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“Don’t gamble! Take all your savings and buy some good stock and hold it until it goes up, then sell it. If it don’t go up, don’t buy it.” The humorist Will Rogers (1879 – 1935) came up with that one. Money and investing used to be something polite people never mentioned. Now it is similar to both a spectator sport and a video game. Do your clients really understand how investing works?
1. Why stocks go up. Every stock analysts follow has a price earnings (P/E) ratio. This is a number. It varies, but is often broadly considered a constant. Publicly traded companies post earnings every quarter. That number, multiplied by the P/E ratio gives you the market price. When a company continually reports higher and higher earnings, the price of the stock is expected to rise over time. When a company stops growing, investors often look elsewhere to make money.
2. Buy on the rumor, sell on the news. Imagine a company is working on a cure for cancer. They have patented a unique process or medicine. This is taking them years. The word on the street is they are getting close. One day the company makes an announcement. They had a breakthrough! The drug works! You might think that is the moment to buy the stock. Early investors are probably getting out. Why? The news is out! Unless they have another blockbuster drug in the pipeline, there are no more surprises on the upside. Investors want to get in early.
3. Wall Street climbs a wall of worry. If you watch the financial news, you might think this is a terrible time to be investing. If you could go back in time and watch the news of that period, you would think that was also a terrible time to be investing. Wall Street is often considered a community of optimists. Things will get better. There will always be technological breakthroughs. The consumer will always continue to spend. The time to worry is when everything looks so great people say “What could possibly go wrong?”
4. Why low or high interest rates matter. There are two views concerning interest rates. It depends if you are a saver or a borrower. If you are a saver, you want high interest rates because the bank or government bonds will be paying you more when you tie it up. The story is different if you are a borrower. Big companies consider new projects. They might be introducing a new product. They have a business plan. They ask: “What is our return on equity?” Put another way, is this project the best use of our capital right now? When interest rates are low, the cost to borrow makes the return on their project higher. The government likes low interest rates because it borrows a lot of money. Higher interest rates mean the cost to service debt is higher too.
5. Is a strong dollar a good thing? We are patriotic. Most people around the world are too. We think of a strong dollar like showing we are in good shape when we go to the beach. For American tourists going abroad, it means their dollar “goes further” when converted into local currencies. A strong dollar also attracts investment dollars into the US. Why? The person putting their money in a bank gets it back with interest, plus they might make an additional amount on the conversion rate when they bring the money back home. If you are an American company selling overseas, a weaker dollar works in your favor. This is important if you are competing for a contract overseas. A weaker dollar makes your bid look more attractive. How it looks depends on if you are spending money overseas or seeking to earn money overseas and bring it back home.
6. Is buying stock on margin dangerous? Everyone has hear the expression “Other People’s Money” (OPM). It was even a 1991 movie starring Danny DeVito. This is also called Leverage, which was the title of a TV series. Buying on margin is when you invest using borrowed money. If the stock goes up, you are making money both on the cash you put up and the cash you borrowed. If the stock goes down, the loss is not shared between the lender and the borrower. The lender wants their money back, plus interest. All the pain of loss is felt on the investor’s side of the equation. There are also circumstances when the borrower must put up additional cash. This is termed a margin call. This was also the title of a 2011 film. You can tell Hollywood loves Wall Street. Buying stock using borrowed money can wipe you out if the stock market moves against you.
7. The S&P 500 Index is a collection of sectors. Logically, the S&P 500 index is made up of 500 stocks. Some people might think if the index is up 1% on the day, every stock moved up 1%. That’s not true. The index is made up of 11 sectors, each representing an industry group. They each are up or down by a certain percentage every day. The number reported for S&P 500 performance is an aggregate.
8. It is possible to still make money owning stocks (or lose less) when the market goes down. The concept of 11 sectors comprising the S&P 500 index introduces the next concept. Each of those 11 sectors delivers different results. For example, as of 10/7/25 the S&P 500 Index was up 14.57% year to date. Within the index, the Information Technology sector was up 22.87%, closely followed by the Communications Services sector, up 22.40%. At the other extreme, Consumer Staples was up only 1.48% and the Real Estate Sector is up 1.91.%. Money is like water. It sloshes around. It needs to go somewhere. It might move out of the best performing sector (taking profits) and move into the sectors that have not made their move yet. Watching which sectors are suffering and which are benefiting (or suffering less badly) gives you clues where the money is going.
9. Day trading rarely works. Imagine you bought a basket of five stocks you hand picked personally. Four worked out, one lost money. You are confident in that last one, but you take your profit in the first four. You think “No one ever went broke taking a profit.” You buy four different stocks. Three work out, one does not. You sell your three winners and are now holding two losers. Of the three new stocks, two work out. You sell them and buy two replacements. One works out. You might congratulate yourself on having bought ten winners, but you are now holding four, perhaps five losers. How much have you lost by not having sold your losers earlier?
10. Understanding percentages. Let us remember those losing stocks from the previous example. You bought a stock at $100. It has declined to $66.00. It has declined by $34 in value, which is about a third. Let us call it 33%. What does it take to get back to where you started? Your $67 stock needs to rise 33 points. That is a 50% upward move. You might have lost 33% going down, but you need to make 50% going up to break even.
11. Are concentrated positions a bad thing? Every investor has a stock they love. It might be the company where they work. They bought some stock outright. They are in the company stock purchase plan, letting them buy company stock at a discount. They have it in their 401(k) plan at work. This is like putting all your eggs in one basket, then running the risk of tripping and dropping the basket. Your future prosperity is tied to the fortunes of one company. It makes sense to diversify, broadening your exposure to different segments of the market. This might be more easily done in your 401(k) or outside investments.
12. The government is your silent partner. If you own stock outside a tax deferred retirement plan, you might be the one putting your capital at risk when you invest, but the IRS is a partner in your profits. This can be a disaster if you do short term trading because those gains are taxed as ordinary income. If you are single and have taxable income roughly between $100,000 and $200,000, you are in the 24% marginal tax bracket. This means the government gets a 24% share of your profit, even though you took 100% of the risk. The government wants you to buy and hold, taking long term capital gains instead.
It is possible some people think investing is a form of video game, unaware of the risks they are taking or what needs to happen for stocks to go up.
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