Over the last few years, I have talked about my Average Joe indicator on several occasions. I even introduced an old high school classmate as the typical Average Joe as he would call me and ask for advice on what to do with this stock or that stock.
Unfortunately, I have had to replace the original Average Joe because I unfriended and blocked the person on Facebook. I have been on Facebook for over 10 years and this is the first time I have ever done either of those things. I am pretty tolerant of others and their opinions and beliefs, but Joe crossed a line in the last few weeks. He posted ignorant and insulting comments about China and Canada as well as the people of those countries. My wife is part Chinese and part Canadian Indian and I took his comments as an insult to my wife’s family and their heritage. That is something I won’t tolerate.
I don’t want to make his comments the focus of this article because I have a replacement Average Joe. We will call him Average Joe II, or AJ the second. AJ the second is much younger than the original. He’s approximately half my age, he just graduated from college, and he’s studying for the CPA exam at this time.
AJ the second went to high school with my oldest son and he helped me coach several basketball teams at different levels. He’s smart and ambitious, but he’s also impatient.
Why am I going into all of this now? AJ the second just started trading stocks a few months ago. While I am glad he has decided to start investing at such an early age, I fear that he has gotten caught up in what the market has done over the last few months. He and I text and message frequently, and I’m trying to help him understand the market. Unfortunately, he’s seeing stocks jump 20% or more in just a few days and I fear that he will think that’s the norm.
I sent him a message last night to remind him that he has gotten involved in the market during the greatest 50-day period in market history and to be careful. Over the last few weeks, he has asked me about a number of stocks that are being touted here and there and I have to caution him about that.
To give you some examples, he asked me about Oasis Petroleum (Nasdaq: OAS), a small oil & gas exploration and production company. The stock jumped from $0.56 on Thursday to $1.26 on Friday and then to as high as $2.25 yesterday. It’s down to $1.67 today, down 18% on the day. Sure it’s exciting to see big jumps like that, but many times stocks like that fall just as fast, if not faster, than they run up.
AJ the second also asked me about Pacific Drilling (NYSE: PACD). This one jumped from $0.40 on Thursday to $0.77 on Friday and then up as high as $1.20 yesterday. Today it’s trading under $0.80.
Sure moves like this are exciting, but to me this isn’t investing—it’s gambling. I looked at both of those stocks for AJ the second and analyzed them just like I would if I were recommending them to my subscribers. Both companies are down in that price range for a reason. The companies are either losing money, earnings are falling sharply, or revenue is declining sharply. They didn’t drop to those prices by accident.
AJ the second has also asked me about companies like Ford and Hertz. I finally asked him about what he was looking for in stocks and he said cheap ones. I suggested an oil and gas producer with a P/E of 7, great earnings growth, and strong revenue growth. He told me that is was “pricey”. I asked him how he could consider it pricey with a P/E ratio of 7. He said, “it’s over $50 a share”. That’s when I had to explain that price is justified by earnings or potential earnings. He wanted low-priced stocks, not cheap stocks.
At one point I asked him if he would rather own three shares of a strong company like Adobe (Nasdaq: ADBE) at $400 a share or 1,200 shares of POS stock at $1 a share. Hopefully, you understand that POS isn’t the ticker symbol of a real company but rather the less than flattering initials to describe something.
Yes, it’s doubtful that Adobe is going to jump 200% in a few days, but it also isn’t likely to drop 50% in a day or two. If a $400 stock goes up to $600, that’s a 50% gain. If a $1 stock goes up to $1.50, it’s a 50% gain. I recommended to him that he not get caught up in the hype of these stocks that are trading under $5.00.
My new Average Joe might not be as useful when it comes to timing the market, but I am hopeful that he will listen to what I am trying to teach him. I hope he keeps the enthusiasm he has for the market and I hope he doesn’t get burned by a bunch of hyped stocks that plummet back down. He’s a good kid and I am proud of him, even if he isn’t my kid.
I gave AJ the second the same advice and the same tools I try to give to Bull Market Rodeo readers and to my subscribers. Develop a process that fits your own style and work with it. Don’t buy into the hype of stocks being touted on this website or this Twitter account. Do your own homework and learn the craft.