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September 2006 - Posts

  • Why Poker Players Make Good Investors: Part I

    In life, taking no risk is often the biggest risk of all.

    “Every serious choice that a man or a woman makes is a leap, more or less frightening, into contingency. Not to make those choices, not to open oneself to misfortune and the fear of misfortune, is a tempting choice, but one gives into it at the risk of never living a fully human life”, says Nelson Aldrich, multi-millionaire investor and author of the best-selling book, Old Money.

    Aldrich is simply saying what is already obvious to legions of risk-loving Americans – that risk is not only at the core of two of mankind’s favorite pastimes, betting on poker and betting on the stock market, it’s what makes those pastimes so appealing to participants.

    Make that millions of participants.

    According to PartyPoker.com, the world's largest online poker Web site, more than 35,000 simultaneous players during peak traffic time every day. That is no insignificant achievement considering the site only launched five years ago. With the incredible upsurge in poker around the world, greatly driven by televised poker, poker has undergone a renaissance of sorts, with bricks-and-mortar poker rooms experiencing a 40 percent increase from 2003-2005, while, online gaming has jumped a whopping 500-600 percent during the same time period.

    But even those numbers pale in comparison to the amount of money pouring into Wall Street these days. According to the Investment Company Institute, mutual fund investors alone accounts for $7 trillion worth of assets through mid-2006. And, according to the New York Stock Exchange’s Shareownership 2000 survey, it estimates 84 million direct and indirect shareholders in the US in 2000, representing 43.6 percent of the country’s adult population. That figure is up 21 percent from 1995’s 69.3 million and up 61 percent from 1989’s 52.3 million.

    Are there that many risk takers in the poker world and on Wall Street? You bet – and risk is a big reason why. Part aphrodisiac, part clarion call, the element of risk is to poker players and stock investors what King Kong is to a movie about apes or what the blues are to the Memphis musical scene.

    A narcotic? Maybe. An addiction? Probably. A passion? Most definitely.

    Risk is the common denominator that ties poker players and stock market investors together (that and the ability to separate others from their money). Risk is a big reason why those who excel at poker are usually those who excel on Wall Street. Each industry rewards those participants who take matters very seriously and understand risk, just as they understand preparation, discipline, and recognizing opportunity and knowing when to exploit it. Good poker players, like good investors, also understand human emotion and leverage that information to separate other people from their money.

    Consider the legendary financier Jay Gould, who made a fortune in the railroad industry and was a dominating force on Wall Street for the latter half of the 19th century. Gould was so good at separating people from their money that he earned the moniker “The Devil of Wall Street”. Once when Gould was attending his local church service on Monday, the minister pulled Gould aside and asked him how to invest a $30,000 windfall that had fallen into the congregation’s lap. Gould advised the minister to invest the entire sum in shares of Missouri Pacific Railroad. The minister did so and watched happily for a short spell as the stock rose. But after a while the stock slid precipitously, finally falling below .50 cents per share. The minister, distraught over losing virtually all of the $30,000, poured his woes out onto Gould, who snapped open his checkbook and covered the entire loss with one sweep of his pen. Then the minister confessed that despite Gould’s request to the contrary he had passed the stock tip along to other members of the congregation. “Oh, I guessed that,” Gould replied merrily. “As a matter of fact, they were the ones I was after.”


    Posted Sep 06 2006, 01:38 PM by moneycoach with no comments
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  • Understanding Stock Market Indexes

    Most stocks are measured against what traders call an index, i.e. a benchmark against which a stock's performance can be calibrated and counted.

    Of these indexes, the Dow Jones Industrial Average is the most prominent stock index in the world. The thirty stocks on the Dow, which are all part of the New York Stock Exchange, are established blue-chip companies like McDonald’s, Coca-Cola, and DuPont. Companies on the Dow Jones Industrial Average, which was created to mimic the United States stock market as a whole, represent a variety of market segments such as entertainment, automotive, healthcare products, and financial services.

    General Electric is the only company that was included in the original Dow Jones Industrial Average created in 1896 that is still part of its makeup today. However, General Electric was dropped in 1898, restored in 1899, taken out again in 1901, and then put back on the list in 1907.

    The thirty stocks on the Dow Jones Industrial Average companies are all represented equally, each being added to reach a total number that is then divided by a “divisor.” Due to stock splits and other market factors, this divisor will vary. The divisor was originally 30, but it has been reduced over the years to a value less than one. The important point to remember is that each company carries equal weight.

    Some indexes are capitalization-weighted, giving greater weight to stocks with greater market value; others treat each stock equally. Other indexes include the following:

    Standard & Poor’s Composite Index of 500 Stocks. The Standard & Poor’s 500 Index is a benchmark that is widely used by professional stock investors. The Index represents five hundred stocks—four hundred industrial stocks, twenty transportation stocks, forty utility stocks, and forty financial stocks. It consists primarily of stocks listed on the New York Stock Exchange, although it also features stocks that are a part of the American Stock Exchange (Amex) and over-the-counter (OTC) stocks.

    Russell 2000. The Russell 2000 was created to be a comprehensive representation of the U.S. small-cap equities market. It measures the performance of the smallest 2,000 companies in the Russell 3000 Index.

    In the past few years, even particular industries have their own market indexes -- biotech, health care, teachnology, and even gold and mining have their own stock indexes.

    But there is a good reason for that. Investors find them useful and analysts find them accurate. So look for even more stock market indices down the road.



    Posted Sep 04 2006, 07:20 PM by moneycoach with no comments
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