Ask the Fool: What do venture capitalists do? – A.N., West Hills, Calif.

A: Partners in venture capitalist firms pool their money and invest in fledgling companies, sometimes specializing in certain industries or areas, such as computer-related technology or biotechnology.

Venture capitalists typically enter the scene well before a company gets to the initial public offering stage. They help the firm grow, usually in exchange for a large percentage of the company, and they offer guidance, as well. The hope is that once the company grows to a certain point, it will go public and the venture capitalists can cash out, making a very tidy profit.

Many companies, such as Amazon.com and Federal Express, have benefited from venture capital.

Q: I recently looked at one of my sister’s mutual funds. Its top holdings include some solid dividend-paying companies, and that left me wondering, “Where do those quarterly dividends go?” Do the companies pay those dividends to the mutual fund managers? – M.F., online

A: When a mutual fund owns shares of a dividend-paying stock, the dividends paid belong to the shareholders, not the fund managers. Typically, when you first plunk some money into a fund, you’ll be asked to specify whether you’d like to receive the dividends as cash payments or have them reinvested in additional shares of the fund.

After a fund receives dividends and before it distributes them to shareholders, the dividends’ value is added to the fund’s net asset value. Later, the NAV is reduced to reflect the departure of the dividend sum. So don’t be alarmed if you see a fund suddenly drop in value one day – it might simply be that a big distribution was made.

My dumbest investment: Circa 1999 or 2000, I purchased stock in EMC Corp. for around $55 per share and watched it soar to roughly $100. Not knowing when to sell and not sticking to a plan – I was both greedy and emotional – I ended up selling somewhere in the $15 range. Since then I have not seen EMC even close to those high prices. It still haunts me to this day. – M.D., online

The Fool responds: If you bought in the summer of 1999, you would have seen your shares almost triple in value in less than a year – before EMC sank more than 95 percent from its all-time high. Greed wrecks many investors, as it has us hanging on to big winners, hoping for even more outlandish gains.

We need to put aside greed and fear and assess our holdings objectively. A great company can still have grossly overvalued stock that’s more likely to fall closer to its fair value than it is to keep rising. When a stock gets way ahead of itself, it’s smart to move that money into something undervalued.

Foolish trivia: Based in a New York town that bears my name, I lead the world in specialty glass and ceramics. I manipulate the properties of light to develop and commercialize innovative products, and I serve the consumer electronics, mobile emissions control, telecommunications, semiconductor, aerospace, defense, astronomy, metrology and life sciences industries. I trace my history back to 1851. I pioneered Pyrex and ceramics for automotive catalytic converters. My products include glass substrates for LCD televisions and optical fiber. There’s a good chance you have some of my wares in your cupboard. I rake in nearly $6 billion annually. Who am I?

Last week’s trivia answer: I was founded in Indianapolis in 1876 by a Civil War veteran who, dismayed by the hawking of “medicines” in sideshows, began developing high-quality medicines to be dispensed by doctors. I introduced the world’s first insulin product in 1923, and in the 1940s I developed a method to mass-produce penicillin, the first antibiotic. In the 1980s I introduced one of the world’s most widely prescribed antidepressants, Prozac. Some of my other drugs include Cymbalta, Cialis, Strattera, Forteo, Actos and Evista. I spend 19 percent of my revenues on researching and developing new drugs (each costs about $1 billion). Who am I? (Answer: Eli Lilly)

The Motley Fool take: Procter & Gamble (NYSE: PG) has been busy slashing prices and realigning its product portfolio to compete a bit more on a value platform. In this tough economy, though, that hasn’t been enough to drive big growth.

In the company’s recently reported first quarter, sales fell 6 percent over year-ago levels to $19.8 billion, due mostly to a stronger dollar. But organic sales, which exclude currency effects, rose 2 percent. Earnings per share grew by 3 percent. Notably, both the top- and bottom-line numbers showed sequential growth.

Of course, it’s always nice to see that a company can lift revenue by price increases. But fundamental business health is marked by growth in volume, and on an organic basis, P&G sold 2 percent fewer products. (Remember, though, that its total revenue still grew.) Most of the volume decline was driven by softness in developing and emerging markets, where the company increased prices to bolster profit margins.

In recent years, these corners of the globe have been the Holy Grail for global consumer-goods companies, with rising middle classes fueling sales growth. P&G’s price increases, however, seem to have turned away some of these otherwise eager consumers.

Procter & Gamble may not deliver industry-beating growth in the near-term, but its apparent new focus on consumer value and product innovations could lead to some well-groomed profits down the road.

The Motley Fool is written by Tom and David Gardner for Universal Press Syndicate. Reach the Gardners at fool@fool.com, or by regular mail to Motley Fool, PO Box 19529, Alexandria, VA 22320-0529.

Stock indexes other than the dow are best indicators

Dating back to 1896, the Dow Jones industrial average, known as “the Dow,” is a surprisingly flawed index of stocks. For starters, while the S&P 500 includes 500 big American companies, and “total stock market” indexes such as the Dow Jones Wilshire 5000 include several thousand, the Dow Jones industrial average features just 30, including IBM, Boeing, McDonald’s and ExxonMobil.

Then there’s the fact that the Dow is a “price-weighted” index, which means that the stocks in the index with higher prices carry greater weight in calculating the overall average. So when IBM was recently trading around $120 per share and General Electric was trading around $14, IBM was more than eight times more influential in the Dow – even though the companies’ market capitalizations were both not far from $155 billion. Thus the highest-priced stocks are really the ones moving the Dow around, while the lowest-priced ones have little impact on it.

When the financial companies in the Dow fell to the single digits, for example, they ceased to have much impact on it. And when Bank of America stock, down from $40 per share in early 2008, doubled from $3 to $6 per share this past spring, that also had little impact.

Fortunately, there are other ways to build indexes, other than weighting components by stock price. The S&P 500 index, for example, is a market-cap-weighted index, giving the companies with the greatest market values the most influence. Even that, though, can be problematic. The top 10 companies out of the 500, for example, make up about 20 percent of the index’s value, and the top 45 make up about 50 percent of it. So the vast majority of the index’s component companies have little effect on it.

So what should you do now? Well, be savvy about indexes. And don’t pay too much attention to the Dow. When you see how it’s changing from day to day, it’s really mainly telling you how a few stocks have performed.

The Motley Fool