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"...
Showing posts with label upside surprise. Show all posts
Showing posts with label upside surprise. Show all posts
Thursday, January 26, 2012
Monday, January 23, 2012
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"...
This is why "Cash is King"...
Wednesday, January 18, 2012
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"...
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"...
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"...
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.
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"...
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.
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| 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"...
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