Friday, January 16, 2009

Where In The Market Should I Invest?

This post got featured on this week's Money Hacks Carnival. Check it out!

It is difficult for everyday people to make a lot of money investing in stocks because they only invest in companies they know. These companies tend to be the large market cap stocks like Microsoft, Exxon mobile, Proctor and Gamble. The problem with these stocks is that the companies are so large and have so many analysts following them that they are rarely mispriced. They are mature companies so the growth has already been done. Microsoft and Exxon Mobile are already so large and do so many things that they do not have that much room left to grow. Investing in these large companies, since they will not grow like a small startup company will, is not going to earn anyone big money. These large cap stocks only go up or down when the market as a whole moves. If you wanted to make a lot of money through Microsoft, you had to invest in it when it first started, not when it is already fully grown into a 200 billion dollar company.

To make a lot of money in stocks, you need to invest in small companies that will one day turn into Google or Microsoft. The problem with this is that these small companies are hard to find, most average investors are not going to be able to spend the time researching small cap stocks. Nor do they have the business intelligence to be able to pick a company out of thousands that is going to be the next Google. Most people will not know what makes good management or if the small company has a viable business model.

Thus, most average investors should look to invest in stocks with high dividends because they are going to make the bulk of their money investing through dividends, not stock growth.

Right now is not a great time to get into the market. Unemployment is on the rise, currently it is at 7.2% but I think it will go as high as 9-10%. As unemployment rises, companies will continue to suffer because people will not be buying their products. Because no one is buying their products, they will not be growing at all and their stock price will not go up. If you want to invest right now, I would suggest you invest in companies that are "recession-proof." Meaning the business of company will not suffer during a recession. For example, Altria Group(MO) makes cigarettes and Bristol Myers Squibb (BMY) is a pharmaceutical company. When people cut back on spending, they will not cut back on cigarettes and their prescription medicines, for the most part. Thus the business of these two companies are recession proof because they can continue to earn money in tough economic times. Also, look for companies that give high dividends, because the overwhelming majority of stock are not going to go up this year, but you can still make money through dividends. That way your investment is still giving you some kind of return.


  1. This was good read. I included in my weekly potpourri

  2. Thank you! I am glad you found it informative.