Stocks Are Leading Indicators

Stocks are leading indicators.  This is true because of how the market is designed.  People who play this game, make bets about the future of a stock.  Regardless of their betting direction, it's that looking into the future, that makes the market trade in advance of factual information.

The people that are making these bets often have very good reason to do so.  They understand the prospects of what they are buying and selling.  They understand the fundamentals of the business.  This understanding, can come from having a ground level perspective, just keeping your eyes open socially for trends, or in illegal cases, insider trading.

It's these bets, from people with a perceieved knowledge of the situation, that makes stocks leading indicators.  This means a stock doesn't report good earnings, and then move higher, it moves higher, then reports good earnings.  While it is true, you will see stocks pop the day after results, those people are late, or traders.  In 99% of cases, they've missed a great run already.

This game is not that easy.  You can't just see the results, make your bets on winners, and keep winning (okay well sometimes, thanks AAPL!).  The results these companies report, are old, and we're making bets on the future, not the past.  This is a "what have you done for me lately" market, with an extremely short memory.  You have to know a key piece of information, and you have to be right about it.

In 2010, I saw Apple, and Android's products, in everyone's hands, and concluded RIMM's life was short lived.  I saw the business niche Blackberry had eroding.  I saw RIMM's stock topping out, going from an out-performer, to an inline stock, and eventually to an under-performer, on up, or down days.  I knew RIMM was up against two very big, very tough, great tech companies (GOOG and AAPL), with more evolved ecosystems, not to mention NOK, MOTO etc..  That was enough to put RIMM on my do not buy list for 2010.  RIMM got massacred that year.   Six month's after my call, I must've seen 20 of my 300 Facebook friends, long time Blackberry enthusiasts, say they were switching over.  Selling at any point in the last two years, was pretty much, correct.

The stock was, and still is, the perfect leading indicator.  The overcorrection in RIMM is the red herring here.  If RIMM's business was just slightly slowing, it's stock would've declined at a more gradual pace, especially with a back drop, of a slightly appreciating market.  Even when accounting for a shrinking PE, due to slower growth, I would've expected RIMM's stock to find bases, at $40, or $50 based on it's pretty good earnings.  Good stocks do that.  They get hit with a decline that wasn't warranted, or was just profit taking, therefore become attractive, and become good buys.

Photo By N. A

RIMM's stock didn't do that.  It decided to go right to $15 in almost a straight line.  I understand about over-correction, but that was ridiculous.  As it happened, I knew I was even more correct than I had imagined.

If you had just paid attention to the conference call, and watched the earnings reports, you might have never even seen this decline coming.  People are still scooping up RIMM, for what they feel is "on the cheap".  Right now, it appears RIMM will bring in at least $4 a share this year.  If that's true at $15, the PE is only 3.5.  That seems very cheap right?

I trust my gut, and the stock action, way before the earnings predictions.  The stock is screaming, very loudly, EPS is going to shrink, and fast.  It's way more likely now that RIMM will only earn $2, or possibly, god forbid, post a loss in 2013.  Otherwise, why would the stock plummet so far?

The people who rode RIMM down, weren't listening to all the signs I've been teaching you.  I do feel sorry for them however.  They missed every signal, saying sell.  They missed increased competition.  They missed the stock action giving them many technical points to sell.  They missed the change that was going on the ground, where Apple, and Android, just had better products, and ecosystems.  They forgot that RIMM was trading as a high growth tech stock, a 35 PE, and couldn't afford to have slowing growth, in this booming sector.  They forgot RIMM had all there eggs in literally one basket, and wasn't really innovating new products.  They forgot RIMM lost its title as the "only phone for business use".

Looking back, it's obvious.  However, the past doesn't make you money.  As I sat there Dec 31st, 2009, that was the time to really be right.  Like we talked about in "What Goes Up, Doesn't Need To Come Down", sometimes you have to go against the grain.  Your not going to have all the reasons these people were wrong, laid out for you in a nice post on "The Dice".  What you will have, is the stock action itself, and the ground level evaluations, both leading indicators.  If the stock action, and the fundamentals seem to be aligning, it might be time to make the buy.  If overall, the stock action is going against your perceived  fundamentals, that should send off alarm bells.  You need to be damn sure those earnings are there, and growing at their perceived rate.  Most of the time, you'll just be plain wrong.

What Goes Up, Doesn't Need To Come Down

People actually attempt to apply the laws of gravity to stocks.  It so drilled into our heads, that what goes up, must come down, people try to apply this physical law to stocks.  A stock can go up, stay up, and then go up some more. 

The amount of terrible advice, and mis-information out there is astounding.  People suggesting to sell, or buy, for all the wrong reasons.  Like I've mentioned before, so much of this game is just keeping an open mind, not allowing yourself to get stuck on one piece of information, and discrediting the nonsense.

You'll hear people say,  "I sold because the stock had run too far", or "I bought because the price has been cut in half."  I'd say about half the people who invest in stocks, never calculate a PE ratio.  It's the only true way to value companies, yet some could care less.  You need to be always evaluating where you stocks are currently.  Just like we talked about in the "Dreaded PE Ratio", keep checking your stocks to see how they are valued.  As the price moves up or down, and as the companies earnings do, that PE will change.

This will sound funny, but these kinds of folks must prefer just to guess if a stock is over, or undervalued.  Wallstreet calls buying a stock after a big upwards run, "chasing".  It calls buying a company where the stock is declining rapidly "catching a falling knife".

The mistakes I see daily in this game are inexcusable.  I'm left stunned that someone who's supposed to be very intelligent, deciding a stock is a sell, for all the wrong reasons, while it's as clear as day to me, the stock is a buy. The reasons why people can be so incorrect on a stock's direction can vary greatly.  With so many factors, reasons for being completely wrong, are easy to find. 

The most glaring reason is the stock action itself.  When you see a successful company's stock, trending higher over a period of years, it's much easier to stay on the bandwagon.  You have been correct for years, all the other investors have been correct also, so who are you come in and spoil their party?  If you are right, and the stock has peaked, and will decline soon, you'll have hundreds of stocks owners telling you just how wrong you are. 

It works the same in reverse.  A stock that has fallen heavily over a period of time, the people that owned the stock and sold it, hate it, because they lost big bucks.  They will trash that stock until the end of time.  The people still in the stock, hate it also, because they are losing money big time.  Then's there's a select few, that have taken the losses, but still believe in the underlying company.   When a new buyer like yourself, come in and decides this stock has fallen too far, maybe the business prospects changed, or the valuation has gotten too cheap, understand that most people will call you crazy.

Going against the grain is necessary, and very profitable.  You need to be agnostic towards the stock, and company.  This is where good traders make their money.  Greed, Stubborness, Denial, are all human emotions, and when applied to the stock market, will lose you money. It counter-intuative, but it's usually when the naysayers are the loudest, that your buy, or sell call, will be the most correct.

Let me tell you why "Stocks Are Leading Indicators"...

The Dreaded PE Ratio

The amount of shares outstanding varies from business to business.  One company might have 1 million shares outstanding, while the next, 1 billion.  Not only that, the float size can change at any time, depending on the company's actions.  They might sell more shares into the market to raise money, or decide to buy back shares to shrink the float, and increase Earnings Per Share (EPS).  Sometimes companies do "splits" and "reverse-splits" which restructure the float, and share structure.

The amount of shares outstanding, is simply the amount of pieces a business has been broken into.  In the example above, the billion dollar company has been split into a billion pieces.  That's 1000 times more shares than the company with a float of one million shares.

How do we then compare these companies Apples to Apples?  We use a "PE Ratio", or a price-to-earnings ratio.  This ratio allows us to see the company for what it earns, per share outstanding, and factors the current price of the stock.  Sometimes, people call the PE, the "multiple".

Basically the ratio, takes the "Price" of the stock, and divides it by the "EPS".  You can calculate the earnings per share for any company, by taking their total income for the year, and dividing it by the amount of shares outstanding.  This will get you the "Earnings" for the stock.  You can then take the price the stock is currently trading at, and divide by the EPS, and come up with a PE ratio.

This is exactly why the price of a stock has almost zero value.  You can't look at a stock like Apple trading around $440, and call it expensive.  Tomorrow Apple could do a 10-1 share split, increase their float tenfold, but the share price going forward would only be $44 each. 

Buying Apple at $440 with a billion shares outstanding, is the same as buying it at $44, with 10 billion shares outstanding.  The price may seem more attractive, but both buys are exactly the same.  Sure, you can buy 10 times more shares at $44, but there's also 10 times as many shares out there.

You can't just compare EPS to EPS, because we'd be completely ignoring what price the stock is currently trading at.  The last step, dividing the Price by the EPS gets you a PE ratio, which will factor the price the stocks are trading at, as well.

If your calculations lead you to conclude that Apple is trading at a 16 PE, and MSFT is trading at a 12 PE.  You can say for certain that MSFT is cheaper than Apple at that point in time, assuming earnings projection for the year are accurate.  In some cases, you'd buy MSFT because it was a better value. Other times, it's okay to pay more for a better quality stock, with better growth options if that's what you decide makes sense.

Different sectors, and different size companies have a different baseline, for what is a usual PE for that "group" of similar stocks.  Safe, establish companies might only warrant a 10-12 PE due to slowing growth.  A small cap tech stock,  with a hot story, might warrant a PE of 100.

There is a ton more about PE's I can't discuss in this blog post.  Understand one thing about PE's though, they are subject to interpretation.  PE's make the market.  Usually at what growth rate a stock has, has a big impact over what PE it deserves.  In the end, the market will decide what fair PE is for certain stock in certain sectors.

The winners in each sector always deserve a premium to the rest of their group, because that business has superior earnings, and prospects.  The best companies, in their respected sectors, are called "Best Of Breed".  If you see a best of breed company, trading in line with it's pears, after previously out performing, check out their core business.  If they truly are a better company, it's might be just the time to snatch them up.

Time to bend the laws of gravity, in "What Goes Up, Doesn't Need To Come Down"...

Cash Is King

How much money do you need to get started in the stock market?  The answer is as much as it takes, to keep you interested.  You need to care about your stocks, and care about the money.  This will cause you to pay attention to the latest news releases, and earnings reports for your stocks.  It will cause you to sell the stock, taking 10% losses, but saving that other 30%, had you rode it down.

An Example.  Fred invests $500 in Starbucks, and loses 10%.  His investment is now $450.

Jim invests $50000 in Starbucks, at the same price as Fred,  and loses 10%.  His investment is $45000.

Fred is down $50, and probably feeling pretty okay.  Jim is down $5000, and is probably seriously considering selling.

Think about that.  These are the same percentage losses, with the same entry point, only the amount of shares are different.  Who's correct to sell, or not, I'm unsure.  I do know both bets are exactly the same.  They must have the exact same answer.

Photo By scottchan

Caring about the money will make you take caution when the stock is sliding, and the nice profits from correct bets, will keep you playing this game.  You need to care about the money, and that goes both ways.

If I were starting a new investment account today, I'd like to have at least $5000 to get started, with a focus to get that level to at least $10,000 as soon as possible.  If that sounds like a lot to you, don't fret.  This market isn't going anywhere.  Taking a year off the market, to save, and study your possible buys, would be the ideal thing to do anyway.  I know you won't do it, I sure didn't.  I needed to "get in", but that feeling also causes you to miss great entry points.  Overall it's bad investing.

With $10,000, I'd be looking for a high dividend and portfolio stabilizing stock.  The percentage dedicated to my high dividend yielder, would vary year to year.  If I felt we are set to boom that year, that dividend yielder might be 20% of my portfolio.  In scary times it might be as much as 75%.  I trade around this core holding, and use it as my rock.

Some people might suggest a basket of dividend yielders to make up the 20-75%, I do not.  A basket is when you buy multiple stocks to spread around your risk.  I don't like that strategy.  This stock is my rock, like I said.  I need to trust it absolutely.  Good safe dividend yielders will find a floor, even in the worst crashes.  If the market wants to cut Altria (MO) in half, making the dividend a growing 12%, I don't care what's going on in the world, I'm a buyer.  I've never seen anyone lose, long term, buying a safe dividend, that was way too high.

Pay attention to what stocks are making money, when the market as a whole seems to be selling off.  That trait is special to only certain stocks.  Big money gravitates to a few key names in time of crisis, own some of those stocks.  Some of my best days are when the market is down one percent, and my stocks are flat.  Those are hidden profit, but they add up to generally outperforming.

The business needs to be able to pay that dividend, and grow that dividend, for years.  I watch one stock, listen to one set of conference calls, and trade around the holding as I see fit.  This also ensures you are collecting dividends on a high percentage of your portfolio at all times.

Photo By David Castillo Dominici

From there you can use the remaining portion to buy stocks you like, and speculate.  I tend to carry only about 5 stocks at any one time.  It keeps me focused, and keeps the percentage of my portfolio for that certain stock, higher.  With 20 stocks, the average stock would represent only 5% of your portfolio.  Even a double wouldn't get the blood pumping much.  You'd also incur more trading costs, being in and out of all those holdings.  Besides when you invest in too many different stocks, you end up taking an average, and that's not a good thing to me.  That's why I'm not a big fan of mutual funds in general.  You also can't keep up with the news, and the conference calls.

When I'm speculating, I only like to have 5% in any one spec.  In this case, that's $500.  I'm talking very small cap stocks here.  Stocks with no earnings, and big growth stories that could take years to develop.  If your Uncle Bob, approaches you with a great tip, resist the temptation to go "all-in".  Invest $500.  If the story develops further down the road, add more.  Five bucks says you don't.

People over invest in Uncle Bob all the time.  They lose their money, have no idea why, and become a thorn in new investors side, with their negativity.  In reality they invested too much money, in a super small cap they didn't understand, one that had all or nothing type of risk, and never followed what was going on with the company, or the stock, the whole time.  I have a word for that, but I do not call it investing.

Keep your investment level high enough, so you can clearly feel the positive and negative swings.  Balance that against broad market sentiment, and the fundamentals of your stock.  After a bear rally, I watch the technicals, to see a certain stock, or a certain group of stocks level off, and form a base.

A base is simply a period of time after a selloff, where new buyers come in with support, not letting the stock dip below a certain level.  This creates a sideways-like trading that is the foundation for the future move higher.  After further evaluation, I will either cut my losses, hold the stock, or buy more as the stock drops depending on the circumstances.  As your stocks trade higher and lower, whether they are a buy right at this moment, or not, changes.  A stock cut in half can be dead money, or a huge opportunity, depending on the fundamentals.

On to "The Dreaded PE Ratio"...

Averaging Up or Down

Averaging up, or down, can be a solid tactic to maximize your profits.  It's also a very dangerous one.

Let's say you have purchased 100 shares of Apple at an average cost of $400 per share.  If your reason for buying, or your "thesis" is correct, then as the share price drops, you actually have to like the stock more.  This applies even more greatly, if an outside force is impacting the market, and your stock, is poised to beat earnings.

If Apple's stock price were to sell-off, rather than sell the stock, a keen buyer, may average down, by buying an additional 200 shares.  That would mean this person currently owns 300 shares at an average cost of $366.66.  This is the definition of "averaging down".  This buyer now owns more stock, but at a lower cost basis.  They could sell the stock if it get back to even, or ride all 300 shares to even higher profits.  They don't however, have to wait until $400 to be back to even, that comes at $366.66.  

It works the other way too.  "Averaging up" means buying more shares on the way up.  I prefer averaging up because you are chasing a stock that is already going the direction you want, but both methods while completely necessary to good investing, carry risk.

That person in the first example, who bought a 100 shares of Apple, looked at the fundamentals, listened to the conference call, studied the technicals, and all that happened, was they lost $50 per share.  This can happen to different stocks, and different people, for different reasons.  I can't really blame you if you make a good buy, and the next day, an unexpected market event, starts a bear rally.  

That's why it's right to average down, when you are sure the stock is cheap, and the general market activity is a bunch of hocus-pocus, that doesn't affect your stock, on a day to day basis.  This stock must have great qualities.  Earnings, earnings growth, possibly a dividend for support, and visibility, are all needed to average down safely.  

Most of the time, you'll just be plain wrong.  The stock was wrong.  The timing was wrong.  The investment amount was wrong.  A whole bunch of the time, when you evaluate a stock, and it goes down, it is correct to sell.  Compare your stock to the overall market, if it's under-performing it for any length of time, you should have a good idea why.  You can always sell, sit on the sidelines with your money, and then come back in at a lower price, and when the stock is finding support technically.  Most of the time, you'll probably just move on to better things.

You can't just sell the stock every time one falls though, because there is no doubt, as the price falls, the stock gets cheaper.  I know doesn't sound very ground breaking, but it is.  That 200 shares at $350, are a way better buy, than the 100 shares at $400, if the company will rebound eventually, and appreciate in value.  

$350 shares, are 87.5% of the $400 price.  That's 12.5% savings on those shares.  It's so much easier to make money in a stock, when you get the correct "entry price".  It's not a bad idea to dip your toe into a stock, knowing you'd like to increase your position at a later date.  This way you can average down, or up, as the situation demands it.  You won't always be able to get in, at the perfect price, so having the ability to buy more shares is a back up plan.

When you are averaging down, you are chasing a stock that is moving lower.  When averaging up, you are increasing your overall cost basis, in the hopes of even further profits.  Both those are extremely risking strategies unless you are correct about the longterm fundamentals of the business.  The good news is, if you are correct about direction the stock will take, you can't go wrong with either strategy.  

This is why "Cash is King"...

Big Caps Vs. Small Caps

The word "Cap" is short for Market Capitalization.  Market Capitalization is simply the amount of shares a company has in their float, multiplied by their current stock price.  This number is supposed to give you an idea of a company's overall value, and size.

There's small caps, mid caps, and big caps.  All they're referring to, is how big and established the company is.  Most people who own, and trade stocks, use mostly big caps to do so.  These companies are established.  They have been around for years.  They have name recognition.  They have an earnings history.  They have a chart you can study.  They have big name CEOs.

Big caps are the easiest, and safest stocks to trade, for all the factors I just listed.  For a company like IBM to lose half of their share value would be completely shocking.  It would take a market crash at this point, or a complete business catastrophe, to ever get back to that level, and it the decline could take weeks.  By contrast, a small cap could lose half it's value in a day, pretty easily.

With small caps, a lot of time we're taking about companies who aren't currently making money.  You have to be extremely careful with companies that aren't making money.  If they aren't making money, they are burning, or spending it.  At some point, if that little company can't turn a profit, it will need more funds to survive.  They can add debt, if a lender is willing to lend them money, they can sell assets, or they can attempt to release brand new shares into the market.

Any shares issued by a company after they've had their inital public offering (IPO), are called a "Secondary".  When this happens, most of the time, it's a bad thing.  As more shares are added to the float, your current shares become less valuable, because there are more of them distributed.  The company is in a sense, selling more pieces of itself into the market, and they will recieve money back for each piece.  We'll talk about "Dilution" more in a future post. 

Understand, there is more risk in small caps, but there is also more profit to be had.  You would be surprised how many small and mid caps, go virtually unnoticed, even if they are doing a great job.  Quality small businesses do go largely unnoticed in this game.  Big money likes established names, and predictable earnings.  Much of the time, they completely ignore these smaller companies, even knowing they are good, and will wait until they grow more.  Basically you will find gems out there, and it will be easier than you think, because these small companies just don't get exposure.

Most people when they start this game make the huge mistake of allocating a lot of funds, to small cap companies.  The market offers all kinds of business' from very safe, to very risky.  I'd prefer the first stock you sink some real money into, is a reliable big cap.  You'll have more information to work with, and the stock will have less volatility.  You'll have a trust that this company will be around for a long time.

There's a huge difference between buying McDonalds, a big cap, with great earnings viability, and a dividend, and a small cap Chinese semi-conductor company, with no earnings, that trades on the Chinese stock exchange.

Let me teach you "Averaging Up And Down"...

The Conference Call

Most public listed companies are expected to release their results every 3 months.  Smaller companies may just put out a press release, but more established companies use a "Conference Call".  During this time the company releases their results, from the 3 previous months, via a audio presentation, telling you revenues, earnings per share, and other details.

The conference call is proceeded by a press release with the basic details of how the 3 months turned out. Then it's up to the management team, to clarify those results, and answer questions.  Different companies have different ways of measuring success, because businesses are different. Wallstreet calls them "Metrics".  You always want to know what metrics Wallstreet gauges a certain stock on.  Those figures allow analysts to make projections, and come up with an estimated earnings per share (EPS) for the current year, and in future.

These conference calls contain a ton of amazing information about the market.  You get to know the management team on a personal level.  You can hear their confidence, or lack thereof, in their voice, and about the business' future.  You hear them answer tough questions.

The best part is nobody really listens to conference calls.  For the most part they are boring.  Actually sitting down and taking 30-60 minutes to review you stock, every three months, is too much work for the average investor, and even for some pros.  Here we have an amazing resource, where at times, I've literally heard CEO's say, there is no way we don't make more money than last year.  They don't say it in those terms, but they say they have more customers, that will pay a higher price point, which always equal more money, if they execute.

These CEO's are obligated by law to tell you the truth, and 99.9% of them do.  They are all however, masters at bending that truth.  A good CEO can paint a beautiful picture when times are great, and still a pretty decent one, when times are tough.  They know how to spin their business' to make them sound better, and there's nothing wrong with that.  You just need to be able to read between the lines.

The first stock you buy, why not listen to a conference call, watch a couple of earnings periods before you buy?  This is some of the work involved in determining how to value a stock.  A lot of the time it's just watching, reading, and listening.  The majority are too lazy to do all that.

That's great news for anyone who isn't.  If you put in just a little time a week, and listen to the conference call, you should be able to eventually make an informed decision on whether or not, you think something is buy, or a sell.

Listening to the conference call is probably the smartest thing you can do in investing.  There is nothing more important than fundamentals in this game.  If a business has good fundamentals, it has good profitability, with growth potential.  You can find out right from the horse's mouth, if now is the correct time to buy that certain stock, or whether there could be danger ahead.

Most people don't listen to conference calls, good thing your not most people.  Now, on to "Big Caps Vs. Small Caps"...

Keep It Simple

The stock market is already complicated enough, you don't need to buy businesses, you don't understand.  Sectors are sections of the market that group like minded business.  I stay away from certain sectors, because I have to admit I just don't fully understand their business.  The Banks, and Big Pharma are sectors for examples.

The Banks have complicated financials, and things on their balance sheet, called "Level 3 Assets".  All I really understand about those, is they assets that aren't accounted for.  They are invisible.  I have no idea why they exist.  There a lot of bonuses' being flung around in this sector, leverage being used, and I believe weird accounting is more prevalent.  That all adds up to I'm out on the Banks, for the most part.  There are certain foreign banks in which I would entertain the idea of investment but we can talk about that, a year down the road.  I don't own any currently.

Big Pharma, trades on medical breakthroughs, and patents.  This means that while a drug companies have a monopoly on it's drug, they are making lots of money selling it, because no one else has it, they are allowed to charge very high rates for it.

At some point, they will lose their exclusivity, and what they call "Generic" Drug Companies can make it, and sell it for cheaper.  This lowers a companies earnings, so they are forced to find new innovations to fund their companies future.  If they don't, they will get bought out, or drop big.  I can't guess when these breakthroughs will happen, so how am I to guess which stocks will have real longevity?  I don't understand the science happening on the ground level, so I'm out.  I'd just way rather own Altria, and sleep at night.

Understanding how a business is going to make money going forward is very important.  Established business' are expected to make money each year, and to slowing grow those earnings over time.  If they can do that, eventually they can afford dividends, and become long term winners.

Altria is simple.  They sell cigarettes, and chew tobacco (and also own at least a 30% stake in SABMiller.)  Each year less people are smoking overall, so the total market is shrinking by about 4% a year, but then they raise prices by 8% a year, to offset that, and grow earnings.

I have a high confidence level that people will continue to drink and smoke as they have been doing it for thousands of years.  Buying the biggest brand in the US, increases my confidence.  I can't see another company just coming out of nowhere and killing off the Marlboro Man.

I understand the business.  They sell a product people want, they have input costs, labor costs etc., At it's core, it's an easy to understand.  How much product are they selling, and at what price, and what is it costing them to make it all?

That's oversimplified, but you get the idea.  You need to understand what factors drive each business.  Watch the numbers closely.  A good company should be able to maintain fairly steady earnings growth, and a mostly stable stock, relative to the market.  When buying a new stock, dive right in.  Learn everything you can about the business.  If you think you understand how they are going to make money, and increase earnings going forward, take a look at the technicals, and buy the stock as it looks poised to pop.

There's a worry with foreign stocks, that trade on foreign markets.  It can be hard to get information about their earnings.  They can be held to different accounting standards.  For the most part I like to invest in North American companies, and get access to emerging markets through them.  If you live somewhere else int he world, make sure you trust the market, and the company you are buying.   "Emerging Markets" is just a term, for a certain part of the world, that is just starting to advance technologically.  Investing these markets can be lucrative, but most of the time, carries more risk.

I like an established business, with good visibility.  "Visibility" in this game, means how far you can see a companies earnings continue for.  You need to at least have the information accessible if you wish to understand the financials behind the company.  When starting out, stay away from any stocks that don't trade in North America.  We can always add the weird specs later.  Find companies with earnings, a chart you can look back on over 5 years, maybe even a dividend history.  Those companies will have conference call histories, which you can go back and listen to.  Without information, you are blind in this game.  Make sure your stocks give you everything you need to make an informed decision.

Time to open our ears, and check out "The Conference Call"...

Dividend Stocks and Money Management

Altria, or MO was about 75% of my portfolio to start the year in 2011.  This would not be considered a normal investment strategy, but it did allow me to make 18.5 percent on my total portfolio last year.  There is a time and place for all kinds of strategies, but MO made it easy, the whole year.  I love this stock for many reasons, and I'm going to try to explain, why this stock is so amazing.

Established companies payback shareholders in a couple different ways.  The stock can go higher, that is capital appreciation.  They can pay a dividend, most likely quarterly, so that you get money while you hold the stock.  They can also buy back shares in the market, essentially removing those shares, from the share float, making every share, slightly more valuable.  The float is how many share the company has released into the wild.  Essentially, how many pieces the company has been broken up into.  

Lets say you buy 100 shares of Altria tomorrow at $28, for a total investment of $2800.  Using round numbers Altria will pay you 6% a year on your investment, or $168 per year.  Doesn't sound like much?  Well keep listening...  Altria also increases their dividend about 1-2 times a year on average.  Meaning, instead of making 6%, next year, if the stock price is still at $28, you might make 7%.  As the years go on, the dividend yield you recieve on that original investment goes higher, so you dividend return on that money can be sky high, after many years of increases.

When you also have a company that buyback shares, they lower the share count, which increases the EPS automatically.  If the EPS (earnings per share) increases, they can also increase the dividend.

Basically if company A, has 100 shares outstanding, and makes $100 a year, then the EPS is $1/per share.  If that same company decides to buyback 5 shares that same year, and they have no increase in earnings throughout the year, next year, they will make $1.05 EPS because you can now divide $1 earnings per year, by 95 shares, rather than 100.

Basically the less shares outstanding the better for all investors.  If that float, is shrinking due to a buyback, that's a good thing overall.

Altria has a "pay out ratio" of 80%, meaning they will pay out 80% of all profits in the form of a dividend.  So they buyback shares, which decreases the float, and increases the EPS, which allows them to increase the dividend, that increased dividend increases the dividend yield, which likely increases the share price.  That is the virtuous circle I was talking about.

As always, feel free to ask me anything about this, in the comments section below.

Stocks that have safe, growing dividends are very resiliant in an up or down economy.  I use this stock to anchor my portfolio, and I would recommend you do the same.  By having 50% or more of your portfolio in a safe dividend earner, you will have a much easier time beating the market.  From there you can add the risky high fliers that really make this game exciting.

The reason I like one stock for my big dividend play, is because I just need to be right one time.  If that part of my portfolio works, then I can afford to lose, and take risks in other areas.  I can focus a lot of my energy just making sure this secure part of my portfolio really is secure.  I only have to listen to one conference call a quarter, instead of five.  Watch for one set of earnings reports.  This is not the type of investment you can afford to lose on.  Your high dividend yielder, should have money to pay that dividend for years.  It should be secure, and the business should have no real way to be undercut, or go broke.

From here all we need to do, is "Keep It Simple"...

Bulls, Bears, and Pigs

There's a classic saying in investing, "Bulls make money, Bears make money, but Pigs get slaughtered."  There are two different opinions, on the overall direction of the market, and they are called Bulls, and Bears.  Bulls think the market, or a certain stock, will go higher.  Bears think think the opposite.

Both parties are able to place their bets the way they want, as Bears can "Short" the market, and basically play to profit on the downside.  It's a good thing, because it keeps the market is check.  You need Bears.  If you're a Bull, and correct in your opinion, the Bears are the ones that are paying you.

A Pig is either a Bull, or a Bear, that has stayed in a trade for too long, gave back all their profits, and then some.  Pigs are stubborn.  They won't listen when the facts change.  They've been right for so long, they'll ignore all the signs that go against their opinion.  They'll ignore the both the fundamentals, and the technicals, and it will drive you mad, but also drive you find great prices on merchandise.

Fundamentals, are the actual dollars and cents behind the business.  When companies report their earnings, it's all there for you, in black and white.  Wallstreet calls these accounting numbers, the "Balance Sheet".  It calls quarterly earnings reports, "Earnings".  To know a companies "Earnings" and have an understanding of their "Balance Sheet", is essential.  Without that you might as well put a blindfold on.  You just have no idea what shape the company is in.

Technicals, are what the chart says.  You can look up any companies chart, and begin to analyze certain things.  How many shares are trading per day, which they call the "Volume".  You can analyze patterns and make suggestions as to what you believe will happen going forward.  Technicals do have merits, and I use them on every trade I make, however I do believe fundamentals are trump card.  When both fundamentals and technicals align, I like the stock even more.  Basically, if the company look poised to grow and make money, and the chart looks healthy, it's probably a good buy.

Companies either have "cash" or "debt" on their balance sheet.  Companies with good amounts of cash per share, can weather storms.  See, when a company reports a loss for the quarter, they are burning up money.  When that money runs out, they either have to borrow more, or issue new shares into the market, if they can.

Sometimes debt can absolutely swallow a company.  When you see a company in debt, and losing money, you should probably cut your losses.  I start by never buying them.  Or at least not unless I'm speculating, which means investing a small percentage of my portfolio, on something higher risk.

On to "Dividend Stocks and Money Management"...

I Don't Know Everything

I hate to admit, but no, I do not know everything about the market.  In fact, I probably don't know more than 25% of the game at this point.  That percentage however, is higher than more than 99% of the population.  My basic understanding of how the market works, is a rarity.

Think about that for a second.  Isn't that kind of sad?  Many people spend a majority of their lives trying to be financially responsible.  They want to retire with a good money.  They get insurance.  They invest in real estate.  They even invest in the market, or at least someone does for them.

Photo By N. A.

They give up this right to control their destiny, because apparently it's too hard.  That must be it, or why is nobody really doing it successfully?  I say that because you never hear people talk about it socially.  If people really love something, they can't keep it quiet, yet I never hear people discuss stocks with passion (like I do, or want to).  That never happens in regular social circles, unless your in "The Biz".

The reason is you've been taught to hate the stock market.  That right, I said taught.  You probably didn't even realize it happened, but there is a distain for stocks, and investing, and it's very prevalent.    It started with the Great Depression.  People lost a lot of money, for many different reasons, and it took a lot of years before people even wanted stocks.

We had a huge crash, and huge recovery in 2008-2009.  It was what got me to pay attention to the market. I kept reading headlines, about massive losses, so I started to watch the action every single day.  This is that contrary opinion coming through huge for me.  I knew this was my opportunity to get in, and that I had to. I was very correct in doing so.  I was buying stocks at prices that would make you shake your head today, and the whole time the general consensus was the their was much more pain to go.

You have to understand that people were taking massive losses, but I watched the market closely, and bought right into fear.  There were days when the market would lose 8%.  (Buying AAPL at $82, still makes me smile.)   I've watched so many TV shows, video clips, read news articles, listened to so many smart people, tell me just how wrong I was to buy stocks here, but I knew it was right to do so.  People who started picking up stocks into the fear, out-performed extremely.

You have to understand when I recommend a stock, I'm saying I'd buy it at a certain price point.  I'm not suggesting you buy it yourself.  I want no responsibility for what you buy, or how you trade.  I'm not doing the trading.  You are the Captain of your own ship, and you steer at your own peril.  You have to understand what your buying, why it's good, and how long you might hold it for.

Most importantly, I don't know everything.  I'm still learning just like you are.  If you think I'm wrong, call me on it, but make sure you can support your case in a proper manner.  That is how learning happens.  There are different investing styles, but your style has to work, and mine does.  All I can speak to is how I've done it, how I'll continue to do it, and if and when the next bust comes, I'll be out before much damage occurs.  All because I pay attention, and I'm not too proud to cut my losses, and admit when I'm wrong.

Let me tell you about "Bulls, Bears, and Pigs"...

Why I'm Qualified

One of the worst mistakes you can make in this game, is assuming that someone's credentials, makes them good at suggesting what direction a stock will trade.  It's normal to assume, that someone with a great education, full knowledge of a certain sector, someone that converses with different CEO's, that they understand the business the best.

The problem is, then taking that knowledge, and balancing it against, where the stock is currently trading, what's it value is, what it's earnings in future will be, and what the current market sentiment is.  This is where the connection breaks down horribly.  It's not enough to understand a business inside-out, you need to know how to apply that knowledge.

You know what qualifies a great stock picker?  Simply results.  Results in this game are always money.  If a Goldman Sachs (GS) money manager with a billion dollars to invest, was able to return 12%, and that same year, you returned 15%, on your $5000 portfolio, you are the better trader that year.  If you did that consistently over a bunch of years, I would have no problem saying that you are a better trader than one of guys at Goldman Sachs.  You are, and there's no arguing this.

Results are simply gained by being intelligent, knowing what to look for, knowing what information to discredit, and having a contrary opinion.  Investing requires you to hold a contrary opinion to be profitable.  In general, who ever is selling a stock, thinks it'll probably go lower, and anyone buying it, believes it to be going higher.  It's that difference of opinion that makes the market.

Results are what I have to offer you.  My full three years of investing, I have never lost money, in fact, each of those years I returned an average of 47%.  If you could return 47% over a ten year period, they would consider you a God on Wallstreet.  Over long periods of time, like 15-20 years, 25-30% is considered godlike in this game.

Unfortunately, I can't return 47% for you each year.  Those numbers are skewed by a particularly large 2009, my first year, I grew my portfolio by 162%.  That means if I invested $100,000,  I ended up being $262000 in my first year.  Those years are not typical.  2010 I returned 4%, and returned 2011 18.5%.

These would be considered great results by anyone who knows investing.  In this last year, I returned 18.5%, and I did it against a market that was flat for the year.  Flat meaning stocks did not go up or down.  Most people made nothing, or lost,  last year.  Many big money managers did to.  My strategy was actually safe through this time.  I can honestly say, I made 18.5%, got to speculate 20% of my portfolio, on small fun stocks, and still crushed the market, and most pros.

I've started this year also, and looked poised to out-perform.

What I do for a living, how old I am, what sex I am, those are things that have merit, but really, the only that matters in this game, is results.  If I sound like I'm making it out to be a big competition, that's because it is to me, and it should be to you too.  People have to choose sides, and opinions all the time in this game, and I love that.  You do have people that are right, and wrong, and there is a clear answer.  Competition breeds results, and will make you pay better attention.

They suggest X, I suggest Y, and when Y hits exactly as I knew it would, it makes me happy.  I liken it to a checkmate in chess.  The best part is you also win money.  The better part is your are literally out smarting people with PhD's, people who are in the pits of wall street, and the talking heads on TV, at least in terms of stocks direction, which ultimately determines price, which is the only thing that matters.

Why am I qualified?  More than my results, it's my way of thinking.  I've always been against the grain.  I see both sides to every argument, without bias.  I'm willing to listen to what the other guy is saying.  I'll learn from anyone.  I argue my points with passion, and I'm never scared to make a prediction, and stand by it, right or wrong.  It's this kind of thinking, that will be the most valuable thing you take from this course.

If you haven't done so already, please "Follow by Email", and remember to check your email for the confirmation.  This way you won't miss a post.

It's almost time to get started, but first I have to admit "I Don't Know Everything"...

Eating An Elephant

Welcome to my new blog, called The Dice.  The goal here is to teach people about how the stock market works, and find good ways to profit from it.  I have a ton of knowledge I can share with you, but it's going to take time for me to get it all out.  Each week, I'll be picking a certain topic, and running with it. 

This is not a sales site.  I plan on writing weekly article to inspire you to enter the stock market if you haven't done so already, and take control of your future.  Most regular investors are terrible because they break basic rules, and are unaware they even exist.

Photo By jscreationzs

You may be someone who has been burned in the past, or just doesn't trust the stock market.  That's okay.  Please stay with me.  I believe after all is said, and done, I can get you to a place where you feel comfortable investing.  We have a lot to learn, so stay tuned.

The only way to eat an elephant is one bite at a time, so let's start chomping.  If you haven't done so already, please "Follow By Email", so you can get each post delivered to your mailbox.  Each new post will build on the last.

Also make sure you read the content in the correct order, as the course will build on things we've previously discussed.  There will be a hot link at the bottom of every page to take you to the next topic.

You find out pretty quickly I'm not looking to sell anything here.  I'm simply dumping my three years of practical personal investing for all of you to read.  If in 20 years down the road, you hit it big using a strategy, and you want to send a bottle of scotch my way, I'll promise to drink it.

On to "Why I'm Qualified"...