.14%	0.10%
WLP	WellPoint	0.71	12.47	14.90%	0%
CVH	Coventry	0.73	12.90	13.54%	0%
SIE	Sierra Health Services	0.83	15.63	15.33%	0%
CI	Cigna	0.94	12.77	11.97%	0.10%
MGLN	Magellan Health Service	1.11	20.84	16.48%	0%
DMX	I-Trax	1.33	41.60	30.00%	0%

In order to understand the chart, we have to understand the different elements.

MyPEG

MyPEG is my own variation of the PEG Ratio. A MyPEG of less than one means the stock is cheap relative to its growth. A MyPEG of greater than two means the stock is very expensive relative to its growth. More info on MyPEG in this link. MyPEG incorporates the yield and cash per share.

Forward PE

Forward PE is the Price divided by Forward estimated earnings. When choosing between a stock that has a PE of 15 and a growth rate of 15% vs. a stock that has a PE of 30 and a growth rate of 30% (both have a PEG ratio of 1), I'll prefer the former. The reason is that high PE's are often priced to perfection. Any miss and high PE stocks can get hit very hard. Stocks with Lower PEs have less expectations and have a greater margin of safety. Another reason is that I have more confidence in the forward PE than the 5 yr. estimated growth rate. So the results are better by preferring the lower PE stock given an equivalent PEG or MyPEG because the 5 year growth rate is given less importance. Lastly, stocks can't maintain 30% plus growth for long periods of time, so growers from 15-30% might be preferred.

5 Yr Growth

5 Yr Growth is an estimate by the analysts. As I discussed earlier, the higher the better, though some people such as the legendary Peter Lynch have suggested that buying fast stocks, but not too fast, might be a good idea (from Peter Lynch's One Up On Wall Street : How To Use What You Already Know To Make Money In The Market).

Yield

The higher yield, the better. If you have a high yield, high growth, and low PE, that's a good combination.

Symbol	Stock Name	EV/EBITDA	%Short	%Inst. Own
HUM	Humana	5.184	3.70%	88.80%
AET	Aetna	4.122	1.20%	86.50%
MOH	Molina Healthcare	3.611	13.90%	48.50%
CNC	Centene	6.644	13.00%	102.60%
HS	HealthSpring	3.873	5.80%	74.20%
AGP	Amerigroup	7.342	8.90%	117.00%
HNT	Health Net	5.687	1.30%	92.20%
WCG	WellCare Health Plans	8.614	12.80%	106.60%
UNH	United Health Group	7.874	0.70%	85.60%
WLP	WellPoint	8.15	0.90%	83.60%
CVH	Coventry	7.735	2.20%	90.00%
SIE	Sierra health Services	10.309	3.80%	79.70%
CI	Cigna	7.45	1.90%	80.20%
MGLN	Magellan Health Services	7.399	8.60%	104.30%
DMX	I-Trax	27.985	4.60%	52.90%

EV/EBITDA

Enterprise Value divided by Earnings Before Interest, Taxes, Depreciation and Amortization. It is another measure of valuation. The lower the Better. A value of 8 or less is very good.

% Short

The higher the percentage, the higher number of people who believe the stock should go down. However, the higher the percentage, the better for those who go long because if good news is to hit a stock, not only does the price go up, but all those people who are shorting have to "cover" (Buy a stock to fulfill their loan obligation to the broker) their short position further fueling the gains. This is often called a "short squeeze".

% Institutional Ownership

People have different theories on this. Some people, like Peter Lynch, prefer a stock without that much institutional ownership. Because once the big mutual funds discover the stock, this could propel the stock to multibagger (make many times your money on your original investment) heights. However, some prefer a higher institutional ownership because that means that mutual funds and other institutional investors are already buying the stock (and may have them in their approved to buy list), and when more money comes in, they may add to their position.

Conclusion

Based on all this and based on just the numbers, the entire group looks to be inexpensive as a whole. Humana (HUM), Aetna (AET), and Molina Healthcare (MOH) look to be good values, having an EV/EBITDA of 5 and under, and the MyPEG having values less than .50. All three stocks have a lot of cash per share, and Aetna (AET) and Molina (MOH), both have debt to equity (not listed above) less than .26 (very good).