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Individual Investors – I Feel Your Pain

|Includes: IBM, KODK, KRE, Microsoft Corporation (MSFT), QQQ, SPY

 It’s definitely getting harder and harder to invest in the stock market these days. Individual investors are at such a disadvantage compared to investment professionals or stock gurus like John Paulson, George Soros or Warren Buffet due to the lack of resources, access to information and just general investing experience. It’s not that the individual investor can’t get access to these public documents or information — but rather, this information is not easily obtained. For example, do you really expect an average investor to spend time to attend every shareholder meeting of every company they’ve invested in? Or how about listening to every single conference call of every company they have in their portfolio? And those super long and boring 10-K and 10-Q’s SEC filings? And even if the average investor DOES wind up reading ALL of this info, will they truly understand it? Does every individual investor have access to or subscribe to analyst reports (which are usually pretty expensive)? Yes, these documents are all available but they all come with a hefty price in either time or money. Not only do you need the time to absorb this information, but will an average investor truly apply this information meaningfully to their investment decisions? Let’s just say that mastering the business model of every company they own stock in is quite a daunting task — even for investment bankers.

That’s why — when my friends or family ask me what to invest in these days, I almost always tell them to look into buying SPY or QQQQ. If you don’t have the time to research every company, and you don’t trust your money with the mutual fund managers out there (Madoff anyone?), then SPY and QQQQ are safer bets. Of course, there’s always risk with every investment you make. But if you’re betting on the overall market going up, then SPY or QQQQ are pretty solid choices.

If your appetite for risk is a little greater, you can always try to buy an ETF in a specific sector. For example, if you believe regional banks are going to do well, then buy the KRE (SPDR KBW Regional Banking ETF). Here’s a chart with a list of popular ETF’s out there for various sectors

In any case, I just wanted to let all of you individual investors out there know — I feel your pain. As an active, individual investor for over 10 years, with obviously more experience and knowledge than an average investor, I still find myself struggling with analyzing, researching, and finding information about companies I invested in or am interested in. I struggle with the amount of time I have to spend to research each company and keep up with the latest news and/or research on those companies. Not only do you need to understand the company, but also the competitive landscape, the industry that company’s, macro-economic influences, market psychology as well as how technology is changing the very nature of many businesses (look at Eastman Kodak [EK] for example). The sheer magnitude of the amount of information out there is staggering. Try doing all this while juggling a full time job! It’s tough, but you just have to hang in there!

When you invest in individual stocks, one bad stock pick can be detrimental to your entire portfolio and wipe out all your gains for the year. Your margin of error is very small (unless you’re a short term trader — but that’s another discussion all together).

Gone are the days of buy-and-hold. i.e. Buy MSFT or IBM, hold it for 10 years, and retire. It doesn’t work anymore. In today’s electronic age, in order to stay abreast of the market, you need to do your homework and the homework is endless.

So my advice to everyone who’s trying to take control of their own investments and daring enough to buy individual stocks. DON’T BE LAZY. If investing was easy, everyone would be making millions. Do your own homework, draw your own conclusions, read message boards, Google the company, read SEC filings, investment blogs like Seeking Alpha or Motley Fool, analyze earnings reports, and just make sure you do your best to understand everything you’re reading. While it’s impossible to have ALL the information at the time you invest, just do your best to educate yourself as much as possible. If after reading through this mountain of information, you still don’t know whether you should buy the stock — it’s probably better to avoid it. Always invest in what you know. That’s a pretty good rule of thumb.

Disclosure: I am currently long EK.