What should I look for in a stock?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
pongun
Posts: 35
Joined: Mon Aug 22, 2011 3:30 am

What should I look for in a stock?

Post by pongun »

Hey, everyone.

In the past, I always used to run the stock screener for max. dividend yield (I miss the glory days of 35% dividends) and profit margins. However, I'm not sure if those are so good anymore.

Lately I've been focused more on value, and I've been running the screener for positive yields (I think all companies should pay a dividend if they're making money), payout percentage (I want the money the company's making), a low price to book value and a low P/E as a combination that says it's underpriced.

I've seen some companies trading for as little as $.19 on the dollar of book value. And not just financial companies, either. Unfortunately, these companies are often losing money.

So what do you guys think? What should I be looking for in regard to selecting shares of common stock? I'm an enterprising investor with a solid cash hoard and the interest to read annual reports and other statements- no widows and orphans here.

Please no technical BS. If I wanted to gamble I'd play poker.

Thanks.
User avatar
Noobvestor
Posts: 5751
Joined: Mon Aug 23, 2010 1:09 am

Post by Noobvestor »

I use an inverse margin call buffer to ... just kidding, I index.
"In the absence of clarity, diversification is the only logical strategy" -= Larry Swedroe
wilked
Posts: 1890
Joined: Thu Mar 24, 2011 1:50 pm

Post by wilked »

If you are interested in finding the hot stock for today (as opposed to yesterday) I stick with this site

http://www.todayhotstocks.com/

....

OK I am joking as well. People devote their lives (and jobs) to this very mission, and most fail. Why do you think you will be the exception?
User avatar
nisiprius
Advisory Board
Posts: 42832
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Post by nisiprius »

I don't think you should even try it unless you are a professional who earns a living by analyzing stocks, or a dedicated amateur who

* spends at least forty hours a week studying stocks,
* has absorbed Graham and Dodd's Security Analysis and/or taken college courses of similar content and depth,
* has enough accounting knowledge to read a balance sheet.

I haven't done any of those things. I have bought individual stocks approximately... one, two, three, four, five, six times in my life. Dumb moves every last one of them, even though I lucked out. Let me put it this way: the least dumb move was buying 100 shares of a company a niece of mine had just started working at, as a sentimental "you go girl!" gesture. Oh, wait, seven, I forgot the framed single share stock certificate in Target Corporation I bought my granddaughter in hopes of, I dunno, piquing her interest in investing or capitalism or something.

Otherwise, the unit of investment--the thing you place buy and sell orders for--should be index funds or ETFs that capture whole asset classes and market segments.

Forty years ago, when most mutual funds charged sales loads, had >1% expenses, and were actively managed; when brokerage commissions ran $100 for a single trade, and buying less than 100 shares of stock dinged you with "odd lot" fees, there were reasons for an individual investor to buy single stocks. Not any more.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Ed 2
Posts: 1774
Joined: Sat May 15, 2010 9:34 am

Re: What should I look for in a stock?

Post by Ed 2 »

pongun wrote:Hey, everyone.

In the past, I always used to run the stock screener for max. dividend yield (I miss the glory days of 35% dividends) and profit margins. However, I'm not sure if those are so good anymore.

Lately I've been focused more on value, and I've been running the screener for positive yields (I think all companies should pay a dividend if they're making money), payout percentage (I want the money the company's making), a low price to book value and a low P/E as a combination that says it's underpriced.

I've seen some companies trading for as little as $.19 on the dollar of book value. And not just financial companies, either. Unfortunately, these companies are often losing money.

So what do you guys think? What should I be looking for in regard to selecting shares of common stock? I'm an enterprising investor with a solid cash hoard and the interest to read annual reports and other statements- no widows and orphans here.

Please no technical BS. If I wanted to gamble I'd play poker.

Thanks.
You not going to find advise on ind stocks here, we are index investors (mostly). We not a speculators, we are investors.
"The fund industry doesn't have a lot of heroes, but he (Bogle) is one of them," Russ Kinnel
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: What should I look for in a stock?

Post by YDNAL »

pongun wrote:What should I look for in a stock?
Make sure the Stock is a tiny fraction of a well diversified Index fund with thousands of other Stocks.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
yobria
Posts: 5978
Joined: Mon Feb 19, 2007 11:58 pm
Location: SF CA USA

Post by yobria »

I have long positions in many of the following blue chips:

http://www.bogleheads.org/readbooks.htm

An investment in education pays the best interest....

Nick
User avatar
nisiprius
Advisory Board
Posts: 42832
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Post by nisiprius »

I'm just using Vanguard examples here because of familiarity. If you can't be satisfied with something like the total market as represented by Vanguard Total Stock Market Index Fund, here are some dead-obvious starting points for consideration.
pongun wrote:In the past, I always used to run the stock screener for max. dividend yield (I miss the glory days of 35% dividends) and profit margins.
If you subscribe to the "dividend" theory, you might at least consider Vanguard Dividend Appreciation Index, VDAIX or High Dividend Yield Index, VHDYX
However, I'm not sure if those are so good anymore.
Why would that change? I don't think philosophies such as "dividend investing" are supposed to outperform all the time. Surely sometimes they'll do better and sometimes they'll do worse, and that the theory is only that they'll do a little better on the average in the long run... and that the dividends are valuable in themselves if you are in retirement?
Lately I've been focused more on value, and I've been running the screener for positive yields (I think all companies should pay a dividend if they're making money), payout percentage (I want the money the company's making), a low price to book value and a low P/E as a combination that says it's underpriced.
If you are interested in these things as captured by the Fama-French "value" factor, you might consider Vanguard's Value Index (actually large-cap), VIVAX, or Vanguard Midcap Value Index, VMVIX, or Vanguard Small-Cap Value Index, VISVX.

Or of course you might consider some Vanguard's actively managed funds, Vanguard historically being considered good at the "value" investing style.

Or you might consider numerous funds from other companies that apply investment theories and philosophies but invest in hundreds of stocks and diversify away some of the risk. Just to pick one example--one that I personally find uncongenial and wouldn't think of investing in myself, but that's just me. I think Joel Greenblatt's "Magic Formula" investing is an example of a method of picking stocks by screening for value criteria. And I think it's well regarded. If this particular theory appeals to you, you might at least look at the "Formula Investing Funds" which claim to capture this strategy for you.

Why screen for individual "value" stocks when a mutual fund can give you 100 or 1000 funds that have already been screened for you?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
BruceM
Posts: 1845
Joined: Fri Aug 08, 2008 1:09 pm
Location: Manzanita, Oregon

Post by BruceM »

I hold individual stocks not for any price appreciation, but for the reliable income they produce over the years, as I combine this with a pension and part time work to provide income I live on in retirement. If this is what you are after, this board would not be a good place for that kind of discussion. For stock income-investing related topics, I'd suggest either Morningstar Discuss/Income-Dividend investing - or - Investing During Retirement....or Seeking Alpha "Investing for Income"

http://socialize.morningstar.com/NewSoc ... fault.aspx

http://seekingalpha.com/dashboard/investing_income

BruceM
User avatar
HomerJ
Posts: 15983
Joined: Fri Jun 06, 2008 12:50 pm

Re: What should I look for in a stock?

Post by HomerJ »

pongun wrote:If I wanted to gamble I'd play poker.
If you're picking stocks, you're gambling.
marbles
Posts: 37
Joined: Mon Mar 15, 2010 1:19 pm

Re: What should I look for in a stock?

Post by marbles »

pongun wrote:
So what do you guys think? What should I be looking for in regard to selecting shares of common stock? I'm an enterprising investor with a solid cash hoard and the interest to read annual reports and other statements- no widows and orphans here.

Thanks.
There is only one sure way to do this.
1-Buy a good stock
2-Wait for it to go up
3-If it don't go up, don't buy it
Topic Author
pongun
Posts: 35
Joined: Mon Aug 22, 2011 3:30 am

Picking stocks isn't gambling

Post by pongun »

I had no idea how many trolls there were on this forum. I don't buy stocks to sell them- I buy them for income. I haven't sold since 2007, despite the "downturns" and "meltdowns" this market thing has had since then. I just want to own great companies and really be a part of something.

I hate mutual funds. Some overpaid elite making my decisions and taking a cut of my profits sounds too much like another tier of government (as if I don't have enough of those demanding things of me already). From the research I've seen, such as in Graham's Intelligent Investor, mutual funds underperform the market by roughly the amount of their fees (a good reason for ETFs, which are often computerized and tend to have tiny fees).

ETFs are cool. However, a value approach with discipline, dollar-cost averaging, plentiful dividends and lots of research can often do better. I have the time. I have the interest. I don't just want a stock-market savings account. I want to own things, not just pool my resources with everybody else.
luckyduck288
Posts: 65
Joined: Tue Dec 08, 2009 7:55 pm

Re: Picking stocks isn't gambling

Post by luckyduck288 »

pongun wrote:I hate mutual funds. Some overpaid elite making my decisions and taking a cut of my profits sounds too much like another tier of government (as if I don't have enough of those demanding things of me already). From the research I've seen, such as in Graham's Intelligent Investor, mutual funds underperform the market by roughly the amount of their fees (a good reason for ETFs, which are often computerized and tend to have tiny fees).
Welcome to the forum, pongun! None of the advice you've received so far is from "trolls". If you spend some time here you'll find a wealth of information that can hopefully help you find a better/simpler way to invest your money that is more likely to help you reach your financial goals.

Buying and selling individual stocks has costs, too. It may be the case that building your own index fund is a reasonable thing to do. Some on this forum do just that. For most people, a total market index fund has such low costs it is not even worth worrying about (0.07% per year for VTSAX). On a $1 million investment that is only $700. I'll guesstimate $100 an hour for labor (including all transaction costs for the entire year), that amounts to 7 hours of someone's time. If you were to do it on your own, you'd probably spend 7 hours on initiating/monitoring your trades alone not to mention the amount of time picking your winning stocks.

You say you want to own things, not just pool your resources. But when you buy an index mutual fund, you own just as many "things" as if you bought the stocks on your own (true, minus a small fee), but you should make an assessment of the true costs of buying individual stocks before dismissing indexing.

The real issue for you seems to be that you think you can outpick everyone else with the proper information and time. Good luck to you. The reality is you will spend a lot of time spinning your wheels and the outcome has to do entirely with luck, not your ability. You won't find much support for that here as the value in doing so has been soundly disproven by academia so many times it is amazing people still think they can pick the winners reliably.

Again, welcome to the forum and read around here with an open mind, and you may be well on the way to improving your financial future.
awval999
Posts: 1254
Joined: Fri Apr 08, 2011 10:17 pm

Post by awval999 »

1. A product you can understand.
2. A reasonable P/E ratio.
3. History of dividend payment.
Topic Author
pongun
Posts: 35
Joined: Mon Aug 22, 2011 3:30 am

Perhaps

Post by pongun »

I'm not talking about luck, and I am talking about fundamental analysis. Why do so many people think that buying individual stocks automatically means I'm some kind of day-trader who only cares about nonsense like beta and trends?

The way I see it, somebody has to be the best. Why not me? Maybe I'm taking the wrong tack here. I know that the best way to do well is to lose as little money as possible through:

1. Unnecessary transaction costs
2. Taxes
3. Fees
4. Realized losses due to liquidating during a "down" time

I hold for the long term, and I want to buy at great discounts for a margin of safety. I'm really only interested in buying companies that will pay me solid dividends for decades to come, and I DO put in the time. I've put in hundreds of hours this year poring over screeners, validating or invalidating their claims (most screeners suck, I admit), reading annual reports, running hypothetical ownership scenarios, etc.

I'm only asking for people's opinions on the best way to win here. Winning, in my case, means retiring as soon as possible on my dividend income with strong companies supporting me. "As soon as possible" for me means October 2nd, 2012 (my 30th birthday). I hate working some job and making a company rich instead of letting a company make me rich.

Is Graham's hypothesis of 6% per year returns really the best we can do over the long term? If that's true, retirement is a long way off.

I do not have a huge cash hoard to put into a tiny-dividend fund/stock/etc., and I don't just want price appreciation so I can sell and put the money into an annuity. Am I asking this at the wrong place?
awval999
Posts: 1254
Joined: Fri Apr 08, 2011 10:17 pm

Post by awval999 »

If you want to retire on your 30th birthday I hope you already have a very large headstart in the range of 3-5MM.
User avatar
HomerJ
Posts: 15983
Joined: Fri Jun 06, 2008 12:50 pm

Re: Picking stocks isn't gambling

Post by HomerJ »

pongun wrote:a value approach with discipline, dollar-cost averaging, plentiful dividends and lots of research can often do better.
I don't believe this to be true.
I have the time. I have the interest.
There are people whose whose PhDs are in this subject, who work as professionals, 60 hours a week studying the market, and they can't consistently pick the stocks that will do better than the market.

But you think you can?

Maybe you're the one in a million... (1 in million skill or 1 in a million luck). But maybe not.
I hate mutual funds. Some overpaid elite making my decisions and taking a cut of my profits sounds too much like another tier of government (as if I don't have enough of those demanding things of me already). From the research I've seen, such as in Graham's Intelligent Investor, mutual funds underperform the market by roughly the amount of their fees (a good reason for ETFs, which are often computerized and tend to have tiny fees).
Yes, we dislike many mutual funds too... That's why many of us use index funds or ETFs. Vanguard's Total Stock Market Index Fund (Admiral Shares) has an expense ratio of 0.07%... That is, if you have $100,000 invested with them, it costs you $70 a year.

That's right $70 a year... for $100,000 invested... It doesn't get much closer to free than that...
I don't just want a stock-market savings account. I want to own things, not just pool my resources with everybody else.
Well, I suggest you read "The Four Pillars of Investing" and other good books on our book list... http://www.bogleheads.org/readbooks.htm

Strange it as sounds, pooling your resources and owning ALL the stocks in a broad index fund actually does better than 75%-80% of actively directly stock mutual funds...

So, it's not really a dumb bet to just take the market's average return, when trying to beat the market is pretty difficult.
User avatar
Random Musings
Posts: 5904
Joined: Thu Feb 22, 2007 4:24 pm
Location: Pennsylvania

Post by Random Musings »

Most active funds who have financial analysts have a hard time outperforming those bland indices in the long run, risk adjusted.

The most likely way you can "win", that is to generate alpha that is statistically significant on a risk adjusted basis, is most likely luck via security selection in a concentrated portfolio.

Another way is to buy funds (like DFA) that ignore certain "bad" anomolies that always pop up. But that seems boring to the OP.

RM
luckyduck288
Posts: 65
Joined: Tue Dec 08, 2009 7:55 pm

Post by luckyduck288 »

You may think you aren't talking about luck, but that is really what it is. Fundamental analysis sounds fancy and all, but it doesn't give any reliable returns. Look at Burton Malkiel's A Random Walk Down Wall Street. He spends an entire chapter discussing why fundamental analysis fails.

I don't think you are talking about day-trading. Even when you look at long-term holding, picking individual stocks has an element of luck. No one knows what the future holds. How many Dow Industrials companies from the 1950s are even still in business? No one can foresee which companies will be the most profitable let alone which will even still exist 10, 20, 30 years from now.

You are right to want to minimize losses by minimizing transaction costs, taxes, fees, etc. Those are all good things to do.

Real returns over the past 80 years give some indication of what could be expected over the next 80, but it would be unwise to assume they will be higher. It seems more likely to me that they will be the same or lower. But, again, no one knows. One view of the efficient market hypothesis says, basically, today's prices have already discounted the price to the "right" one based on the market's assessment of future income and price growth. Finding stocks at true discounts to real value is a very very hard thing to do.
User avatar
Scott S
Posts: 1651
Joined: Mon Nov 24, 2008 3:28 am
Location: CID

Post by Scott S »

Interesting that you should come onto The Bogleheads Forum and call us "trolls" when we pooh-pooh the idea of picking stocks. :lol:

Read this: http://www.bogleheads.org/wiki/Boglehea ... philosophy and this: http://www.bogleheads.org/wiki/Indexing

- Scott
User avatar
HomerJ
Posts: 15983
Joined: Fri Jun 06, 2008 12:50 pm

Re: Perhaps

Post by HomerJ »

pongun wrote:The way I see it, somebody has to be the best. Why not me?
So what happens if you pick the wrong stocks?
Maybe I'm taking the wrong tack here. I know that the best way to do well is to lose as little money as possible through:

1. Unnecessary transaction costs
2. Taxes
3. Fees
4. Realized losses due to liquidating during a "down" time
These are all good.
I hold for the long term, and I want to buy at great discounts for a margin of safety. I'm really only interested in buying companies that will pay me solid dividends for decades to come
Our point is that it's very hard to tell when a company is trading at a great discount. The last crash in 2008 saw quite a few blue-chip companies that had paid dividends for decades cut or eliminate their dividend.
I'm only asking for people's opinions on the best way to win here. Winning, in my case, means retiring as soon as possible on my dividend income with strong companies supporting me. "As soon as possible" for me means October 2nd, 2012 (my 30th birthday). I hate working some job and making a company rich instead of letting a company make me rich.

Is Graham's hypothesis of 6% per year returns really the best we can do over the long term? If that's true, retirement is a long way off.
Umm... yeah, retirement is usually farther off than someone's 30th birthday... I'm not sure what to tell you...

There's no get-rich-quick and retire at 30 strategies on this board.
KyleAAA
Posts: 8756
Joined: Wed Jul 01, 2009 5:35 pm
Contact:

Re: Perhaps

Post by KyleAAA »

pongun wrote: I'm only asking for people's opinions on the best way to win here. Winning, in my case, means retiring as soon as possible on my dividend income with strong companies supporting me. "As soon as possible" for me means October 2nd, 2012 (my 30th birthday). I hate working some job and making a company rich instead of letting a company make me rich.
Hmmm, so in a little over a year you want to be a multimillionaire by investing in the stock market? Nobody is that good. Unless you're already a millionaire to begin with.
pongun wrote: Is Graham's hypothesis of 6% per year returns really the best we can do over the long term? If that's true, retirement is a long way off.
Yes.
User avatar
Higman
Posts: 227
Joined: Wed Aug 20, 2008 7:51 pm

Post by Higman »

I would suggest you read “The Little Book of Value Investing” by Christopher H. Browne of Tweedy Browne. He writes about a couple dozen steps he uses to evaluate a value stock. He runs the Tweedy Browne Value Fund (TWEBX). This book convinced me that I was not up to doing all the work required to select stocks properly. So now I’m all in index funds. Also FYI his fund has greatly underperformed the Vanguard S&P Index (VFINX) over the past 10 years. So much for extensive research!

Good luck.
hsv_climber
Posts: 3969
Joined: Tue Sep 22, 2009 7:56 pm

Re: Picking stocks isn't gambling

Post by hsv_climber »

pongun wrote:mutual funds underperform the market by roughly the amount of their fees (a good reason for ETFs, which are often computerized and tend to have tiny fees).

ETFs are cool. However, a value approach with discipline, dollar-cost averaging, plentiful dividends and lots of research can often do better. I have the time. I have the interest. I don't just want a stock-market savings account. I want to own things, not just pool my resources with everybody else.
Good luck in your quest. Maybe you are the world's next Peter Lynch...

But you better educate yourself about the differences between ETFs and mutual funds, since your statements are incorrect.
User avatar
chuck-lyn
Posts: 294
Joined: Wed Apr 15, 2009 12:54 pm

Post by chuck-lyn »

If you insist on picking individual stocks, which I don't advise and which I think you will grow out of eventually, then look into stocks that offer dividend reinvestment programs (DRIPS). If you own one share in your name (not your broker) you can join the program and have your dividends reinvested automatically. These programs are great for dollar cost averaging a little bit at a time with no brokerage fees. This is the way many of us old timers used to invest before no load, low cost index funds were invented.

Cheers,

charlie
livesoft
Posts: 75084
Joined: Thu Mar 01, 2007 8:00 pm

Re: Picking stocks isn't gambling

Post by livesoft »

pongun wrote:I I don't buy stocks to sell them- I buy them for income. I haven't sold since 2007, despite the "downturns" and "meltdowns" this market thing has had since then.
What? You mean you haven't done any tax-loss harvesting to make you some easy money?
I hate mutual funds.
Have you tracked your performance head-to-head with several index mutual funds and/or ETFs? I'm curious if you can document what has happened.
Wiki This signature message sponsored by sscritic: Learn to fish.
marbles
Posts: 37
Joined: Mon Mar 15, 2010 1:19 pm

Re: What should I look for in a stock?

Post by marbles »

marbles wrote:
pongun wrote:
So what do you guys think? What should I be looking for in regard to selecting shares of common stock? I'm an enterprising investor with a solid cash hoard and the interest to read annual reports and other statements- no widows and orphans here.

Thanks.
There is only one sure way to do this.
1-Buy a good stock
2-Wait for it to go up
3-If it don't go up, don't buy it
The sure way to buy stocks quoted above is from a wise old philosopher, you might have heard of him. Will Rogers

There is another famous quote attributed to him that might fit your situation.

--inflammatory quote deleted--

How about we use " A fool and his money are soon parted"

If I were you, I would look hard at both quotes.
Last edited by marbles on Mon Aug 22, 2011 7:31 pm, edited 1 time in total.
User avatar
bigROI
Posts: 217
Joined: Tue Jun 15, 2010 9:08 am

Post by bigROI »

If I had the assets to play a percent or two I would go after sectors. This just blends a lot of business with something I think we have to have regardless of economic state. So say you had a million in Vanguard and had a pretty good asset allocation. To have a little fun, and I mean a little fun. 10k in Energy, Health Care and maybe Real Estate. This would be 3% of the total egg. This would be as far as I would go with it, the rest (considering a 70/30 portfolio) would be split between the total stock and total international stock and maybe 1-2% in the small cap blend. Again I would much rather go after a sector then a individual stock - but only if I could lose it all and not be affected and only after I had the rest of the portfolio in a state that could cover my behind.
A penny saved is much more then a penny earned when you consider the tax/SS/medicare cut.
User avatar
BruceM
Posts: 1845
Joined: Fri Aug 08, 2008 1:09 pm
Location: Manzanita, Oregon

Re: Picking stocks isn't gambling

Post by BruceM »

pongun wrote:I had no idea how many trolls there were on this forum.
Because they don't tell you what you want to hear?
pongun wrote:I don't buy stocks to sell them- I buy them for income. I haven't sold since 2007, despite the "downturns" and "meltdowns" this market thing has had since then. I just want to own great companies and really be a part of something.
I don't think you're an income investor....I think you value the realized gains of dividends over pure growth. This approach seems pretty popular in this particular market. It was very UNpopular during the 1990s market...and it will be unpopular again..someday.

Income investing, as I previously briefly described it, is entirely different. If you are not retired and seeking reliable income, you probably should not be an income investor.
pongun wrote: ETFs are cool. However, a value approach with discipline, dollar-cost averaging, plentiful dividends and lots of research can often do better. I have the time. I have the interest. I don't just want a stock-market savings account. I want to own things, not just pool my resources with everybody else.
I don't want you to take this wrong...but your investment philosophy is immature. You are clearly either young or inexperienced or both. You CANNOT outperform the markets consistently overtime. If individual market returns over some extended period for all investors were graphed, only a very few would be to the right of the unmanaged market index...and these are likely going to be those who do this, day in and day out, year after year as their ONLY job. There are thousands if not tens of thousands of such persons..that's your competition.

All of us, or at least myself, went through this phase where I thought I was smart enough to pick enough winning stock to outperform. I occasionally hit the right stocks, but more often than not, what I thought would be a consistent performer turned out to be a poor performer. I took years before I finally convinced my ego I could not outperform.

You'll have to figure this out for yourself.

BruceM
Karamatsu
Posts: 1351
Joined: Mon Oct 27, 2008 2:42 am

Post by Karamatsu »

So what do you guys think? What should I be looking for in regard to selecting shares of common stock?
Back when I traded individual stocks I came to favour discounted cash flow models. I would start with a screener to identify likely candidates in each sector that I was interested in (avoid financials), then build a DCF model for the ones that looked most promising. You need a lot of data and time, but it sounds like you don't mind. In the end you will have both a notion of value and a target price. Then if you decide to invest, you must keep up with all of that information as time goes on, and adjust your model accordingly.

I think it's important to build the model yourself, rather than just take a number from some screener, because the process is never objective. If you build the model yourself you will know where the hand-waving is being done, and can factor that in. Spreadsheets or software you write yourself are great for this because they allow you to play "what if" games and see how much of a margin of safety you have. If you're not familiar with DCF, have a look at the Streetsmart Guide to Valuing a Stock or similar books to start.

Another thing to do is to read the company reports from services like S&P (or whatever your broker gives you access to) on the companies you have identified. Do your valuation first, then compare with theirs and try to understand why it's different. Also the reports may give you insights on industry trends that aren't in company reports. It's an art, not a science!

For what it's worth, I don't invest in very many individual companies any more unless it's "old school" investing that includes not just money but also time and effort. Otherwise I just don't have the time for this kind of analysis any more. My interests are elsewhere. But I do appreciate people who do fundamental analysis, and if nothing else, this kind of valuation process will teach you a lot about what makes the companies tick. It's good knowledge to have. You can also combine approaches. You could, for example, establish an AA based on asset classes, the divide the equity portion into a base of X% broad index ETFs and (1-X)% individual stocks. You have total freedom there, so why not? Eliminating company/industry/sector/country risk is no small thing.

Good luck!
User avatar
rob
Posts: 3487
Joined: Mon Feb 19, 2007 6:49 pm
Location: Here

Post by rob »

Square peg.... Round hole

Maybe try hypertraders.com and/or crystalballgazing.com
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
yobria
Posts: 5978
Joined: Mon Feb 19, 2007 11:58 pm
Location: SF CA USA

Re: Picking stocks isn't gambling

Post by yobria »

pongun wrote:I had no idea how many trolls there were on this forum. I don't buy stocks to sell them- I buy them for income. I haven't sold since 2007, despite the "downturns" and "meltdowns" this market thing has had since then. I just want to own great companies and really be a part of something.

I hate mutual funds. Some overpaid elite making my decisions and taking a cut of my profits sounds too much like another tier of government (as if I don't have enough of those demanding things of me already). From the research I've seen, such as in Graham's Intelligent Investor, mutual funds underperform the market by roughly the amount of their fees (a good reason for ETFs, which are often computerized and tend to have tiny fees).

ETFs are cool. However, a value approach with discipline, dollar-cost averaging, plentiful dividends and lots of research can often do better. I have the time. I have the interest. I don't just want a stock-market savings account. I want to own things, not just pool my resources with everybody else.
That link to the Bogleheads book list once again is:

http://www.bogleheads.org/readbooks.htm

Why not educate yourself regarding the basics of investing? It takes only a few hours.

Nick
Jacobkg
Posts: 700
Joined: Sat May 23, 2009 7:32 pm

Post by Jacobkg »

I think the best approach would be to back up just a little and make sure we understand your goals so we we can give you advice tailored for you and not the average investor.

If you don't mind answering just a few questions:

1) How much money in income do you think you will need your first year of retirement?

2) What size portfolio will you need to expect that you will be able to take that much income?

3) If your investments do very well, how long do you think it will take you to acquire the amount from question 2.

If you have trouble answering these questions to your satisfaction, there are many forum members that can help you (without you needing to give out any sensitive personal information).

I look forward to your reply.

Best,
Jacob
TigerNest
Posts: 374
Joined: Mon May 10, 2010 12:58 pm

Re: Perhaps

Post by TigerNest »

Morgan wrote:To illustrate this, W. Buffet is the richest investor in the world. It therefore stands to reason he is both the luckiest and the smartest investor simultaneously. His average rate of return over his lifetime is something like 23%.

Now, people compare his performance to the market average. This is incredibly disingenuous. W. Buffet has frequently invested in small value stocks and other similar asset classes, which, as I said before, are very risky and have one of the highest rates of return over very long periods e.g. 18%.
More importantly, Buffett buys large enough stakes in companies so that he has control.

Why is that important? Because he gets inside knowledge on the returns that each company's capital projects will meet. If they don't meet his stringent standards, he will not allow management to invest in the project, and instead ask them to return cash to the main company, where it will be re-allocated to projects in other companies and divisions that do.

This is where he eeks out that extra return. Markets aren't good at this, because management teams are not incentivized to return cash to shareholders. If a board sees that they might be able to make a 12% rate of return on a new factory, they're not thinking that some other company can make a 19% return by building a boat. If a single saavy shareholder controls both companies, they can re-allocate the cash to the 19% project. That, I believe, is the Buffett model.
rylemdr
Posts: 352
Joined: Wed Jun 15, 2011 6:10 am

Post by rylemdr »

I think you might find answers you really want to hear somewhere else..
User avatar
sergeant
Posts: 1705
Joined: Tue Dec 04, 2007 11:13 pm
Location: The Golden State

Post by sergeant »

The op joins yesterday and calls us trolls? :shock:
AA- 20+ Years of Expenses Fixed Income/The remainder in Equities.
User avatar
dnaumov
Posts: 495
Joined: Tue Jul 27, 2010 6:04 pm
Location: Finland
Contact:

Re: Picking stocks isn't gambling

Post by dnaumov »

pongun wrote:I had no idea how many trolls there were on this forum.
You join a Boglehead forum, ask for stockpicking advice and and call others trolls? How does this work?
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: What should I look for in a stock?

Post by YDNAL »

pongun wrote:I hate mutual funds. Some overpaid elite making my decisions and taking a cut of my profits sounds too much like another tier of government (as if I don't have enough of those demanding things of me already). From the research I've seen, such as in Graham's Intelligent Investor, mutual funds underperform the market by roughly the amount of their fees (a good reason for ETFs, which are often computerized and tend to have tiny fees).
pongun,

You (and only you) choose to "allow anyone to make your decisions." What do you think is an Index mutual fund?

1. Sign-up to get what you want - nothing more, nothing less.
  • a. S&P 500 Index? - sign-up for that.
    b. Total Market Index? - sign-up for that.
    c. High dividends? - sign-up for that.
2. Pay as much/as little as you want - there are plenty of choices.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
Topic Author
pongun
Posts: 35
Joined: Mon Aug 22, 2011 3:30 am

Moo

Post by pongun »

Okay, I've a lot to answer for. Yes, I'm a bit immature when it comes to investing. I still don't see how any investment that doesn't pay cash (ie dividends, rents, interest, residuals) can ever be worth anything. I don't want to have to sell something to make money. That's my job, not my investing.

I don't care about being a multimillionaire. I just want cash flow. I need to research this DCF thing in depth- thanks to the person who suggested that.

In response to Jacob's questions (and I'm glad he's seeking to understand my situation and thought process):

1. I'll need $17.5k gross my first year of retirement.

2. At 20% dividends (my target), I'll need $90k. At 10% dividends (the sigh of reality), I'll need closer to $200k.

3. If I continue to save and invest fairly well, I should have this by about the middle of 2012. I have a trump card in that I can sell/mortgage out a piece of real estate I'm developing for a major chunk of that money. Otherwise it'll likely be late 2015 :(


I've never had a problem discussing my money. In fact, some folks say I talk TOO much about it. When I do well, I'm proud of my accomplishments. When I do poorly I'll give anybody advice on how NOT to do something, free of charge. Yeah, I've had more of the latter than the former times.

As far as the efficient market theory, I think that's misinformed on its best day. Markets are composed of buyers and sellers, not just algorhythms. While the methods are computerized today, the momentary and irrational greed and fear are the why. People sell when stocks go down and buy when stocks go up- Well, I don't, but some people say I'm not a person. 8-|

I believe I can find a strong company that pays a strong dividend and will continue to do so for a long time. If I can get a great deal on it, I will invest significant effort into doing so.

However, since the overwhelming majority of people here are suggesting index/mutual funds, do you know one that pays a high dividend?
User avatar
HomerJ
Posts: 15983
Joined: Fri Jun 06, 2008 12:50 pm

Re: Moo

Post by HomerJ »

pongun wrote:2. At 20% dividends (my target), I'll need $90k. At 10% dividends (the sigh of reality), I'll need closer to $200k.
I believe I can find a strong company that pays a strong dividend and will continue to do so for a long time. If I can get a great deal on it, I will invest significant effort into doing so.
There is no way you can find a strong company that pays a 20% or even a 10% dividend.

Investing a ton of money into companies that pay such high dividends is a hugely risky move, and very likely to leave you broke.

You might as well just retire in Vegas, and try to live off your blackjack winnings.

Instead of retiring at 30, why don't you switch careers and do something you actually like... If you only need $17.5k gross to get by, you can do almost any job, and make enough...

So find a job that you can enjoy and see where that takes you.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: Moo

Post by YDNAL »

pongun wrote:Okay, I've a lot to answer for. Yes, I'm a bit immature when it comes to investing. I still don't see how any investment that doesn't pay cash (ie dividends, rents, interest, residuals) can ever be worth anything. I don't want to have to sell something to make money. That's my job, not my investing.

1. I'll need $17.5k gross my first year of retirement.

2. At 20% dividends (my target), I'll need $90k. At 10% dividends (the sigh of reality), I'll need closer to $200k.
pongun, you have received misinformation. Where do you think you can get 20% or even 10% dividends?

A best value (currently) among dividend-paying companies is Vale SA (VALE). It has a projected yield of 1.8%.
http://dynamicdividend.com/dividend-values-2011/
http://finance.yahoo.com/q?s=vale&ql=1

To get "$17.5K gross" income you need roughly $875,000 at a 2% yield. How does that sound to you?
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
hsv_climber
Posts: 3969
Joined: Tue Sep 22, 2009 7:56 pm

Re: Moo

Post by hsv_climber »

YDNAL wrote: pongun, you have received misinformation. Where do you think you can get 20% or even 10% dividends?

A best value (currently) among dividend-paying companies is Vale SA (VALE). It has a projected yield of 1.8%.
http://dynamicdividend.com/dividend-values-2011/
I am not sure what this guy (at the link) mean by "best value", but there are stocks that pay ~20% dividends.
I've just ran Yahoo stock screener to verify that.

Here is one of them (19.40% dividend yield).
http://finance.yahoo.com/q/ks?s=AGNC+Key+Statistics

Obviously, return of your money might be more important than return on your money when investing in these companies.
YDNAL
Posts: 13774
Joined: Tue Apr 10, 2007 4:04 pm
Location: Biscayne Bay

Re: What should I look for in a stock?

Post by YDNAL »

hsv_climber wrote:
YDNAL wrote:pongun, you have received misinformation. Where do you think you can get 20% or even 10% dividends?

A best value (currently) among dividend-paying companies is Vale SA (VALE). It has a projected yield of 1.8%.
http://dynamicdividend.com/dividend-values-2011/
I am not sure what this guy (at the link) mean by "best value", but there are stocks that pay ~20% dividends.
I've just ran Yahoo stock screener to verify that.

Here is one of them (19.40% dividend yield).
http://finance.yahoo.com/q/ks?s=AGNC+Key+Statistics

Obviously, return of your money might be more important than return on your money when investing in these companies.
This is a REIT. Diluted EPS is $6.53 and paid $5.60 trailing.

Edit: to update the subject line.
Last edited by YDNAL on Wed Aug 24, 2011 10:37 am, edited 1 time in total.
Landy | Be yourself, everyone else is already taken -- Oscar Wilde
partisan
Posts: 150
Joined: Fri Dec 18, 2009 12:34 am

Re: Moo

Post by partisan »

pongun wrote:Okay, I've a lot to answer for. Yes, I'm a bit immature when it comes to investing. I still don't see how any investment that doesn't pay cash (ie dividends, rents, interest, residuals) can ever be worth anything. I don't want to have to sell something to make money. That's my job, not my investing.

I don't care about being a multimillionaire. I just want cash flow. I need to research this DCF thing in depth- thanks to the person who suggested that.
If you want to invest in stocks you need to think like a businessperson. Here's an example:

I present you this opportunity to open a company in a prime location, it will require you to invest $500k upfront to get things running, there are no competitors in the area yet.

Each year the business will throw off $100k in earnings (20% net margin) you have two choices:

1)Reinvest in the business roll out new products and upgrading facilities. Each dollar of earnings you reinvest in the business returns 20% (20% ROE).

2) Pay yourself a dividend of $100k to get the cash you covet.

After 10 years you either have a business worth $3m (500k + 2.5m in growth) or $1m in cash from dividends. The $3m business is now throwing off $600k a year, you would need a 60% dividend rate on your $1m to equal it.

During those 10 years the business didn't throw off any cash, it was just reinvested in the business, so in your view the business is worthless?

I do a bit of stock investing myself and like nisi's post mentioned it took a LOT of research/reading/studying etc. I'd be scared to total all of the hours up and divide my return by it, it's probably negative (I've been at this for years.) But I enjoy it, and the reason I enjoy it is I enjoy business and understanding how and why a business works. Learning valuation is secondary to understanding business. Why is one company able to reinvest at 15% verses 20%. I should also note that in my day job (I'm not a professional investor) I can use these skills to help my clients as well so all is not lost.
luckyduck288
Posts: 65
Joined: Tue Dec 08, 2009 7:55 pm

Re: Moo

Post by luckyduck288 »

pongun wrote: As far as the efficient market theory, I think that's misinformed on its best day. Markets are composed of buyers and sellers, not just algorhythms. While the methods are computerized today, the momentary and irrational greed and fear are the why. People sell when stocks go down and buy when stocks go up- Well, I don't, but some people say I'm not a person. 8-|
People sell and buy on every trade no matter the "direction" of the market. You say people sell when stocks go down, but who is buying those stocks? Someone has to be on both sides of each trade.

The fact that markets are composed of buyers and sellers is exactly why the price settles on the "correct" one. What is being traded has a future value (even if determining that value is incredibly difficult). An algorithm running on the computer is just a proxy for an actual human buyer or seller. The computer doesn't randomly trade just for fun. The market wouldn't make sense if stocks didn't represent something of real value to the people/computers involved.

My opinion is that the fear and greed you describe are just ways of saying the market is determining how rosy or bleak the future is going to be. If the outlook is scary, people get fearful that future returns are going to be poor, and the price must fall to compensate for reduced future returns. If the outlook is wonderful, then people assume that future returns must be higher than today, and the price must rise. This calculation of future outlook is going on continually every day with each and every trade.
Topic Author
pongun
Posts: 35
Joined: Mon Aug 22, 2011 3:30 am

Perhaps

Post by pongun »

As far as valuing a business goes, you forgot that if it could throw off $100k per year, I could easily take $20k for myself and reinvest $80k into that business... or another business that further diversifies my wealth.

If a business just keeps expanding, it looks like a cancer or something. If it doesn't pay me, why should I own it? I *never* want to sell, and you either get paid while you own it, sell it at some point to get paid or never get paid at all.

And when the person suggesting this hypothetical business remembers, they also said there wasn't any competition. In five years that's likely to change, and part of my adaptive strategy would be to diversify and find my market segment. At some point a business needs to stop growing or it becomes insanely large, unmanageable and prone to corruption (See Citibank).

AGNC is among my foremost holdings, matter-of-fact. But I have watched some REITs die a horrible death, despite the fact that I consider this to be a solid company. I also have a couple of other companies paying me in the 9-12% range, so it IS reasonable. Back in the day, some of my REITs (the now-dead ones) paid me in the 29-35% range.

I think it's condescending when a company gives me that "daddy knows best" impression, thinking they can produce a better return on my money than I can. Plus, getting the return of my money is a whole lot easier when they're *paying* me money instead of just saying, "oh, we're bigger and better than we ever were before" while the executive team takes ever-larger bonuses and buys ever-larger yachts.

I *only* consider the business itself when I buy a stock. But I believe a lot of folks see stocks as little more than crap to toss around like poker chips. I don't believe in a "right" price, just as I don't believe any opinion is purely "right" or "wrong." And let's please not veer into a discussion of ethics- I hope you know I'm referring to the subjectivity of opinions, not to whether Jeffry Dahmer was a good guy.
Jacobkg
Posts: 700
Joined: Sat May 23, 2009 7:32 pm

Re: Moo

Post by Jacobkg »

pongun wrote: In response to Jacob's questions:

1. I'll need $17.5k gross my first year of retirement.

2. At 20% dividends (my target), I'll need $90k. At 10% dividends (the sigh of reality), I'll need closer to $200k.

3. If I continue to save and invest fairly well, I should have this by about the middle of 2012.
Pongun,

Thank you for taking the time to answer my questions. That shows me that you are serious about your financial future.

Since your goal is to retire early, it is especially important for you to construct a portfolio that will be able to grow its income over time in order to keep up with inflation. You also want to make sure that your portfolio has the stability to last you for at least 40 years (so you don't run out of money when you get old).

Therefore, you will want to pick companies that won't just pay you a good dividend today, but will be able to keep paying you that dividend year after year (hopefully with it rising a bit each year as well). If you look back at which companies have done this consistently, you will find that these are companies like Johnson & Johnson, WalMart, Coca Cola, etc. You can find a good list here: http://www.standardandpoors.com/indices ... --p-us----.

If you look at the list (called the S&P Dividend Aristocrats), you find that these companies tend to have dividends averaging around 3-5%, with some reaching up to 6-8%. The reason why these dividends tend to be on the lower side is because companies with stable, growing dividends are in high demand and so the price of these stocks get bid up (and thus the yield gets bid down). Companies with yields above 10% tend to have high yields like that because there is something about the company that means it may not keep paying out such a high dividend into the future (otherwise it would have made the dividend aristocrats list).

Therefore, if your goal is to build up a stable portfolio of dividend-paying stocks, you should probably plan for a dividend yield in the range of 3-5%.

On the other hand, you could instead manage your portfolio more actively and move from stock to stock in order to find the ones with >10% yields and sell them before the yield drops. In my mind, that is a challenging path and one that I am not equipped to help you with. I will say that my personal belief is that this path comes with higher risk and thus a greater chance that your portfolio will not be able to last you for the 40+ years you will need it. Also keep in mind that even if you like managing a portfolio now, you may change your mind in 30 years, in which case you portfolio's yield will drop from >10% to 5% (as you move to a safer portfolio requiring less active management), which is an income drop you may not be able to stomach.

I wish you the best of luck with your endeavors and would be happy to answer any follow-up questions you may have.

Best,
Jacob
partisan
Posts: 150
Joined: Fri Dec 18, 2009 12:34 am

Post by partisan »

Just took a quick look at your AGNC

Does it concern you that they had 300k CFO had (24m) CFI and had to issue equity to make up the difference?

Looks like they invest in levered CMO's, what's the sensitivity to a fall in home prices, or a slight uptick in borrowing costs?

Have you done a deep dive into the portfolio?

This reminds me of Allied Capital written up by David Einhorn in "Fooling Some Of The People All Of The Time", excellent book by the way.

Not trying to dis you or anything, just wondering how deep you've gone on this stuff, for all I know you're a MBS analyst, I'm just curious.

Here is an EXCELLENT post by a MBS analyst about a company similar to AGNC, Gramery Capital. This guy went deep diving, reading all of the term sheets etc, lays out his thesis here: http://variantperceptions.wordpress.com ... a-mystery/
http://variantperceptions.wordpress.com ... ment-team/
http://variantperceptions.wordpress.com ... oose-ends/
SamB
Posts: 823
Joined: Mon Mar 12, 2007 3:17 pm

Post by SamB »

There is nothing wrong with picking individual stocks as long as you do not take your own advice and instead sell it to other people. This is a proven strategy for wealth accumulation. Remember, don't follow your own advice, and you can retire early.

Sam
luckyduck288
Posts: 65
Joined: Tue Dec 08, 2009 7:55 pm

Re: Perhaps

Post by luckyduck288 »

pongun wrote: I think it's condescending when a company gives me that "daddy knows best" impression, thinking they can produce a better return on my money than I can.
Why do you invest with them in the first place if you think you can get a better return on your money than them?
Post Reply