Be the bid!

[Felch]

Kid, you're wrong. The cost of the stock is what you are risking. To get 100 shares at $2 is half as risky as getting 100 shares at $4.

[snoopy369]

That's nuts. Why not just always invest in penny stocks for less risk? No, that's more risk. Why do you believe what you do?

Risk/reward (and it's pointless to talk about the former without the latter) is (possible gain) versus (possible loss). As prices drop sharply, for stocks that are major companies (ie, GE, Ford, etc.), the possible gain goes up and the possible loss goes down. I'm not saying it's linear - certainly you could lose everything - but you could ALWAYS lose everything. The fact that you can buy 1000 shares of Ford for $2000 means you stand to gain $50k+ if it goes up even to $25-$30 a share in the mid term (say 5 years) for a minimal outlay.

[Kidlicious]

Risk/reward (and it's pointless to talk about the former without the latter) is (possible gain) versus (possible loss). As prices drop sharply, for stocks that are major companies (ie, GE, Ford, etc.), the possible gain goes up and the possible loss goes down. I'm not saying it's linear - certainly you could lose everything - but you could ALWAYS lose everything. The fact that you can buy 1000 shares of Ford for $2000 means you stand to gain $50k+ if it goes up even to $25-$30 a share in the mid term (say 5 years) for a minimal outlay.

The possible loss is everything in both cases, and the possible gain is undeterminable in both cases.

[Japher]

That's why you protect your downside risk. Saying I have the possibility of losing everything is just as silly as thinking my upside is unlimited. The risk isn't so much in the investment vehicle as it is in the investor.

In my case, however, I am very risky. That same risk is getting me a nice size chunk of change coming my way once Roche closes on Genentech. Though, I will probably use that to pay down the principle on my house.

[Aeson]

Kid, you're wrong. The cost of the stock is what you are risking. To get 100 shares at $2 is half as risky as getting 100 shares at $4.

Not really. It's like putting $4 on a blackjack table to putting $2 on a roulette number. Sure, you're risking less money at roulette, and the "jackpot" is bigger, but you're also getting worse odds.

[Victor Galis]

I think if any of the Big 3 survive, that it will be Ford.

JM

I don't think any of them can survive independently. If any of the big three fails, it'll take out a chunk of the others' supply chain.

Kid, you're wrong. The cost of the stock is what you are risking. To get 100 shares at $2 is half as risky as getting 100 shares at $4.

Yes, but you're only risking half as much money Getting 200 shares at $2 can be as risky as getting 100 at $4 if the company's on it's way to 0. There's also the time frame. Buying a stock that's on its way down at $2 is worse than having bought the same one while it was on its way up at $4 in the short-run.

[Dauphin]

If stock prices are "low" compared to a defined expectation, the rates of return are therefore greater by the same expectation. As a measure of perception, the risk is greater, but then so are the rewards.

The absolute value of a share is not really worth considering, unless its indivisibility affects its ability to be traded.

[Japher]

I think now is the time to get in. With that in mind I have DNA stock, which is set to get bought out by Roche so I don't think that it's going anywhere. Should I just sell it now and use the proceeds to reinvest in GE/BAC or some other blue chip, or just wait and hold?

[DanS]

Any chance that Roche will sweeten the bid? If not, then I would sell out and move all the proceeds over to an S&P500 index fund or similar. These prices are 51% off the highs -- still excellent.

[Dauphin]

These prices are 51% off the highs -- still excellent.

I often think it odd that simply because an index is off its high by X%, wher X is quite large, it is supposed to be a good reflection of future performance.

[Japher]

I sold and put about 2/3rds of it between BAC and GE. Right after I did this the market turned south. Roche isn't going to sweeten the bid. The only reason to hold it would be to think that an appraisal of the company would come back higher after the sale goes through, but I think if it would it would be marginal.

I am happy with the general price of BAC and GE right now, as well as their outlooks, at least from what I can tell right now. I like their betas, opens me up to the risk. I will take the rest of the money and put it towards my kids educational savings in which I am buying DIS (beta = 1) and K (beta = .5) for the near future.

My dad always tells me to buy mutual funds and bank stocks, I can't do that ('cept in my IRA and 401k). As I said earlier I like the risk exposure and when the market is so bad, and Bernake and others are saying that it looks like we'll make it out of this I am much more inclined to take that exposure over paying down my overvalued house. Risk is a measure of the individual and not the stock. I told my dad that last Monday after he sold out his portfolio after losing 50% (a large chunk of change, nothing like my measly little investments). I wonder why, at 65, he was so exposed. Should have been in bonds once retirement was on the horizon. I've already decided I will never get rich on the market, I need to up my inflow in order to reap any benefits there.

[DanS]

I often think it odd that simply because an index is off its high by X%, wher X is quite large, it is supposed to be a good reflection of future performance.

If you're not taking it in context, then no, it's not a good reflection of future performance. Further, it says nothing useful about short-term future performance. I use it as a nice short-hand to tell where we stand in the bear market.

But if you want a solid answer about long-term future performance, you would have to arrive at a fair value for the S&P 500 by discounting the cash flow of an investment in the S&P 500 using long-term corporate profits and today's interest rates. It's not rocket science, but it does take several hours to accomplish.

[Dauphin]

I wouldn't call the answers solid. More indicative, maybe.

DCFs were one of the best things about my exams, meant I didn't have to write so much and the answer was either right or wrong (in a text book sense).

[Victor Galis]

I just bought some 1 yr. corporate bonds. I'm thinking those are a much better investment than the market right now, as long as you pick a company in no danger of defaulting.

[DanS]

I wouldn't call the answers solid. More indicative, maybe.

If we have a great depression or a lost decade, all bets are off, of course. But note that the long-term total return and corporate profit figures do include a great crash and a great depression. Not perfect, but still a pretty solid basis from which to work.