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Episode 29 - Stock Buying: A Rollercoaster Ride or a Smooth Sailing?

In this episode of the Blue Money Podcast, hosts Jim Donnelly and Kevin McGarry discuss the intricacies and risks of buying individual stocks. They stress the importance of market knowledge, diversification, and having a solid financial plan before investing. The hosts warn against the dangers of overconcentration in one sector and greed-driven decisions. They explain the use of the price-to-earnings ratio for stock evaluation and caution against following unverified investment tips. They advise seeking professional advice and remind listeners to be cautious, especially with the rise of cryptocurrency investments among police officers. The episode emphasizes informed decision-making and risk management in stock investments.

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Episode 29 – Stock Buying: A Rollercoaster Ride or a Smooth Sailing?

Jim (00:00:00) – I want to welcome everyone back to the Blue Money podcast. This is your host, Jim Donnelly. I’m here with my co-host, Kevin McGarry. What’s up Jimmy? Not much Kev. Just watched the Sixers game last night.

Kevin (00:00:09) – I did very, very, shaky there at the end.

Jim (00:00:12) – Yeah, they locked up the seven seats. All matters.

Kevin (00:00:14) – They better learn to play against the zone.

Jim (00:00:17) – Wow. You can’t have them be shooting threes. You hit that three at the end. But man that’s Jimmy.

Kevin (00:00:21) – Butler was hurt. But he was still. And he was a lot of pick and pockets last night.

Jim (00:00:25) – Jimmy Buckets.

Kevin (00:00:26) – Missed that.

Jim (00:00:27) – Guy. So Kev going onto a topic for today’s podcast I thought it’d be important to talk about individual stock buying. There’s a lot of police officers out there. There’s a lot of family members out there that are just saying, man, I can do this myself. They start buying individual stocks and we know how tough it is. We know how complicated it can be.

Jim (00:00:46) – So just start off first with these individual stocks.

Kevin (00:00:49) – I mean listen the markets had a good run as a recent. And when the market’s doing well a lot of people do think they can do it on their own especially with stock selection. You know to hit a couple right.

Jim (00:01:01) – That’s what happens right. Everyone usually starts off hot.

Kevin (00:01:04) – And they become the next portfolio manager. But I think about it this way a little differently. Like good luck. There’s 11 different stock market sectors right. There’s 69 distinct industries, over 8000 securities and 4000 listed stock companies. To pick something right is going to take a lot of luck and a lot of time tough.

Jim (00:01:27) – It’s really tough with all those numbers you’re just throwing out. It’s tough.

Kevin (00:01:29) – I mean, and even thinking about things change, right? The S&P 500 index in 2000 top five holdings were GE, Intel, Cisco, Microsoft, Pfizer today Microsoft still in it, today’s Microsoft, Apple, Nvidia, meta, alphabet. Things change. And you know when people come in here Jim and they say hey this is my stock portfolio.

Kevin (00:01:53) – These are the stocks I bought online. And they come show it to us. Typically they’re all invested in one sector tech.

Jim (00:02:01) – Everyone loves the tech.

Kevin (00:02:03) – So right. And that’s unsystematic risk where they just don’t understand pure diversification. They’re chasing winners most times. And a lot of times when you chase the winners is typically we see them lose over time. Right?

Jim (00:02:17) – Right. That’s tough. One problem that I see is I talked to some guys that are buying individual stocks, like I said, and I don’t I don’t have a problem with it. I think it’s good. It’s a good way to learn. But they don’t have nothing else playing like they might not. They’re low on life insurance. They don’t have enough to take care of family, or they’re only contributing it just a little bit to the retirement plan and they’re not maxing it out. So to me I’m like, God, man, gotta hit these other checkboxes first before you’re hitting that other bucket and trying to get rich on these individual stocks because it’s so tough.

Jim (00:02:47) – It’s tough. So that and then the other thing is they don’t have no exit plan. They have zero exit plan. They’ll buy stock for $30. And they should say, listen, when it comes to 55 or 60, I’m going to I’m going to sell it. They don’t. What happens? They get greedy gets 65. When people agree to cap, what do we say? Yeah, pigs.

Kevin (00:03:02) – Get slaughtered I think I think, you know, the most important thing here is does buying individual stocks meet your family’s financial plan, right. You know, maybe you want a stock portfolio. Well, how many stocks is that typically is it 30 is at 60 right. What’s the pure diversification there. If you’re going to go out and create your own stock portfolio. Because having 2 to 5 stocks isn’t diversified. No not at all. Right. And I think the other thing is if you’re going to do this right, Jim I know what you’re investing in. Understand the company, understand the space, understand the industry.

Kevin (00:03:39) – Right. Don’t just follow the herd. Right. And a lot of people to come in here, they’ll own XYZ company because their neighbor did it, their friend did it, their family member did it. And they’re just chasing they’re following the herd. Now, what about.

Jim (00:03:54) – The p cap? We hear that a lot about people buying stocks. Can you hit upon that one or really what. Because people look at that. Yeah. What what is that and how important is it. Yeah.

Kevin (00:04:02) – So p price to earnings ratio is a tool used to value a company by measuring its current share price relative to its per share earnings. So simple p e ratio is you take the stock price and you divide it by your earnings per share. And that’s what your p e ratio is. So if you have $100 stock and your earnings per share is five, you divide a five and 100. Your PE ratio is 20. You use this as I mentioned earlier, to compare it to the markets, to compare to the sector, to compare it to other stocks, to make sure, you know, to see if there’s value there, if you’re not overpaying or underpaying.

Kevin (00:04:43) – And a lot of times, you know, when p ratios are high, it doesn’t mean it’s a bad thing. Or if it’s if it’s low, it doesn’t mean it’s a bad thing. But when it’s high, that means some people are willing to pay a higher price for it and see more value in it. Right. Versus the opposite when it’s low. So. We look at PE ratios just to say, hey, is there value there? If you look at the index, the S&P 500 index. Historically it’s been between 17 and 18. Right now the PE ratio for the S&P 500 is approximately around 25. So you said well that seems more expensive. Well over the last five years we’ve been in that range. So relative things may be not as expensive as 1st May think or vice versa.

Jim (00:05:28) – And like I said, we’re going to buy the individual stocks. Like I said, I applaud it. I think it’s nice. It’s going to be it’s going to teach you the lessons, hands on experience.

Jim (00:05:36) – But just be careful if you’re just listening to Twitter or you’re just listening to any podcast and you know that same podcasts getting blessed all over the country and everyone’s buying the same stuff and you see the price go up and you’re like, oh my God, it’s just driving prices up. Let’s think about it. If someone had all these tips, they would be bonnet themselves before the price run up, then not selling with everyone else for free information. So like we said, there’s great information on the news and the media and these Twitter accounts. But just be careful. Just don’t think, oh my God, the ship sound. I gotta jump on it because it’s going to keep shooting to the moon. It doesn’t happen all the time, right?

Kevin (00:06:08) – I mean, think about it. If you look at the S&P 500, the index return over the last 30 years has been 10.22%, right. If you want straight diversification, you’re not going to work with advisor to get these companies because they’re all in there, right.

Kevin (00:06:24) – You know you’ll have diversification. You’ll have the the biggest companies out there. And you have potentially the possibility for strong return over time. But you can’t come in and come out. You got to be in it for the long term. once you invest in an index there. But back to the individual stock. Know the company, know if there’s value there, and don’t get greedy with it.

Jim (00:06:48) – Right. Because I just remember in the last couple of years how many police officers are just loading up on crypto. I mean, you name the coin, they had it because everybody was buying it. So just be careful out there, guys. If you have an emergency fund and they’re 60,000 in there, just say don’t spend 25,000 on stocks and just touch into your emergency fund. It’s just a bad idea. It’s going to probably end bad. So if you have some extra cash and you want to learn, you know how the stock market works, get some experience. It’s a great idea. I applaud it.

Jim (00:07:15) – So just be careful out there. Anything you want to wrap it up before we close it out?

Kevin (00:07:19) – I think if you’re going to do it, have a plan with it, you know, evaluate it and make sure you understand what’s going on in the markets with it.

Jim (00:07:28) – So if anyone has any questions, please feel free to contact Kaveri. Be careful out there.

Kevin: Be safe.

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