The Motley Fool
Last week’s question and answer
I was founded in 1901 by two Milwaukee gentlemen intent on “taking the work out of bicycling.” (Back then you’d have to buy gas for me a pint at a time, at drugstores.) By 1933 I was dominating racing events. Twenty-thousand of my products served in World War I. In 1921 I was the first of my kind to pass 100 mph. In 1965 I set a world land speed record, at 177 mph. I’m known for teardrop-shaped gas tanks, “knucklehead” engines and “Fat Boys.” My stock price has accelerated nearly tenfold during the last decade, making some investors hog-wild for it. Who am I?
Google? No thanks
Shares of search engine giant Google recently debuted on the market, priced at $85 per share and jumping to $100 on their first day. The initial public offering (IPO) had many investors salivating, as they remembered that those who got in early on eBay, Amazon.com and Yahoo! did spectacularly. Well, yes, but many other Internet IPOs eventually failed.
Google’s opening market value topped the current market values of General Mills, Starbucks, Nike and General Dynamics. That’s steep. The company is growing quickly and is likely to be successful. But we have to wonder whether this is really anything more than cashing in at the peak.
Yes, insiders will be made wealthy, as will many employees. But if Google’s business is so insanely great, why in the world would they want to share? Public offerings generally occur when companies need to raise money for operations or for new projects. Google’s financial statements reveal no such need.
Being public is both hard and expensive for companies, and for Google, it seems to be unnecessary — the company generates plenty of cash from what it does.
Google isn’t a bad company. But we’re not rushing to buy the new shares at current levels. Great companies can be lousy investments if you buy them at the wrong price. Consider waiting, and you may be able to buy Google shares at more reasonable levels in the future.
No redeemable value
When I sold my shares of Amerada Hess, I forgot about an extra dividend of two shares that were in a safe deposit box. I later learned that selling them would cost about as much as they were worth, so I didn’t sell. For 16 years, I’ve been cashing checks for 30 cents each quarter — dividends on my dividends — much to my initial embarrassment at the bank. Meanwhile, my two shares have almost tripled in value. I’ve quit trying to redeem them. — Ello Simon, Petaluma, Calif.
The Fool Responds: Those two shares, now worth around $150, demonstrate the value of patience in investing. Plus, you’ve collected about $20 in dividends — not a bad deal. Yes, you would have made more by hanging on to all your original shares, but there have been even more profitable companies around. If you moved your money into the stock of, say, Wal-Mart, PepsiCo or Harley Davidson, you would have done even better. Whenever you want to sell your two shares, there are many brokerages that charge modest commission rates. Learn more at www.broker.Fool.com.
Chances are, it’s happened to you. Your favorite TV show is interrupted by a phone call from a broker you don’t know who urges you to buy some investment. This is a “cold call.” A classic broker cold call might inform you that you’re among the “lucky few” to be offered a “surefire investment.” You might even be guaranteed “a 200 percent return within six months.”
Don’t end up as one of many victims of shady cold calls. Understand that promises of high returns for low risk are likely to be broken. Scoff at warnings that you have to “act now!” Any good investment should still be around tomorrow. Avoid “inside” tips, because it’s illegal to pass on or act on material that is inside information. Steer clear of anyone unwilling to provide details in writing. Beware of predicted or guaranteed profits.
If a cold-calling broker really had a valuable stock to offer, he or she wouldn’t have to convince strangers to buy it. People would be snapping up shares on the open market. Stocks that cold callers try to sell are often ones that no one else wants, stocks that their firm is trying to unload. This applies to initial public offerings (IPOs), too. Shares of IPOs that people are excited about tend to be hard to come by, not aggressively hawked over the phone to strangers.
You can ask any cold caller to put you on his firm’s “do not call” list. You can also prevent some others from being conned by turning in any hypesters. Take names and notes during the call and report anything shady to the Securities and Exchange Commission at (202) 942-9634. The SEC offers some excellent guidance on cold-caller restrictions at www.sec.gov/investor/pubs/coldcall.htm.
Anyone thinking of investing with a cold caller should check out the regulatory background of the salesperson and/or brokerage firm. To do that, call the NASD Regulation’s Public Disclosure Hotline at (800) 289-9999.
Whenever I hear corporate earnings reports, there’s inevitably a comment about the reports’ meeting or not meeting “analysts’ expectations.” Who are these analysts and why is so much attention given to their opinion? — Bob Burns, Neenah, Wis.
Wall Street analysts often study companies, issuing reports on their investing merits for their employers and clients. Since these reports are often widely circulated, many people pay attention and watch to see how companies fare relative to analyst expectations. If a firm doesn’t do as well as expected, its stock can falter.
An irony is that many of these analysts are “guided” by executives at the companies themselves, who furnish their own projections in earnings reports and elsewhere. Thanks to the SEC, companies can no longer disclose key information just to analysts — it must be shared with the public.
Too much attention is given to quarterly results. For long-term investors, the most important thing is how a company will perform during the coming years or decades, not what analysts expect will happen in the next three months.