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CNN Today

'Foolish' Advice: 'Invest in What You Know and Understand'

Aired January 2, 2001 - 2:17 p.m. ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

NATALIE ALLEN, CNN ANCHOR: For the most part, tech issues took a beating on Wall Street last year. So what can we expect in 2001?

Joining us now with his advice on playing the markets is Bill Barker from Motley Fool.

Bill, thanks for being with us.

BILL BARKER, MOTLEY FOOL: Thanks for having me on.

ALLEN: Sure thing.

What do you think about this day that you're seeing so far, and overall the feeling for the markets, as we start this new year?

BARKER: Well, I think that part of what you've seen today is some downgrades of a couple of sectors by Robertson Stevens analysts, Web testing software and securities software, I think that those are industries that have a long-term positive element to them, industries that are probably going to grow in the long term. They are industries that were covered by our analysts in our industry focus 2001, as particularly attractive industries. But there's some short-term concerns, which seem to be taking hold today, which is often the case in the market, the short term is what gets, unfortunately, the attention.

ALLEN: So if a consumer is sitting at home, they really got hit last year by tech stocks. What would be your advice as far as what to avoid and what to look at in the first quarter of this year?

BARKER: My advice for 2001 would be the same as it would have been for 2000 or 1999, which is to invest in what you know and understand. And I think that a lot of investors saw in 2000 that tech stocks, broadly defined, broadly called, moved up. And that's what they understood about them. But they didn't really understand whether the businesses were going to be profitable in the short term and the long term. And when the prices went down, they sold those stocks. And I think that's -- that's appropriate that people sell things that they don't understand.

So I think this year you will probably see fewer people buying things that they don't understand because of the pain a lot of people experienced last year. ALLEN: Give us an example of a tech stock that people latched on to without knowing much about and didn't go anywhere and isn't expected to go anywhere.

BARKER: There are so many names from last year. You know, particularly Internet dot.coms, I guess, a company like iVillage or TheGlobe.com, which is back in the news today, had outrageously high prices because of what people I guess understood was that they were Internet stocks. But they didn't look further into the actual operation of those companies, and to see whether they had sustainable business models that were going to produce profits. I think that this year, a lot of sanity is going to return, and people will be focusing on the profits that companies make, rather than whether they do something that sounds kind of sexy.

ALLEN: What about energy stocks? We just heard Rhonda Schaffler's report, one California power company saying it will run out of money at the end of this month if it can't raise rates.

BARKER: Yeah, well, I think that, with energy companies, one industry that might be attractive in 2001 would be fuel cell stocks, as people look outside of the traditional energy companies. Also I think that you could look at the cold winter that we're having as a positive for some well-positioned energy companies. But the effect of the cold winter has probably been priced into those stocks already. So unless there's something unexpected, that we can't really predict right now, I think that there's no particular reason to get into energy stocks right now unless you have a good understanding of the industry.

ALLEN: Well, as far as new economy goes, what will you be looking after this year as far as potential growth?

BARKER: Well, I would advise people to keep their trading costs low, and to keep all their costs low, to get out of managed mutual funds that have 1 1/2 percent expense ratios every year, and to instead look at a broad index fund, like the total stock market index fund, that's the one that I prefer.

But specific companies to look at things like athletic footwear, or major food and beverage manufacturers. The types of what until recently have been considered boring companies, but are the ones with the stable operating histories. And, you know, the kinds of companies that our analysts have been focusing on.

ALLEN: All right, they are not very boring if they make some people some money, I guess.

BARKER: Exactly.

ALLEN: Thanks so much, Bill Barker from Motley Fool, we appreciate it.

BARKER: Thank you.

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