Interview With Howard Feigenbaum

Posted on March 30, 2011 by StockTrading.net | No Comments

Howard Feigenbaum has been an investor since he was in the seventh grade when he and his classmates pooled their money and bought two shares of Standard Oil of New Jersey. He has been in the financial services business since 1981 helping clients plan for retirements with a variety of investment products and strategies. For the last twenty-two years he has owned a broker-dealer firm, Sharemaster (www.sharemaster.com), that specializes in mutual funds that pay dividend income.

1. What are the main reasons people should consider investing?

Investing allows an individual to participate in owning parts of successful businesses or businesses which are on the path to becoming successful; or, conversely, an individual may benefit from identifying businesses which are declining in value and benefit from the decline in ownership value. An individual may also loan money to businesses who have offered an attractive return to gain capital.

There is inherent risk in taking a financial position in ownership or lending. For many people the return or profit from taking the risk may be attractive; the risk may seem prudent or worthwhile. However, there is always risk. There is also risk in not investing.

When someone deposits funds in the bank and receives a one percent rate of interest, there is inflation risk. The asset may be guaranteed against loss by FDIC but the value of the deposit may decline because of inflation. If the inflation rate is four percent per year but the interest rate is one percent per year, the asset is losing value at the rate of three per cent per year. When businesses experience inflation, they pass the increase costs on to their customers.

A good example is gasoline. Oil producers do not sell the product at the price you prefer; when their cost goes up, your cost goes up. If you own shares of an oil producing company, the value of your shares may stay the same or go higher, even in the face of inflation.

Some companies pay dividends. They distribute their profit among their shareholders. If they do well, you do well. It’s nice to be an owner. If they don’t do well, then you don’t do well. Then it’s not nice to be an owner.

The essence of investing is deciding where it is prudent to take risk, which companies will perform well over time and which will not. Could you do better with your money in an alternative, like a certificate of deposit, or is the additional risk worthwhile? You should consider investing if you can tolerate the risk. If you cannot, then you should not. Even Warren Buffet loses money sometimes. But overall, Warren has found that the occasional losses are more than offset by the reward of taking prudent risk.

If you are interested in taking on the responsibility of risk assessment, then you might do as well as Warren. If you are not interested in taking on the responsibility, then you should have professional management available in buying shares of a mutual fund. Your job then is to choose a suitable fund.

2. What are the risk differences between buying stock and day trading?

Buying stock and day trading start out the same. The difference lies in the purpose and length of time that the stock is held. Someone who sees the benefit of accumulating shares of companies at reasonable prices over a longer period of time is investing. Someone who is trading on a stock’s market direction within a very short period of time is speculating or day trading.

The risk differences are substantial. Buying shares over a longer period based on value assessment, allows a reduction of risk through averaging the cost of shares by buying at lower and higher prices. Day traders are more concerned with market direction of the share price. The day trader is hoping to identify trends in buying or selling from which he can benefit.

The value of a company may not be accurately portrayed by the price of its shares. When people who own shares of stock panic, they are willing to sell shares at prices much lower than what they paid and much lower than the real value of the company, even if liquidated. When there is euphoria in the market, people may often pay more than a company is worth. The day trader looks for very short term movements in stock share prices that may be the result of emotion, news, large shareholder decisions, perception of product or service demand or other elements that, for a short time, may influence price.

Since the day trader’s main concern is not a company’s value, the risk is much higher. The day trader sees the stock as a commodity. The short-term perception holds the greatest risk.

3. What’s a good approach for a new investor as he or she gets started in stock trading?

A new investor should gather information. Information has a lot of value for investors. Warren Buffet likes to own the majority of a company’s shares. Why? He can know the most there is to know about the company; as a majority shareholder, he is participating in the company’s operation. He has the most knowledge.

A new investor should become knowledgeable about any company whose shares he or she plans to purchase. The quality of the company, its position in its industry, its sources and amount of profit and risks associated with the particular industry are valuable information. Knowing this information makes an investment prudent.

If a new investor doesn’t have the time or interest to gain the necessary information, he or she should “hire” professionals like mutual fund managers who will do the job. A mutual fund also allows for diversification. An investor who is diversified by owning many companies through a mutual fund does not have as much risk in ownership as the investor who has purchased shares in one or two companies. If the fortunes of the one or two companies go down, the value of the investor’s money can decline more rapidly.

However, as Warren Buffet has found, having thorough knowledge of one or two companies and being right about their future prospects can produce a handsome return. Knowledge offsets risk and can produce reward.

4. What are the advantages to investing in the current market?

There are no particular advantages to investing in the current market versus the past or future market. The risk is always associated with a company’s value, profit and with supply and demand for a company’s shares. In every market there are winners and losers. Risk never disappears.

There are changes in opportunity, however. For the last three years an investor would have done better in Asian stock than in the U.S. market. Some South American stocks have done very well. But markets change and the prospects of companies change. A sobering exercise would be to look at the companies in the Dow Jones Industrial Average thirty or forty years ago and see how many of them are still there or, indeed, how many of them are still operating businesses. An honest assessment of risk and changes in risk is always part of investing in any market, whether past, present or future.

5. How should someone research a potential investment?

Start with the services that provide analysis like Standard and Poor or Morningstar; read about the industry that the company serves; if the company is regional or local, go to the company and take a look for yourself. For larger companies, do you like their product or service? What do others think. Do a little market research. If possible look at the company’s financial records. Public companies are required to file reports with the Securities and Exchange Commission. Look at companies’ annual reports. Look at their credit ratings. Look at their debt. Look at their sales. Notice the trend line. Look at their competitors. Who is growing, who is declining and why. Or let a professional management team at a mutual fund do the job for you.

6. How does one select a broker?

Just like anything else, check with people you trust and see who they deal with and what they like or don’t like. Decide if you want to pay the commissions that a full-service broker charges for providing extra service and advice; is the service and advice worthwhile. Do they have a good track record with people you know. Or, do you want to go solo, do your own research, make your own decisions and merely pay for trade execution. Then a discount broker might work fine. Or choose a mutual fund whose investment objective matches yours.

7. What advice would you give to a new investor?

Never forget that when you invest in stocks you are an owner. It is not like a magic bank account that continuously goes up. There is no guarantee. However, owners have the benefit of being rewarded for their risk. Decide whether or not you want to be an owner.

Personally, I consider owning shares of a company to be one of the greatest opportunities possible. Where else could a regular guy like me own part of a world-class company like Exxon Mobil or Intel and have them do all the work while sharing with me the success that can come from that hard work? I love it.

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