Rules For Better Investing
Here are seven simple rules that will help you make better investing
Focus on Your Stocks
Forget trying to predict which way interest rates or crude oil prices
are heading. Instead, focus on your stocks. Start by reading the
transcripts of the analyst conference calls following each quarterly
earnings report. You can find many of them on Seeking Alpha (seekingalpha.com).
Spending around 10 minutes reading a transcript will give you tremendous
insight about a firm’s management competence and outlook.
Sell When Company Cuts
Stocks prices reflect expected earnings growth. When a firm cuts
earnings forecasts, its share price usually takes a hit. Sell anyway.
Your first loss is your best loss. Things will get worse. Management
always portrays problems as temporary and easily fixable. But bad news
often leads to more bad news. Sell at the first sign of faltering
Sell When Competitor Cuts
Consider yourself lucky when a competitor announces the bad news first.
Analysts will tell you the problems were company specific. But they
weren’t. Everybody in the same industry faces the same problems. Sell
before your company issues similar bad news.
Never Average Down
Averaging down means buying more shares after a stock that you’ve bought
went down instead of up. Say you pay $20 per share, then your stock
drops to $10. You’re thinking you could cut your breakeven to $15 by
buying an equal number of shares at $10. Bad idea! The stock dropped
because something went wrong. Chances are; it falls even further.
Many stocks with great stories have come and gone over the years. But,
as said earlier, eventually share prices reflect earnings. Stocks that
are burning cash this year will probably repeat that story next year.
Check Yahoo’s (finance.yahoo.com)
Analyst Estimate report (Analyst menu) to see analyst’s earnings
estimates for the current and next quarters and fiscal years. Require
positive numbers for the current and next fiscal year’s earnings
Not long ago, biotech stocks were hot. Now they’re not. Fast-trading
hedge funds rule this market. Industries quickly move in or out of
favor. Don’t put more than 15% of your investable cash into any single
industry, e.g. social media, pharmaceutical makers, online retailers,
Pay Too Much
It’s tempting to overpay for a hot stock. Trees don’t grow to the sky.
Pay attention to valuation. The price/earnings ratio (P/E) is the
current share price divided by the last 12-month’s per-share earnings.
It’s the most popular valuation measure. But, for fast growers, you’re
better off using forecast future earnings instead of historical numbers.
Yahoo’s “forward P/E,” found on its
Statistics report, compares the current share price to next year’s
Forward P/E ratios in the 10 to 20 range are reasonable for established
steady growers such as Apple or Verizon Communications. But for faster
growers such as Alphabet (Google) or Facebook, 20 to 30 is reasonable.
Whatever you do, avoid stocks with forward P/Es above 40.
Those are my ideas. Over time, you’ll probably modify them to suit your
own investing style. That’s okay, as long as you follow them. Successful
investing is more about discipline than fancy analysis.