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"...
Thursday, January 19, 2012
Wednesday, January 18, 2012
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"...
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"...
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.
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"...
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"...
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.
 |
| 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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