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Getting Started the Right Way
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The proliferation of investment information has never been greater. We have tons of people telling us what to do. We have lots of experts telling us how to get started and what you need to know before you buy and sell. Yet they presume a level of knowledge that most of us simply don't have. Unfortunately, plenty of novices immediately get clobbered making amateurish mistakes because they don't understand the basics. These mistakes make neophyte investors feel that the game is rigged against them or that they will never succeed on a regular basis. Many of you got started during an era when everything worked, when the economy was strong, interest rates were low, and stocks went up pretty much every day. Homework was anathema to profits because it kept you out of the most promising short-term situations. That level of perfection had been previously unheard of and is unheard of again. Now people feel that things are simply unfathomable. I think the opposite is true: Stocks can be fathomed, but you need the basics, and the basics weren't taught during the heyday of the late 1990s when so many got into buying and selling stocks. And they certainly aren't taught at any level of school in this country.

I know there is always frustration out there among the first-timers because many of you e-mail me or call me at my radio show, Jim Cramer's RealMoney, and ask me if I used to lose money regularly when I started. In fact, many of the millions of people who got their start in equities during the boom, bubble, and burst of the late 1990s to 2000 are convinced that the business is a sucker's game and that you might as well just turn it over to someone who is a professional.

But we are a profession without standards. The media, always so eager to tout any manager regardless of credentials, particularly if he is a good talker, never let you know that most of the "professionals" out there are rank amateurs themselves, often with much less experience at handling money and much more experience in sales than you. The astounding progression of individuals who first got clobbered by buying any old piece of trash online and then tendered their money to mutual fund charlatans, who then sold them out to wealthy hedge funds, is enough to make anyone throw his hands up in disgust about the process. You see why individuals reach the conclusion that handling money well in any fashion is simply impossible. The individual has experienced a fleecing that I wouldn't wish on the most shaggy of sheep in the dead of summer.

First, let's clear up a couple of misperceptions about the business of investing. I always thought the buying and accumulating of stocks looked easy. But once I started, I learned about the hazards of com­missions, about the changing nature of markets, and the vagaries of the brokerage business. I learned that it seemed impossible to know enough to buy or sell anything right. No one could ever know enough to pull the trigger with any confidence; the task was too daunting.

And of course, when I started, I lost money. Big money. I would go on colossal losing streaks where literally everything I bought went down. I experienced tremendous ups and downs that were psychologically debilitating; often I just wanted to return to the confines of whatever paycheck I was drawing and learn to be content with that income. But I always believed that stocks could be mastered if someone would just show me the landscape, if someone would explain to me the real pitfalls and give me the real rules, not the ones that I read in books or heard about on TV or saw in articles about the market. I call what I knew the Mistaken Basics. They are why, in part, I come to Praise Speculation, Not Damn It.

Part of the reason that I failed so dramatically when I first bought stocks is that I, like everyone else who has ever bought a stock, believed in conventional wisdom about stocks. In fact, I can sum up the doctrine I foolishly believed in with three rules:

•  Buy and hold because that's how you make the most money.

•  Trading is always wrong, owning is always right.

•  Speculation is the height of evil.

I guess it is only fitting in a book written by a successful investing iconoclast that the first thing we do is demolish these three shibboleths. They are blights on the investing landscape, idols that must be smashed before we go a step further. So, let's do it.

First, the concept of buy and hold is a beautiful thing because it presumes a level of ease and a level of perfection that we should all strive for. What could be better than a philosophy bedrocked in pa­tience and conviction? Unfortunately that level of conviction about pieces of paper—all that stocks really are, and don't you ever forget it—is impossible. Patience, while a virtue, can turn into a vice when you sit there and watch a good company go bad and hold on to its stock anyway under the guise of prudence. I can say with confidence that an unmodified program of buying and holding stocks will definitely smash your nest egg worse than a McDonald's cook whipping up a fresh batch of Egg McMuffins. Buying and holding is actually a bizarre misinterpretation of the long-term data that I have quoted about why you need to stay in the game. Given that no asset class has beaten equities over any twenty-year cycle, it is natural to assume that if you buy stocks and hold them you get to beat all other asset classes.

However, the foremost academic on this particular issue, Jeremy Siegel, a Wharton professor, blanches visibly when he hears the distillation of his work interpreted as a recommendation to buy and hold stocks. Siegel's work shows that if you buy and hold good quality stocks that open pay dividends, you get the benefit of the cycle. In fact, the dividend portion is the reason why stocks outperform bonds, and not vice versa. Take it away, and you fail to win. Just buying and holding any old stocks, Siegel will tell you, can be a ticket to the poorhouse.

That's why on Jim Cramer's RealMoney, I have changed the superficial buy-and-hold mantra to the more arduous "buy and homework" doctrine, meaning that the real homework begins after you have bought a stock. Just buying and holding Sunbeam, Enron, WorldCom, Dome Petroleum, and Lucent, each at one time the most heavily traded stock of its era, was a recipe for certain disaster. Homework, or the spadework that I describe to you in my chapter on what constitutes homework, would have gotten you out of all of these stocks before the damage and the rot set in. Again, not buy and hold, but buy and homework. If you are going to make big money in the market, only with homework can you be sure that your stocks qualify as good quality stocks that can pay a dividend.

Second, the idea that trading is somehow evil is ingrained in most individuals almost from the moment they begin to invest. Stubborn adherence to this point of view has led to more big losses than any other strategy I know. Trading, meaning the rapid or short-term buying and selling of stocks, is something that can prove to be entirely necessary if you are to be prudent and lock in gains when the market takes stocks past their logical extremes, which happens quite frequently in every generation of stocks. If you chose to never sell because, say, you are afraid of the tax man, or because you despise paying commissions, you need to get your head examined. When I got into this business, it made some sense not to sell. It would routinely cost you several hundred dollars in commission to trade more than a couple of hundred shares. When combined with the spread, the difference between the bid and asked, for all but the most liquid or heavily traded stocks, a diminution of return was almost a given. A quarter of a point of spread, $200 in commissions, and gigantic taxable gains might have turned a substantial gain into a moderate loss on a trade. But that was then, this is now; we are in a whole different ballgame. Taxes these days are incredibly low even on short-term gains, because ordinary tax rates are much lower than they used to be. Trades that would have cost hundreds of dollars in commissions will now be done for about seven dollars by any discount broker. The liquidity of almost all stocks is pretty terrific since the advent of decimalization, where stocks trade in penny increments. You no longer get nicked for quar­ters and halves on the buy and sell. Pennies, just pennies separate al­most all of the places you can buy and sell stocks. They just don't eat into the profit anymore. You can't use them as an excuse not to take a profit. In fact you have to be a fool not to sell to lock in at least some of a big gain these days lest it be taken away. The old bias against trading, however, remains as people simply don't know how little friction there is between the buy and sell these days.

Finally, the bias against speculation has taken on mythic proportions. I don't know of a soul besides me who thinks that speculating can be a handy tool on the road to riches. Yet I know that all of my biggest gains, my largest wins, came from pure speculation, which I define as making a calculated bet with a limited amount of capital that turns into a monster home run. I believe that speculation is not only healthy and terrific, but is vital to true diversification. You must be diversified to stay in the gake when things go bad. (More, later, about how diversification is the only free lunch in the business.) But diversification without speculation is stultifying and can mean the difference between your losing interest—which is unforgivable—and your paying attention. Speculating, particularly when you are younger, is not only prudent, it is essential to making it so you don't have to be totally dependent on that darned paycheck to become rich. I believe in my heart and in my head that if I had never speculated I would be working as a lawyer right now, perhaps proofreading some indenture somewhere in the middle of the night trying desperately to stay awake as others made the money. You've got to build in speculation as part of diversification. It is a crucial component.

I play a game called "Am I Diversified?" every week on my radio program. I ask people to read to me their five largest holdings. When they have done it they have to ask me whether they are diversified. I feel so strongly about this notion that I have taken to asking why people don't have one stock bet that could make them significant amounts in a short time. I want to see speculation for a portion of even an older individual's portfolio, albeit only a name or two—a small percentage—to keep you interested. Given the nature of the potential losses I don't want someone who will need the money for retirement to speculate with more than a fifth of his portfolio. You have to make taking a chance a part of your arsenal. I know this pro- speculation view runs counter to anything you have ever heard or read, but this is how I made it big in the market, this is why I was able to beat the market even when I was just starting out both as an investor-hobbyist and then as a professional at Goldman Sachs before I went off on my hedge fund. Of course a portfolio of nothing but speculation is like a diet of nothing but bacon and cheese; it will kill you. But speculation in moderation is no different from enjoying some so-called fattening foods in an endless bid to stay on the healthier regimen. The current wisdom, though, is either buy and hold whatever strikes your fancy as solid, even if it isn't, or turn everything over to someope who doesn't care as much as you do about either capital preservation (no defense) or capital appreciation (no offense).

Understand that I love to invest. I love to buy and do homework. I have owned some high-quality stocks for years and years and years. Yet I always do the homework still. And I always speculate when I am able to speculate, either through the use of options (which 1'11 explain later) or through the use of small-dollar acorns that I think can grow to be tall oaks or, even better, to be taken over by larger oaks long be­fore they go through the slow process of growing up.

I know that academics and those market professionals who believe that stocks are priced perfectly don't believe that you can make large amounts with small investments in a short period of time. They think such situations don't exist or that they are flukes, luck. Because they don't believe in them and because you often search for them and fail, the tendency, the belief, becomes ingrained that there is no quick way to make big money.

Let me give you an example of a situation I stumbled on in my younger stock-picking days—an example of what some would say was just rank speculation but I say was a legitimate opportunity—that might show you why I believe in speculating wisely. This opportunity came when I was younger and had almost no money to speak of, precisely the time to speculate the heaviest because you have your whole work life to make the money back if things don't pan out.

At Harvard Law School , I managed in my spare time to work for Alan Dershowitz, helping to get the supremely guilty—at least in my view—Claus von Bulow acquitted on procedural grounds. The job paid well, more than eight dollars an hour. Despite being phenomenally bored with my law school classes—to this day I regard them as pure torture—I made it my business to go every day. I would check in on the markets every hour via the phone booths located outside the classrooms, usually reserved for homesick kids calling their mothers after a particularly brutal grilling or exam. That spring, 1984, the oil patch had heated up. Getty Petroleum had just gotten a bid. I had made some money speculating in some call options, which for a little money provide the right to be able to capture the upside above a particular level of stock,'in the Conoco battle the previous year and in Sinclair Oil, another target, not long after. I had small positions— several hundred dollars' worth of money I had saved from the Dershowitz chores—in both oils and was drawn to the group. At this point I was also managing a pool of money for my friend Marty Peretz, who had found me via my answering machine. I had such a hot hand picking stocks while attending classes that I began recommend­ing a stock a week on my machine. Only later, in my third year at law school, did I discover that such a touting system was a violation of the 1940 Investment Advisor Act, but I hadn't taken that class yet, so who knew? Marty tried to reach me to write a positive book review for the New Republic, which he owned and edited, on behalf of a mutual friend, Jim Stewart, a terrific author, and got discouraged when I never called him back. After three straight weeks where he said I had made more money for him than any other person alive in the thirty years he'd been buying and selling stocks, he handed me a check for $500,000 over a cup of joe at the Coffee Connection. I ran his money side by side with my little pool of cash. I told Marty that I thought our next big hit would be Gulf Oil; it just seemed too logical. I purchased us small amounts of Gulf call options (again, the right to make money if a stock reaches a certain level). I had decided early on that call options, if you can handle their risk, were the ideal method of speculation for a small investor because the downside was limited and the upside was bountiful. (More on how calls work and how to master them later in the advanced section of the book.)

One day, while I was in class, Chevron launched a bid for Gulf Oil. I was gleeful after I called in and discovered I had had my first big hit. I had been discouraged when I had initially lost money for Marty, but this Gulf Oil deal put me in the black with him. I wanted to give his money back and just trade for myself—I hated the responsibility of running other peoples' money and still do! But Marty wouldn't hear of it. Now we were back where we started, and I was feeling better about myself.

That spring I had been taking Antitrust with the giant of antitrust, the late Phil Areeda. Most of raw school was a valueless blur, but this guy was a master. I still recall his classes, among the few I took seri­ously, because he was a great teacher. We were working on a unit on Standard Oil and the origins of antitrust law. I always sat in the back and said nothing. If I was ever called on, I always passed, lest I look like an idiot. But I was taking it all in. I thought, You know something, this guy Areeda knows what the heck he's talking about. Most of the professors were a bunch of left-wing, dogmatic blowhards. But Areeda was in the game.

Right after the announcement of the bid, and the concomitant move up of Gulf, the oil giant's stock started slipping. One day during a break in class, I checked in with my broker, Joe McCarthy from Fi­delity, and heard the disturbing news that Gulf had fallen back almost to where we had first bought the calls, on chatter that the government was definitely going to block the Gulf-Socal (as it was called then) merger. I was so distraught I didn't even notice that the break was over and I slunk back into class late, several minutes after intermission had ended.

It was obvious that I was tardy. Areeda hated that. He was too much of a gentleman and I was not enough of a scholar not to feel bad about coming in after class had started. At the conclusion of the class, I went up to him to apologize for my slothfulness. Areeda knew I was one of those students who couldn't care less about law school, but he knew I was interested in business. I took a chance. I said, "Professor, I was late because I own Gulf Oil and my broker says that the deal won't go through."

He looked me in the eye and he said something I would never forget: "It's a done deal." I looked at him the way a man looks at the piece of glass he just found in his backyard that he now realizes is a diamond. I said to him that I had real money riding on this one. Was Justice going to block the deal?

"Not a chance," he said. He knew the players. He knew Reagan's people wouldn't block it.

I asked him again.

He said he didn't have any more time to waste. If I had done my homework, which I obviously had not, I would have known that the decision was in the bag. I left the class and bet the farm for me and for Marty on Gulf Oil, wagering just about every penny I had in the bank, some $2,000 at the time.

Justice approved the deal soon after and I made a fortune for Marty and enough for myself to pay for law school and college (I still owed substantial amounts from college) and emerge from school free and clear. Two thousand dollars turned into twenty-five thousand just like that. And an indebted student who expected to labor for years to free himself of that indenture was freed before he graduated. I had speculated and I had succeeded.

Would I endorse this view if you called me on my radio show or met with me privately for a consultation? Yes, if you were young enough that you could afford to lose it all and still make it back. No, if you were older and speculating the same percentage of assets I did, which was just about everything. I want you to speculate, but as you get older, you don't have the rest of your life to make the money back from the paycheck side of the ledger, so, naturally, you have to scale back and take smaller risks. But as a small percentage of assets and with a hunch like I had with Gulf, absolutely. These kinds of informed bets are the best kind of investments, because the risk, the downside, is limited, and the reward, the upside, is monumental. I know, I know, you won't always have the insight of some Harvard antitrust professor, but these kinds of home runs, while not as frequent as singles, do get hit every day in this business.

Why is this kind of short-term thinking so antithetical to most in­vestors? How did we get brainwashed into buy and hold forever? I think that the literature on the topic is very much responsible for the misapprehensions about speculation, buying and holding, and trading. All investing literature has one thing in common: It refuses to admit that great investing, long-term or short-term, has much in common not with science or mathematics, but with gambling! There, I said it. We are wagering on the direction of stocks, both long and short. We are wagering in a way that we hope will allow a little bit of money to grow into something huge. We are betting that we can evaluate merchandise and figure out which can win, which places, which shows, and which loses. We want more winners than losers; if we get more winners than losers we will grow rich. Once you admit that it is wagering, and that you have to monitor the jockey (the manager) as well as the horse (the company) as well as the track (the stock market), then you can make some sense of what you are up against and know which rules do and don't apply.

That's why it is no coincidence that (until now) I always recommended one text to those trying to figure out how to beat the market. One book, besides this one, that can change your view of investing forever. It's not Reminiscences of a Stock Operator by legendary trader Jesse Livermore (written under the pseudonym Ed Lefevre), even though that's a real hoot. Nor is it something by value investor Ben­jamin Graham, nor the Peter Lynch books, which are excellent, nor the Bill O'Neill books, although I would come to like them later.

In fact, it is not a stock book at all. It's Picking Winners by Andy Beyer, the premier horse-racing columnist in the country, who until recently penned a column for the Washington Post. Yep, a handicapping book. Because the two, horse-race betting and stock betting, are so alike that the wagering rules he lays out apply to both. Beyer excels in handicapping horses; I excel in handicapping stocks. Beyer's main lessons, besides the basic need to be a good speculator, are vital for you to understand, and I will give you a variety of ways to master them. They seem simple, but in the reality of stocks, it will take plenty of practice and homework for you to use and maintain them:

•  If you learn from mistakes you will not repeat them.

•  Only go to tracks where there aren't a lot of good players so you
can clean up. (The analogy here is only to invest in stocks where the re
search and information flow aren't perfect and lots of minds aren't al
ready trying to figure it out.)

•  Only bet on situations where you have total conviction. Leave
the rest to others; you don't have to play. You don't have to invest in
everything that comes down the pike.

Now, let's analyze how these three rules apply to stocks. First, amateurs must realize that much time must be spent doing homework (I will show you what homework entails) and learning the stocks you own. Approach it like a job. Investing can be a hobby, but trading can't. Even Mrs. Cramer, who is a fabulous trader, has failed miserably as a part-time trader, although her investing skills are still top of the heap.

Second, while you can't be an expert on everything, you can learn a few stocks well and profit handily from those. I will show you where to find them, but you still have to do the homework when you get them.

Most of all, recognize that you have to have an edge, something different that you can bring to the party. I will show you some methods you can use to gain an edge in your investments, using commonsensi- cal approaches to the businesses around you.

To get there, you must have a basic understanding of what stocks are, how stocks work, and why they go up and down. You have to know how they work before I can give you the rules, show you the mistakes, and explain the best ways to find the best stocks, and, finally, how to speculate in ways that could make you rich without a lot of money, both basic and advanced methods. Only then can you make the wa­gers, both short- and long-term, that fit the rules that Beyer outlines. Only then can we benefit from his handicapping wisdom.

We assume so much in this business, we who own and trade stocks. We assume that you understand what a stock is, what it represents, and how stocks figure into the capital structure. Those are blithe assumptions. I know this because I have seen people confuse shares of a stock with something that is almost tangible, something that is palpable, and that misconception leads to a level of certainty and lack of accurate skepticism that can betray you in a heartbeat. So let's take a second to explain where stocks come from and where they fit into the investment picture. Those who have been investing for years should still pay heed because you may assume certain things, too, that may not be true.

First of all, all companies need money, especially companies that are trying to grow. They can get money in a couple of ways. They can go to the bank as we go to a bank to get a loan such as a mortgage. The collateral for the loan might be the inflow of cash the company expects (the receivables) or it might be the worth of the company itself. A company can issue debt, or bonds, that it pays interest on over time, and then, when the debt is due, it pays back the principal.

If the owners of the company are willing, or if some of the owners want to get money out of the company, the company can issue common stock shares in the enterprise. A company's capital structure can be made up of shares that are issued to the public and bonds that are issued to the public.

We all assume that the common stock the company issues represents the real ownership of the company. We proudly talk about how we own shares in the company and are therefore somehow "owners" of the company, as if we were all members of some grand club that owns the clubhouse. The first thing I want to do is disabuse you of that entitlement. When you own stock, you do have a fractional interest in the company if there is no other element in the capital structure, that is, if there is no debt. But beyond the danish and 0. J. that you might get if you attend the annual meeting, owning stock itself entitles you to nothing. Worse, if the company has debt, the debt holders are senior to you and have more power than you. I call these folks the bond bullies. As long as the company is doing well, the bond bullies behave themselves and let the stockholders run the company. However, if the company loses a lot of money, to the point where it can't pay the interest on the bonds, the bond bullies take over. I stress this because in the period from 2000 to 2003, many common stock shareholders were wiped out and bond holders took over companies. The common stock shareholders in many cases did not know what hit them. They thought they owned the company. So, remember, you only own it when things are good. When things go bad, you don't own anything but the piece of paper that the common stock is printed on, and you probably don't even have that because almost all stocks these days are held electronically, with no certificates issued.

The saving grace of stocks is that they can only go to zero. Don't laugh, I've owned some stocks that were so bad that it was a blessing they stopped at zero. Each share of common stock is theoretically worth something, a fractional share of ownership. But if you go to the company to redeem your shares to cash out of your ownership, the company will tell you that while it issued the shares, it won't take them back from you. Companies aren't department stores of shares. You have to sell those shares to someone else. In fact, the company can issue more shares at any given time to dilute your ownership in the enterprise. It can also buy back those shares if it wants in the open market, if it chooses to shrink the number of shares outstanding.

Why do people own stock if the company won't take it back? Why is it worth anything? I know people who have traded stocks for years and years who have never asked themselves that, yet it's a tremendous leap of faith to understand why an electronic entry of shares that can't be taken back to the company is worth anything at all.

The answer is really twofold: There is an enterprise value to the whole company that can be bought or sold and can grow over time from the retained earnings of the company, and there is an income stream (known as dividends) that can come from the shares when the company is prosperous. If you own a stock that pays a dividend you could be getting both the income stream and the value of an appreciating stock. Most companies, however, don't start out as dividend payers. Many other companies have no intention of paying a dividend because they want to reinvest earnings to grow the company and don't want to return any capital to the shareholders.

Why are we given this opportunity to participate in the welfare of a public company? Why do companies go public, or sell shares to investors? What is the stock made of and what determines its price? Let's look at it through one situation I know well, one that is somewhat typical of the process, although each company, of course, is different from others in its own way. Let's~look at TheStreet.com, a publicly traded company that I own a ton of shares in. Marty Peretz and I started the company in 1996 by putting in $ 1 00,000 every month. It didn't begin to generate any revenue until 1997, but then advertising on the Web took off like a rocket and we needed money both to pay people and to expand. The money we needed was beyond what Marty and I could afford. Frankly, while we were growing revenues, or sales, nicely, we were losing money hand over fist. We had no profits, which are sales minus expenses and the cost of the goods sold, but we had two revenue streams, subscription and advertising, and we had a brand, which had some amorphous value. When we had burned through all of the money that Marty and I were willing to invest we had to raise money from other individuals, known as venture capitalists. They gave us money not because they were our buddies—far from it—but because they hoped to get more than their money back when the company was sold to another company or if it went public. We were in it to build the company, they were in it for the payoff. That's a fairly typical situation for young, growing companies.

After we burned through the venture capitalists' money, we raised money from a couple of other companies, notably News Corporation and the New York Times Company. They, too, gave us their capital in return for the right to have shares when we issued them. We could have gone to a bank, but I don't think any bank would have lent us money because we were losing too much money as it was. But because of the fascination with the stock market at that time, we hired a banker, Goldman Sachs, to tap the public's dollars. We knew people would buy shares in our enterprise for the reason they buy shares in many enterprises: They hoped we would one day either return a profit or be bought by another company for more than they paid for their shares. One of Goldman Sachs' main jobs was to raise money for us through an underwriting, or initial public offering (IPO). Everyone thinks he understands this underwriting process intuitively, but as one of the people who has worked on IPOs, from the entrepreneurial side to the sellside, I can tell you they are rather mystifying. Unless you are a serial entrepreneur, you probably will only go through the going- public process once, if you are unlucky enough to go through it at all.

I was hopelessly nayve. Here's the way it really works. Management of the company, which is typically clueless about Wall Street, has a meeting with the banker's corporate finance department, which draws up the documents for the offering and structures the deal, and the syndicate department, which prices the merchandise. The investment banking people tell you how many shares you are going to have outstanding and how many of those shares the company will float publicly. The syndicate person tells you what price those shares will most likely be issued at. Our syndicate people told us that they looked at companies comparable to ours and said that given how much in sales we had—we had no profits—and how much money the New York Times and News Corp. had paid, the company should be worth $250 million dollars. The figure wasn't totally arbitrary—the New York Times and News Corp. had valued it similarly, although it sure was hard to figure out why it was worth anything given how much it was losing. Then the investment bank said, arbitrarily, that the company's ownership would be divided into 25 million shares. Of that, 19 million would be owned by the original investors and 6 mil­lion would be sold to the public. I give you these numbers because there is no magic to the number of shares a company has. Goldman could have said we were going to have 100 million shares and 24 million would have been issued to the public. It could have said we would have 200 million shares and 48 million were going to be issued. That's just how it works. The total share count matters tremendously only as a way to figure out how much earnings per share there are. Of course, TheStreet.com wasn't close to having any earnings per share, but you can still figure it out by taking the overall loss we were having in a year and dividing that by the number of shares to be issued, so you can compare TheStreet. com's earnings per share to those of other companies.

I initially owned 50 percent of the company with my cofounder Marty Peretz. When we invited the venture capitalists in, our 50 percent stake was diiuted to about 30 percent each. With each new round of financing, we gave up more of our claim to the enterprise. By the time we contacted Goldman Sachs, my stake had been diluted to about 16 percent of the enterprise, since each new buyer was entitled to shares and the company issued shares to some of the people who worked there in addition to salaries. You may think that 16 percent is way too little versus where we started, but it is part of a much bigger pie than we started, so I was quite happy with the percentage.

Goldman Sachs then conducted what is known as a road show, where it flies management to a bunch of cities to stir up demand. We already had a ton of demand for the shares before we started, so the roadshow was a complete waste of time and should have just been done over the Web. But theoretically you want to explain to people in person what the company does and what it plans to do. In actuality, the merchandise—the shares the company is issuing—was "hot" merchandise, meaning that everyone was clamoring for the darned stuff and we could have just as easily sold shares on eBay, but that's not how it works, unfortunately.

It is during this period that people at the company write the prospectus, or selling document, which tells you what the company does, how it is doing financially, what the backgrounds of the people involved are, and then gives you a huge list of reasons, or risks, that tell you why you would be nuts to buy the company. It's a funny way to do business, but, as I have said from the beginning, there's a lot of nutty, counterintuitive things about Wall Street that often are there just to confuse you and make you need someone who can help you—for a fee, of course. Most people throw the thing away immediately, but the prospectus can be an immense source of information about a company. You don't need to keep it—they are all online now, reachable with a keystroke.

After the company's top officers have been on a plane visiting a dozen cities, the merchandise gets repriced by the bankers to take into account the stirred-up demand as the deal gets closer. For me, this was another totally eye-opening process. While we started the trip thinking we would get $10 a shire, the price got lifted seven times, the final bump to $ 19. It was only later that I found out that the plan was always to have it priced at $19 because that's the price Goldman thought would work best for everyone—the buyers and the company selling the shares. We insiders were restricted from selling for eighteen months, and then we were allowed only to dribble out stock slowly, so as not to crush the offering with too much supply. At this point we were only allowed to buy more on the deal, not sell any stock. If we had been allowed to sell stock, that would be considered "secondary" stock, not "primary" stock, which is just for the company.

Because the system for initial public offerings at the time couldn't really factor in all of the market orders, the company ended up selling 6,350,000 shares at $19. The stock opened, however, at $63, nowhere near the $19, as demand totally outstripped supply. Brokerages aren't allowed to issue more supply than they originally promised and so many uninformed folks in the public foolishly used market orders to buy. They ended up buying stock for 20, 30, and even 40 points more than they thought they would because they used the dreaded market order system. Never use it, as I will explain later, when you can use limit orders. Those who got the stock from Goldman Sachs at $19 on the actual offering mostly flipped the stock at those inflated prices and pocketed the $63 minus the $19 they paid. What a huge windfall for the customers and what a monster shortchange for the company! But there are no do-overs in this business. Even though, in retrospect, we could have sold many more shares at a much higher price, the company still had to pay Goldman Sachs 6 percent of the proceeds for this one-day sale.

Once the deal is done, the company has almost nothing to do with the shares again. The shares that come public, and then, in time, the shares of insiders such as the venture capitalists and the corporations and the founders like Marty and me, are free to be traded, although insiders can only peel them out slowly since there are tightly regulated rules for how much stock you can sell at one time—again, so as not to overwhelm the market. The price of the merchandise is reset every day through trading by the public, in this case on the NASDAQ, where companies can be listed that don't make money—you have to make money for a year before you can list on the New York Stock Exchange. While there are differences in how stocks trade on the two exchanges (the New York Stock Exchange uses what is known as a specialist system with humans manipulating the supply and demand, while the NASDAQ trades electronically from computer to computer with no human middle man), those differences are virtually irrelevant to all but those who trade in multiple thousands of shares, so we won't need to address the pros and cons here of the two systems. Suffice it to say that once the deal goes public, the public sets the price from then on. For us at TheStreet.com, we had to watch the sickening slide from opening day at $63 to $1 a couple of years later, although it has since bounced back to more reasonable prices. You should remember those prices whenever you hear a silly academic say that the pricing system of stocks is "perfect," meaning that it prices in all data precisely. Within a period of two years the brilliant "market" valued Thestreet .corn at both $1.2 billion and at $20 million. That's a lot of room for the savvy to make money and the nalve to get shafted.

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