 |
April 21, 2008
Worries about the Market
Worry is a constant with regard to the stock market. When markets are up, people worry that the economy is too strong, possibly leading to inflation. When markets are down, people worry about recession. A wise investor once concluded:
· If people aren’t worried, sell everything.
April 14, 2008
Interest Rates and the Economy
Interest rates will rise or fall to whatever level necessary to slow or lift the economy. If low enough, economic activity is triggered. If rates are too high, it is curtailed. Sometimes, the adjustment of rates takes a long, slow path before the economy turns, but rates will trend in the same direction until the turn occurs.
March 17, 2008
Comparison to Benchmarks
Comparing returns to benchmarks or indexes over time is a measure of performance. However, investors should make decisions to buy or sell on the underlying value of the businesses whose stock is being traded. Fire a manager for poor performance over time, but don’t sell a great business for short-term price reasons.
February 11, 2008
Is MVA the Same as EVA?
Both are measurements of the value added by management. However, EVA is focused on profits in relation to the cost of capital, while MVA (Market Value Added) is focused on the total market value relative to the amount of investment capital. MVA is the value the market places on a future stream of EVA’s.
December 31, 2007
What Exactly is EVA?
It is a measurement of operating results by which shareholders can judge management. As a formula, EVA = After tax profit minus the total annual cost of capital. The cost of debt capital is the interest paid. The cost of equity capital is the opportunity cost given up by the equity holders – hard to figure exactly, but higher than the cost of debt. EVA is a better measure than profits because it considers the total cost of financing the operations.
December 24, 2007
Fundamental Factors
There are three major factors that drive trends in the stock market:
1) Inflation rate
2) Interest rate
3) Corporate profits
Inflation rate and interest rate tend to cause investors to move funds between cash and fixed income securities and equities. Corporate profits seal the deal.
December 17, 2007
Behind the Stock is a Tangible Business
Don’t be tricked into focus on the short-term reactions of the markets to general economic matters. Long-term, the value of the shares of a particular company are dependent on the successful operations of that company. If the company is profitable and generates significant cash flow in relation to its stock price, then the company should be a great investment. If the company lacks sound fundamentals, then no amount of market hype will support it long-term.
December 10, 2007
Caution When Buying Thinly Traded Stocks
Stocks of small companies are often thinly traded – meaning that they either have a very small float or there just isn’t much activity. Taking a large position in a thinly traded stock can be quite risky. Attempting to liquidate a large position can impact the price of the stock, making it tough to exit quickly. Before you invest in such companies, make sure you limit your investment to a size you can liquidate or that you are prepared to liquidate over a rational period of time.
December 3, 2007
Never Buy Stocks based on their Price Alone
Looking for a good $2 stock? Is it better to buy 1,000 shares of a $2 stock than 100 shares of a $20 stock? The answer is clearly – NO!!! It’s better to buy the stock that is likely to appreciate by the largest percentage. Look at the fundamentals of the company and determine whether the company is likely to grow and profit. The $20 stock may be more likely to go to $40 than the $2 stock will go to $4. Keep in mind, also, that many institutional investors stay away from stocks under $5 per share and stock in that range often have low trading volumes.
November 26, 2007
Don’t Margin More than you Can Afford to Lose
Margin, simply put, means buying stocks with borrowed money. If the stocks go to zero, the loan must still be repaid. In fact, if the value of your stock portfolio falls below the allowed threshold, your brokerage firm will call your loan and sell-off your stocks to pay down the loan. If you buy on margin, you must be aware of the potential to lose more than you have invested.
November 19, 2007
No Thank You to the Cold Call
The stock wizard who calls with a hot tip may be right or may be wrong. Very likely, however, he is simply out to separate you from some of your cash. Legitimate brokers solicit new accounts over the phone, but the sure fire tip generally comes from a lesser known firm. Don’t trust your savings to a total stranger. If they get you hooked, take a time-out. Check their story and check their references. Quick decisions are often costly decisions.
November 5, 2007
Remember that Analyst Estimates are Just Estimates
Think about how many companies announce earnings surprises. And the ones you hear about are the large companies with significant numbers of analysts who follow their stock. Many stocks have limited analyst coverage, but just one or two. The coverage may be reasonably accurate when it is fresh, but the analyst may not have revisited those estimates for quite some time.
Does a target price of $20 in 18 months mean that a $12 stock will actually reach $20 in 18 months? Absolutely not!!! Something will change. The stock could reach $20 in 6 months or it could go to $3. Analysts are often wrong, so remain skeptical as you read their reports.
October 29, 2007
Saving for Retirement vs Saving for College Education
Many parents are faced with a choice: to save and invest for retirement or to save and invest for education. If funds are not there to accomplish both, parents feel pressure to take care of their children. That might be a mistake.
There are many financial aid programs available to help students finance their education. There are no financial aid programs to help parents finance their retirement. By investing to the maximum extent in tax deferred retirement plans, you may not have the liquid resources to pay for college, but you probably increase your child’s chances of getting financial aid. The top students have more options for financial aid and the marginal students will likely attend public institutions that are not as costly. Even those students who do not qualify for scholarships can obtain student loans. And by providing for your own retirement, you don’t become a burden on your children later in life.
October 22, 2007
How to Develop a Model
There is no need to reinvent the wheel. There are published studies of tremendously successful investors, such as Warren Buffett and Peter Lynch. Using the investing philosophies of these and other masters as a starting point allows an individual investor to short-cut the learning curve. There is no substitute for your own judgment in making investment decisions, but adopting the philosophy of the masters has resulted in long-term success for many small investors.
October 1, 2007
Value versus Price
Price is what you pay. Value is what you get. Investors should seek stocks that are worth substantially more than they cost. Consciously paying more for a stock that its calculated value, just in the hope of a still higher price, is speculation. The vast majority of speculators lose money in the stock market.
September 17, 2007
The Stock Market is Less Efficient than Many Believe
There are buyers for stocks that are not attractively priced. Sometimes these buyers are sophisticated money managers. Most often they are playing the momentum of a stock or sector and attempting to rack up a near term profit. This type of trading is closer to speculation than investing. The essence of investing is to create a discipline to determine if a stock is UNDERVALUED. You can be the market by purchasing when you believe a stock price is wrong.
September 10, 2007
Importance of Return on Equity
Don’t just follow the increase in profits from year to year. Be aware that companies typically add to their equity base each year. A 30% increase in profits coupled with a 30% increase in the equity base is really no increase at all. A better measure of profitability is ROE (return on equity). ROE measures the amount of profit based on the number of dollars invested and is a more appropriate measure of managerial economic performance.
August 13, 2007
Factors Most Important to Analyzing Investment in Equities
The first step in determining which stocks are good investment opportunities is identifying those stocks that are worth further study. A couple of key global economic factors may keep us from looking at entire segments of the market:
· Inflation
· Interest rates
Specific factors related to each company are then used to trigger further analysis:
· Corporate earnings
· Return on equity
· Cash flow
· Balance sheet indicators
· Corporate or insider buying (or ownership)
Is a certain stock a good buy? Once the established criteria have been met, valuation is determined by studying the present and historical relationship of the stock price to the company’s earnings.
August 6, 2007
Develop (or Adopt) a Discipline and Stick with It
Most investors have no real philosophy. To achieve consistent performance requires consistent application of basic principles. The principles are based on the capacity to understand what makes a business really great. This understanding leads to the stocks with the most opportunity for capital gain. Each investor determines how to define and apply their own philosophy. An example might be looking for companies with:
· Consistent earnings growth of xx%
· Returns on equity of xx%
· A balance sheet with debt less than xx% of assets
· Management and insider ownership of more than xx%
· Free cash flow of more than xx% of revenues
July 22, 2007
Looking at Small Growth Companies?
Big dollars can be made or lost with “hot small companies”. How do you know the difference? The most commonly overlooked factor is Long-Term Growth Potential. Many of this year’s hot companies are in markets that are best described as niche markets, rather than having broad appeal across the economy. While these companies may be quite successful in their market niche, don’t try to project a billion dollar market cap to a company in a $200 million market niche. Look at the fundamentals and ask: Can you see clearly how this small company will become a large company? If the answer isn’t clear, then it likely won’t happen.
July 15, 2007
Is This Stock a Steal if it Trades for Less than its Cash?
Traders looking for bargains analyze many data points in determining which stocks are likely to pay off big. There are stocks trading at prices that yield a market cap less than the amount of cash they have in the bank. Does that make them a bargain? Maybe yes. Maybe no. The company is not liquidating, so it really doesn’t matter that they have more cash than market cap. What matters is the strength of their business plan and whether they have adequate cash to execute that business plan. A higher stock price will eventually be driven not by the company’s cash balance, but by the amount of cash flow that the company can generate from operations.
June 18, 2007
Most Investors Should Buy and Sell on Long-term Fundamentals
Bear markets typically last less than a year and decline 30%; bull markets typically last four or more years and rise 100%. Therefore, most money managers advise investors to limit their reliance on economic or market forecasts and continually invest for the long term. Try not to focus on the outlook or trend. Focus, instead, on the long-term value of the companies in which you invest. Investing for spectacular short term results often leads to horrific long term results. That’s why very few traders accumulate significant long-term wealth.
June 11, 2007
A Conservative Investor is Not a “No Risk” Investor
No Risk does indeed equal No Return. Keeping all of your funds in totally safe, liquid, short-term investments is not as conservative as it might appear. It might even be considered foolish. After taxes and inflation, the No Risk approach leaves you worse off in terms of real purchasing power. Your objective is the same as everyone else: the most return for the least risk. Depending on your personal situation, you may be better served with an aggressive approach to investment or you may be better served with a conservative approach to investment. Either way, you need to distinguish the extremes and understand that speculative is beyond aggressive and foolish is beyond conservative.
June 4, 2007
Don’t Overlook the Impact of Taxes and Inflation
Your money is undermined by both taxes and inflation. You achieve financial security through investment returns that exceed the cost of living increases and provide “after tax” net profits. To maintain your purchasing power, returns must exceed the rate of inflation. To build wealth, your investments should provide tax-savvy returns. Tax analysis should include planning to take advantage of long-term capital gains rates, tax-exempt investments, and timing of tax events. Your principal must grow so that increasing returns will allow you first to maintain purchasing power, and then to build wealth.
May 21, 2007
Asset Allocation is an Essential Part of Your Plan
Asset allocation is the splitting of investments into major categories. The proper balance of stocks, bonds and other investments allows you to achieve your goals for growth while providing some hedges against volatility. Over the long haul, stocks have provided the greatest opportunity for growth. However, short-term and mid-range cash requirements dictate that some portion of every portfolio be invested in instruments that have limited downside risk. Within the stock portfolio, allocation is just as important. Investment risk should be spread by maintaining diversity in your portfolio. Experts disagree on the merits of wide diversification versus maintaining a concentrated portfolio, but there is consensus that even a concentrated portfolio requires some level of diversification.
May 14, 2007
There Are Only 3 Ways to Get Rich
Take a look at people who have amassed a fortune. How did they get there?
Way 1 – They inherited their wealth
Way 2 – They married into wealth
Way 3 – They spent less than they earned and invested the difference
For those of us who didn’t fall into the first two groups, there is only one way. We have to earn to the best of our ability, we have to budget our expenditures, we have to avoid consumer debt and we have to invest for returns that will achieve our objectives for wealth. Everyone is different with respect to targeted wealth, but most will target amounts that will at a minimum allow for comfortable retirement. The earlier we set our plans in motion, the more comfortable that retirement will be.
April 30, 2007
Don’t Bet What You Can’t Afford to Lose
Preservation of capital must be high on our list of investment objectives. The prudent investor doesn’t subscribe to the philosophy of “double or nothing, every day”. The person who invests only in cutting edge high-tech growth stocks is going to take a serious hit at some point along the way. An individual’s propensity for risk will change over the years, typically becoming lower as retirement approaches, and the balance in the investor’s portfolio needs to reflect this tolerance for risk. The extent to which an individual holds growth stocks, blue chips and debt instruments should not be accidental, it must be based on the individual’s objectives and must reflect a careful evaluation of options for investment.
April 23, 2007
Value of Brand Loyalty
Brand loyalty cannot be measured by statistical data. Brand equity, franchise companies are like compound interest machines. While seemingly overvalued at anytime, it could be argued that they are “priceless”. They must continue to protect the brand, but they have a power that should not be overlooked.
April 9, 2007
Ability to Generate Cash
Companies offering “floats” on the funds are in great businesses. Search for companies generating heavy free cash flow with high margins and attractive terms for repayment.
April 2, 2007
Watching a Company’s “Free Cash Flow”
Free cash flow is a valuable characteristic when it is used to reduce debt, increase dividends, make acquisitions, or buy back stock. A company with strong and sustainable cash flow can increase its ROE by buying back stock, thereby reducing the equity versus the debt on the balance sheet. However, a company should never increase its ROE at the expense of the balance sheet.
March 19, 2007
Using the Economy to Predict the Market
Economic fundamentals clearly do drive the stock market. Inflation dictates interest rates. Interest rates and inflation dictate P/E multiples. Corporate earnings times P/E ratio = stock price.
March 12, 2007
Buy Low, Sell High – one stock at a time
Investor confidence is generally based on the market as a whole and lack of confidence is based on a falling market. However, profits are made on individual portfolios. Apply your discipline to each company that you buy.
March 5, 2007
Carefully Examine M&A Activity
Heavy activity could appear to signal an expensive market as companies use inflated stock to buy other companies. But are these companies so foolish that they overpay? The truth is that some make foolish acquisitions and others are prudent buyers, so you need to study the patterns of M&A activity within each company, more than for the market as a whole.
February 26, 2007
Earnings Announcements are Significant
The market moves upward or downward with earnings announcements that are above or below expectation. Be especially watchful for profit revisions and remember that the first revision is rarely the last.
February 12, 2007
When the Dollar is Down, expect Multi-Nationals to Benefit
A depressed dollar make US goods more attractive outside the US. In times when the dollar is sagging, research companies with strong multi-national operations. If the dollar is looking really strong, those same companies will suffer.
February 6, 2007
Growth Investing as a Means to Outrun Inflation
Inflation brings the US dollar down and the cost of living up. Low risk investing will do well to stay even with inflation. The equity market, however, has been proven to beat inflation over the long-term.
January 29, 2007
Advantage of the Generational Investor
Great wealth is built through long-term capital gains, after tax. The really wealthy investors understand the value of a lasting relationship between shareholder and company. Look for the great underlying business and lock-in your investment.
January 22, 2007
Invest with the Head, not the Heart
Strategy and discipline, not emotion. When you have developed and tested and proven your investment discipline, learn to trust in your strategy. Such methodology develops patience and rationality in the heat of financial panic.
January 15, 2007
Dumbest Reason to Buy
The dumbest reason in the world to buy a stock is just because it is going up. Momentum changes. Bet on the underlying fundamentals and reap the results over the long haul.
January 8, 2007
Stick with your Discipline, Regardless of Who Agrees
Forget the opinions, pay little attention to the media. You are never right or wrong just because the consensus agrees with you. Most investors, tend to be bullish at the wrong time. It is essential to avoid group think/consensus analysis.
December 4, 2006
Look for a Great Idea and Stay with It
Maintain a strong resistance to losing the position. It’s long term investing with low turnover that builds wealth. A great investor is a true student of the stock market with a passion for investing, looking to own a stock experiencing large gains in earnings growth and an expanding P/E ratio on those earnings.
November 27, 2006
Do What Everyone Else Does?
Do what everyone else does. What is the result? Your performance will be what everyone else’s is. If your expectation is superior performance, then do your own research. Watch what other do and learn from their mistakes.
November 20, 2006
Following the Herd
The crowd is always intellectually inferior to the isolated individual. A great investment manager seeks private time and isolated enough surroundings, allowing time to think and develop strategy, a mental aloofness from crowd thinking.
November 13, 2006
Keep Some of Your Powder Dry
Everyone has a little luck in their lifetime, but very few have any cash to do anything about it. When the stock market bottomed in 1982, there were plenty of undervalued opportunities, but there was very little cash to take advantage of those opportunities. Sock away a nest egg to use when opportunity knocks.
October 30, 2006
Long-term Growth Requires Market Share
Corporate re-engineering often focuses on cost reduction techniques. While management of cost is important to profitability, the truly great companies are driven by a great marketing machine. Long-term growth in earnings requires both cost containment and above average revenue growth. Bet on the companies that know how to reach the marketplace.
October 16, 2006
Most Significant Trait of Poor Investors
The most significant trait of poor investors is the tendency to hold their losers and sell their winners. Successful investors let their profits run and cut their losses. There is no substitute for understanding the underlying fundamentals of the company behind the stock in determining which stocks will continue to perform. Invest with knowledge, not emotion.
October 2, 2006
Bull Market to Bear Markets and Back
Long-term bull markets do not end strictly due to over valuation. More likely, they end as the result of a dramatic event and the collapse of consumer confidence. That’s one of the factors that makes market timing impossible for the average investor. Stocks continue to rise when logic says they’re overvalued and stocks continue to fall when logic says the market has bottomed. Invest for the long run and leave timing to the players.
September 18, 2006
Big Money Selling Short?
Most investors understand that in the stock market, it’s possible to lose your entire investment. With short selling, however, you can lose much more. The potential loss is theoretically unlimited. If the company does well and the share price increases, you will be forced to purchase the shares at a price greater – possibly far greater – than the price when you sold short.
September 11, 2006
Stock Buybacks are More Important than Many Believe
Corporate America is usually right in its stock repurchases. Repurchases are typically based on internal predictors of returns versus cost of capital. When large repurchase plans are in effect, fewer shares are available to the public. Assuming the Corporation made its buyback decision based on economic fundamentals, the price per share should rise.
August 28, 2006
Importance of Supply and Demand
When there is more buying than selling, prices rise. When there is more selling than buying, prices fall. This concept is basic economics and it applies to common stocks. That’s why the flow of funds into the market from retirement plans and mutual funds is important. As those funds flow into equities, there is upward pressure on the price of stocks.
August 21, 2006
Public Values Not Always on Target
Private values of most companies almost always higher than public values, regardless of how high the market may be. Over the course of a year, more than 90% of the stock listed on the NYSE will change hands, and the average stock will fluctuate 50% in price. True company valuations simply are not that volatile. Meaning: there are values to be found.
|
