To value someting, in financial terms, is going to be quite a task for most of us. Sure you can go on the web and get forecasting models and divde the firms value by share outstanding but that takes so much effort. The best way for the individual investor to decide which securities they are willing to buy outside of the ETF or mutal fund they already own is to look at the vitality of the company. Listed below is a simple value model found online.
http://www.moneychimp.com/articles/finworks/fmvaluation.htm
You may wonder what else could help you make a decision for picking a stock. There are several things that can indicate what you may expect from a security.
- The P/E ratio often times will indicate what kind of price movements you may expect from the stock you like. The P/E is often an indicator of how wild of a price change you may expect because it is linked to the the price earnings expectations of investors. Thus, if announced earnings are a disappointment on, say, Apple (NasDaq:AAPL) then one may see a stock value plummet by a few percentage points because investor confidence has decreased.
- A high P/E is considered a growth stock. A low P/E is considered a value stock. Historically value stocks out perform growth stocks.
While this is only a small piece of you valuation pie, this is the start to a long series of valuation tips that can help you, the normal investor, sort through all of the financial crap!
Thursday, January 24, 2008
Tuesday, January 22, 2008
Bears and Bull
After a great holiday weekend I found myself depressed at the market outlook for the week. In a perverted way I am at a ghastly realization in my life: like many other in the world, my happiness is sometimes derived of a series of letters and numbers that stream across my brain daily. I watch as AAPL scrolls across Bloomberg TV and I check my Blackberry regularly to see what USU is doing. Did I mention that I wake up before the sun rises over my little apartment in the city of Nashville to see if JOEZ has moved a few cents in the previous day's "after hours trading"?
Perhaps there is evidence of addiction there. But every time I inhale more information I feel like I am the king of my financial future, and now I realize that this addiction to information is a simple LIE! I, like many of you out there, must come to terms with an addiction that I have a major problem with and the lie that I have bought into that I can beat the markets.
Since when did my diploma read Princeton Business School? I am a CFA level I candidate. I have had a grand total of four classes on stocks and the same amount on debt and derivative instruments. And with that hardly amazing amount of experience, I have lulled myself into the belief that I can beat the masters of the game: the hedge fund managers, the technical analysts with 5 PhDs and the institutional wizards of financial tools.
After watching a great episode of Jim Cramer's Mad Money, I realize that many people have bought into this. Yes, that means you Cindy, mother of 9, from San Fran. And Bob from Michigan, even I know that buying 2 stocks of Google does not make you Warren Buffet. So here are some things we can all take into consideration....
1. Most likely we will only beat the market out of dumb luck, but that does not mean success.
- Yes, you made a good call on timing last June on AAPL with the iPhone but real success comes from long term gains.
2. You cannot day trade, do not even try.
- Day trading for the average Joe is not smart because you have two things working against you; poverty of time and availability AND uncle sam's little gift- short term capital gains tax.
3. Ten stocks is not diversification.
- True diversification is creating a portfolio where beta is not too far above or below 1.0. This can be achieved by buying index funds (google "spyder funds": a group of Equity Traded Funds) or by a mutual fund that has little to no load fee. (keep in mind that load fees often represent the management of these funds.)
4. Savings accounts are not overrated.
- Ask the trader that had an unrealized lose of 30% about savings. Would I rather have an E*Trade savings account with a guaranteed return of 5% per year or a mild stroke? I think I will take the bird in hand. I am not saying that one must be fully invested in boring bank notes, just some of your investment. Many calculate you risk propensity as 120- your age. My risk propensity would be 99% because I am 21 years old. The percentage should be the amount you have in risky instruments. That probably still leaves a percent or more for a small risk investment like a high yield savings account.
5. Try not watching the daily fluctuation.
- If you just leave your group of securities and other financial instruments alone you could be pleasantly surprised in a few months. Watching daily up and downs does not help your addiction.
So this week, as everyone tells you that you are stupid to not be in the market, they could be right. There could be some reward but remember, buying stocks are like buying groceries: sometimes they spoil and sometimes you can eat it all up while they are good. Good luck this week you warriors of insanity!
Perhaps there is evidence of addiction there. But every time I inhale more information I feel like I am the king of my financial future, and now I realize that this addiction to information is a simple LIE! I, like many of you out there, must come to terms with an addiction that I have a major problem with and the lie that I have bought into that I can beat the markets.
Since when did my diploma read Princeton Business School? I am a CFA level I candidate. I have had a grand total of four classes on stocks and the same amount on debt and derivative instruments. And with that hardly amazing amount of experience, I have lulled myself into the belief that I can beat the masters of the game: the hedge fund managers, the technical analysts with 5 PhDs and the institutional wizards of financial tools.
After watching a great episode of Jim Cramer's Mad Money, I realize that many people have bought into this. Yes, that means you Cindy, mother of 9, from San Fran. And Bob from Michigan, even I know that buying 2 stocks of Google does not make you Warren Buffet. So here are some things we can all take into consideration....
1. Most likely we will only beat the market out of dumb luck, but that does not mean success.
- Yes, you made a good call on timing last June on AAPL with the iPhone but real success comes from long term gains.
2. You cannot day trade, do not even try.
- Day trading for the average Joe is not smart because you have two things working against you; poverty of time and availability AND uncle sam's little gift- short term capital gains tax.
3. Ten stocks is not diversification.
- True diversification is creating a portfolio where beta is not too far above or below 1.0. This can be achieved by buying index funds (google "spyder funds": a group of Equity Traded Funds) or by a mutual fund that has little to no load fee. (keep in mind that load fees often represent the management of these funds.)
4. Savings accounts are not overrated.
- Ask the trader that had an unrealized lose of 30% about savings. Would I rather have an E*Trade savings account with a guaranteed return of 5% per year or a mild stroke? I think I will take the bird in hand. I am not saying that one must be fully invested in boring bank notes, just some of your investment. Many calculate you risk propensity as 120- your age. My risk propensity would be 99% because I am 21 years old. The percentage should be the amount you have in risky instruments. That probably still leaves a percent or more for a small risk investment like a high yield savings account.
5. Try not watching the daily fluctuation.
- If you just leave your group of securities and other financial instruments alone you could be pleasantly surprised in a few months. Watching daily up and downs does not help your addiction.
So this week, as everyone tells you that you are stupid to not be in the market, they could be right. There could be some reward but remember, buying stocks are like buying groceries: sometimes they spoil and sometimes you can eat it all up while they are good. Good luck this week you warriors of insanity!
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