Investing Articles

Article / Updated 08-03-2022

The vast majority of bond offerings are rather staid investments. You give your money to a government or corporation. You receive a steady flow of income, usually twice a year, for a certain number of years. Then, typically after a few years, you get your original money back. Sometimes you pay taxes. A broker usually takes a cut. Beginning and end of story. The reason for bonds’ staid status is not only that they provide steady and predictable streams of income, but also that as a bondholder you have first dibs on the issuer’s money. A corporation is legally bound to pay you your interest before it doles out any dividends to people who own company stock. If a company starts to go through hard times, any proceeds from the business or (in the case of an actual bankruptcy) from the sale of assets go to you before they go to shareholders. However, bonds offer no ironclad guarantees. First dibs on the money aside, bonds are not FDIC-insured savings accounts. They are not without some risk. For that matter, even an FDIC-insured savings account — even stuffing your money under the proverbial mattress! — also carries some risk. Interest rates go up, and interest rates go down. And whenever they do, bond prices move, almost in synch, in the opposite direction. Why? If you’re holding a bond that pays 5 percent, and interest rates move up so that most new bonds are paying 7 percent, your old bond becomes about as desirable to hold as a pet scorpion. Any rational buyer of bonds would, all things being equal, choose a new bond paying 7 percent rather than your relic, still paying only 5 percent. Should you try to sell the bond, unless you can find a real sucker, the price you are likely to get will be deeply discounted. The longer off the maturity of the bond, the more its price will drop with rising interest rates. Thus long-term bonds tend to be the most volatile of all bonds. Think it through: If you have a bond paying 5 percent that matures in a year, and the prevailing interest rate moves up to 7 percent, you’re looking at relatively inferior coupon payments for the next 12 months. If you’re holding a 5 percent bond that matures in ten years, you’re looking at potentially ten years of inferior coupon payments. No one wants to buy a bond offering ten years of inferior coupon payments unless she can get that bond for a steal. That’s why if you try to sell a bond after a period of rising interest rates, you take a loss. If you hold the bond to maturity, you can avoid that loss, but you pay an opportunity cost because your money is tied up earning less than the prevailing rate of interest. Either way, you lose. Of course, interest rate risk has its flip side: If interest rates fall, your existing bonds, paying the older, higher interest rates, suddenly start looking awfully good to potential buyers. They aren’t pet scorpions anymore — more like Cocker Spaniel puppies. If you decide to sell, you’ll get a handsome price. This “flip side” to interest rate risk is precisely what has caused the most peculiar situation in the past three decades, where the longest-term Treasury bonds (with 30-year maturities) have actually done as well as the S&P 500 in total returns. The yield on these babies has dipped from over 14 percent in the early 1980s to just a little over 3 percent today. Hence, those old bonds, which are now maturing, have turned to gold. Will this happen again in the next 30 years? Not unless long-term Treasuries in the year 2042 are being issued with a negative 8 percent interest rate. Of course, that isn’t going to happen. More likely, interest rates are going to climb back to historical norms. Interest rate risk has perhaps never been greater than it is today. You would be foolish to put your money into 30-year Treasuries and assume that you are going to get 11.5 percent a year annual return, as some very lucky investors have done over the last 30 years. Chances are, well . . . anything can happen over 30 years, but keep your expectations modest, please.

Article / Updated 08-03-2022

The vast majority of bond offerings are rather staid investments. You give your money to a government or corporation. You receive a steady flow of income, usually twice a year, for a certain number of years. Then, typically after a few years, you get your original money back. Sometimes you pay taxes. A broker usually takes a cut. Beginning and end of story. The reason for bonds’ staid status is not only that they provide steady and predictable streams of income, but also that as a bondholder you have first dibs on the issuer’s money. A corporation is legally bound to pay you your interest before it doles out any dividends to people who own company stock. If a company starts to go through hard times, any proceeds from the business or (in the case of an actual bankruptcy) from the sale of assets go to you before they go to shareholders. However, bonds offer no ironclad guarantees. All investments carry some risk, such as reinvestment risk. When you invest $1,000 in, say, a 20-year bond paying 6 percent, you may be counting on your money compounding every year. If that is the case — if your money does compound, and you reinvest all your interest payments at 6 percent — after 20 years you’ll have $3,262. But suppose you invest $1,000 in a 20-year bond paying 6 percent and, after four years, the bond is called. The bond issuer unceremoniously gives back your principal, and you no longer hold the bond. Interest rates have dropped in the past four years, and now the best you can do is to buy another bond that pays 4 percent. Suppose you do just that, and you hold the new bond for the remainder of the 20 years. Instead of $3,262, you are left with $2,387 — about 27 percent less money. This is called reinvestment risk, and it’s a very real risk of bond investing, especially when you buy callable or shorter-term individual bonds. Of course, you can buy non-callable bonds and earn less interest, or you can buy longer-term bonds and risk that interest rates will rise. Tradeoffs! Tradeoffs! This is what investing is all about. Note that one way of dealing with reinvestment risk is to treat periods of declining interest rates as only temporary investment setbacks. What goes down usually goes back up.

Article / Updated 08-02-2022

Some people are better at bargain hunting than others. What usually separates the clueless from the pros is that the pros know what something is worth. The same is true for finding bargains on Wall Street. You need to know what a stock is worth, and low price isn’t always a bargain. Value investors hunt for bargains, but they buy only after performing some careful research and crunching the numbers. When you spot a stock that seems to be underpriced, ask the following questions to determine whether it’s a real buy: Is this stock down due to market conditions? If the broader stock market is down, possibly due to an economic slowdown or recession, chances are good that most other stocks are down too. If the share price falls but the company’s fundamentals remain strong, this stock may be the bargain you’ve been looking for. (If the market is up but the stock is down, the stock isn’t necessarily a loser. The drop in share price may be an anomaly representing a good buying opportunity. Ask more questions.) When market conditions turn sour, a rational reason for indiscriminate selling is when investors experience a liquidity crisis. Desperate for cash but unable to sell their worst money-losing investments, investors in this situation sell what they can, typically their most liquid stocks and bonds. Often these may be their best investments, but the need for cash forces them to sell. This scenario provides a bargain for the value investor. Is this stock down because of sector news? If bad news comes out of one stock in the sector, traders may flee from stocks in the same sector. If a good company’s stock takes a hit because of another company’s misfortune, that’s a bargain waiting to happen. Is the stock down because it’s not in a sexy industry? At the peak of the tech bubble, anything that wasn’t a technology stock (pretty much anything that functioned as a part of the economy prior to 1980) was considered out of fashion, and their stock prices fell as a result. However, they continued to post earnings and revenue growth. The industrials, manufacturers, food processors, and other standard bearers became value stocks in the late 1990s. Value investors were rewarded for their patience and conviction when the tech bubble burst and investors returned to more traditional companies. Is this stock down because of problems specific to this company? If investors have fled for good reason, sell shares in the company if you own them or avoid buying if you don’t. However, keep in mind that the market tends to overreact and that some negative news can be very short-lived, especially if it’s not true. A passing bit of bad news can trigger a good buying opportunity, but if the news points out fundamental problems in the company’s success or operations, watch out. Be wary of the following: Declining sales or earnings Excessive debt Little or no cash flow Scandal Illegality, such as falsifying documents or insider trading If this stock has a lot of issues, the beautiful thing about the stock market is you don’t have to hang around. Money can stagnate or even rot in a dead stock, but if you sell and put the money into a true value stock, you may be able to recoup some of your losses.

Article / Updated 08-02-2022

Over the years, day traders have developed many different ways to manage their money. Some of these are rooted in superstition, but most are based on different statistical probability theories. The underlying idea is that you should never place all of your money in a single trade, but rather put in an amount that is appropriate given the level of volatility. Otherwise, you risk losing everything too soon. Calculating position size under many of these formulas is tricky stuff. That’s why brokerage firms and trading software packages often include money management calculators. Optimal F is only one method. There are other methods out there, and none is suitable to all markets all the time. Folks trading both options and stocks may want to use one system for option trades and another for stock trades. If that’s your situation, you have one big money management decision to make before you begin: how much money to allocate to each market. Optimal F The Optimal F system of money management was devised by Ralph Vince, and he’s written several books about this and other money management issues. The idea is that you determine the ideal fraction of your money to allocate per trade based on past performance. If your Optimal F is 18 percent, then each trade should be 18 percent of your account — no more, no less. The system is similar to the fixed fraction and fixed ratio methods, but with a few differences. The following figure shows the equation for finding the number of shares of stock, N, to trade according to the Optimal F method. F is a factor based on the basis of historical data, and the risk is the biggest percentage loss that you experienced in the past. Using these numbers and the current price, you can find the contracts or shares you need to buy. If your account has $25,000, your biggest loss was 40 percent, your F is determined to be 30 percent, and you’re looking at a stock trading at $25 per share, then you should buy 750 shares: The Optimal F number itself is a mean based on historical trade results. The risk number is also based on past returns, and that’s one problem with this method: it only kicks in after you have some trade data. A second problem is that you need to set up a spreadsheet to calculate it (so read Ralph Vince’s book if you want to try it out). Some traders only use Optimal F in certain market conditions, in part because the history changes each time a trade is made, and that history doesn’t always lead to usable numbers.

Article / Updated 08-02-2022

The Kelly Criterion is a method of management that helps you calculate how much money you might risk on a trade, given the level of volatility in the market. It emerged from statistical work done by John Kelly at Bell Laboratories in the 1950s. The goal was to figure out the best ways to manage signal-noise issues in long-distance telephone communications. Very quickly, the mathematicians who worked on it saw that there were applications to gambling, and in no time, the formula took off. Using the Kelly Criterion for trading is only one method. There are other methods out there, and none is suitable to all markets all the time. Folks trading both options and stocks may want to use one system for option trades and another for stock trades. To calculate the ideal percentage of your portfolio to put at risk, you need to know what percentage of your trades are expected to win as well as the return from a winning trade and the ratio performance of winning trades to losing trades. The shorthand that many traders use for the Kelly Criterion is edge divided by odds, and in practice, the formula looks like this: Kelly % = W – [(1 – W) / R] W is the percentage of winning trades, and R is the ratio of the average gain of the winning trades relative to the average loss of the losing trades. For example, assume you have a system that loses 40% of the time with a loss of 1% and that wins 60 % of the time with a gain of 1.5%. Plugging that into the Kelly formula, the right percentage to trade is .60 – [(1 – .60)/(.015/.01)], or 33.3 percent. As long as you limit your trades to no more than 33% of your capital, you should never run out of money. The problem, of course, is that if you have a long string of losses, you could find yourself with too little money to execute a trade. Many traders use a “half-Kelly” strategy, limiting each trade to half the amount indicated by the Kelly Criterion, as a way to keep the trading account from shrinking too quickly. They are especially likely to do this if the Kelly Criterion generates a number greater than about 20 percent, as in this example.

Article / Updated 07-19-2022

Many real estate investors pick inspectors as an afterthought or simply take the recommendation of their real estate agent. But inspect the property inspectors before you hire one. As with other service professionals, interview a few inspectors before making your selection. You may find that they don’t all share the same experience, qualifications, and ethical standards. For example, don’t hire an inspector who hesitates or refuses to allow you to be present during the inspection or won’t review the findings with you upon completion of the inspection. The inspection is actually a unique opportunity for most property owners and, because you’re paying, we strongly recommend that you join the inspector while he’s assessing your proposed purchase. What you learn can be invaluable and may pay dividends throughout your entire ownership. When an unscrupulous contractor later tries to tell you that you need to completely replumb your property, you can recall that your property inspection revealed only isolated problems that can be resolved inexpensively. (Of course, inspectors, especially ones who aren’t good, can make mistakes, so you should also dig into discrepancies raised by different real estate–related people. In other words, get a second opinion.) About half of the states now have a license or certification requirement, whereas a few only have trade practice guidelines. This regulation is all relatively new because in 2000 virtually no governmental licensing or supervision of inspectors existed. Regardless of whether your state has strict licensing or certification requirements, every real estate investor needs to look out for her own interests and look for telltale signs of potential problems. Red flags include inspectors who are affiliated with a contractor, offer a special discount if you call who they recommend, or credit their inspection fee toward work. Only consider full-time, professional inspectors. Hire an inspector who performs at least 100 comprehensive inspections per year and carries errors and omissions insurance. Such coverage isn’t cheap and is another key indicator that the person is working full-time in the field and is participating in ongoing continuing education. Many inspectors are licensed general contractors, but not all home inspectors have designations or credentials specifically relating to inspecting real estate. One of the best certifying trade associations for professional property inspectors is the American Society of Home Inspectors (ASHI), which was founded in 1976. In addition to home inspections, many ASHI members are qualified and experienced enough to assist you with your due diligence physical or structural exterior and interior inspection of multifamily residential properties and all types of commercial properties. You can find certified inspectors and more info about the inspection process including tips and checklists at the ASHI website. Some individuals or companies adopt names that at first glance may indicate adherence to certain professional practices. For example, a fictitious but potentially misleading name is “Professional Property Inspection Association.” Do some research to find the best state or regional association and one whose qualified members adopt a code of ethics. For example, in California, the California Real Estate Inspection Association is the group that offers education and designations for real estate inspectors. Review a copy of inspectors’ résumés to see what certifications and licenses they hold. A general contractor’s license and certification as a property inspector are important, but also find out whether they’ve had any specialized training and whether they hold any specific sublicenses in areas such as roofing, electrical, or plumbing. These can be particularly important if your proposed property has evidence of potential problems in any of these areas. For example, if a property has a history of roofing or moisture intrusion problems, an inspector who’s a general contractor and roofer is an extra plus. The inspection report must be written. To avoid surprises, request a sample of one of the recent inspection reports that has been prepared for a comparable property. This simple request may eliminate several potential inspectors but is essential so that you can see whether an inspector is qualified and how detailed a report he will prepare for you. Check out the following figures for a sample interior inspection checklist. Source: Robert S. Griswold Sample interior unit inspection checklist (page 2 of 2). The advent of digital photography is a boon to property inspectors and makes their sometimes mundane and difficult-to-understand reports come to life. Select a technologically savvy inspector and require her to electronically send you her report, including digital photos documenting all the conditions noted. Recently, some inspectors have begun using advanced, non-invasive technology via an infrared or thermal imaging camera to produce images of heat radiation and identify energy efficiency concerns and electrical issues, as well as moisture intrusion scans inside walls or around plumbing fixtures. With the report in the electronic realm, it’s a simple process to email this information as needed. Although the cost of the inspection should be set and determined in advance, the price should be a secondary concern because inspection fees often pay for themselves. Just like many other professional services, there is a direct correlation between the pricing of your inspection and the amount of time the inspector takes to conduct the inspection and then prepare the report. If the inspector only spends a couple of hours at your new 20-unit apartment building, the report will surely be insufficient and your money not well spent. Finally, require the finalists to provide the names and phone numbers of at least ten people who used the company’s services within the past six months. Randomly call and make sure that these clients were satisfied and that the inspector acted professionally and ethically.

Article / Updated 07-19-2022

Gold is a finite element (literally — it’s the symbol au on the table of elements) and has all the necessary qualities needed as money. It’s durable, portable, and divisible. It’s malleable enough to turn into coinage. It doesn’t decay or tarnish and is indestructible. In ancient times, it became an ideal medium of exchange and a store of value ever since. In short, it’s nearly an ideal form of money, especially when compared to other forms of money (such as paper and digital currencies). When you juxtapose gold against modern world currencies, such as the U.S. dollar, the euro, the British pound, and the Japanese yen, you come away with some compelling points. The following figure provides a snapshot of gold’s price performance since the beginning of this century (as of the first trading day in January 2000). Gold began in early 2000 at a price of $288, and when you measure its performance with the price in mid-2020 (June 30, 2020) — $1,817.50 — you get a 531 percent total gain (sweet!). But how well did gold do against other conventional investment assets? Take a look in the following sections. Gold versus the financial world in general So how did gold stack up versus the titans of the financial world? Gold’s “Tale of the Tape” Asset Price Jan. 2, 2000 Price June 30, 2020 Total Gain/Loss Dollar Amount $ Total Gain/ Loss Percentage % Gold $288.05 $1,817.50 $1,529.45 530.97% Silver $5.29 $18.58 $13.29 251.22% Dow Jones Industrial Average (stocks) $11,501.85 $25,812.88 $14,311.03 124.42% Nasdaq (Stocks) $4,186.19 $10,063.67 $5,877.48 140.40% S&P 500 (Stocks) $1,455.22 $3,100.29 $1,645.07 113.05% Average Savings acct* $100 $120.50 $20.50 20.5% Inflation** $1.00 $1.53 $0.53 more 53% * Assuming a savings account balance of $100 for comparison purposes. ** Inflation rate for the sake of comparison. What would $1.00 buy in January 2000, and what would it cost to buy that same item in June 2020? (source: www.bls.gov/data/inflation_calculator.htm) Well, well, well. The table speaks volumes about the past 20-plus years. How many people knew that gold — a dead rock — outpaced the stock market so dramatically?! Time to break it down: Gold crushed it! Generating a gain of more than 530 percent is awesome — who would have thunk it? It beat everything by a country mile. Our companion metal, silver, came in second place with a 251 percent gain — not too shabby! Next comes the primary stock indexes. Nasdaq came in at 140 percent, then the Dow Jones (DJIA) at 124 percent, with the S&P 500 index coming up at 113 percent. The savings account is there for those folks too skittish at investing and playing the safe route. But safety often means that you settle for a much lower return. In this case, you’re getting an average of 1 percent per year, ending up with 20.5 percent. And it didn’t beat inflation. Inflation — our yardstick and the nemesis of savers everywhere — was up 53 percent for the same time frame. The amazing thing is that the general public barely noticed the blistering performance of gold (and silver, too) during that time frame. The question is, how high can gold go once the general public starts to participate? Gold versus stocks versus currencies You see in the prior section how gold was the 800-pound gorilla in the battle royale versus other mainstream investment vehicles, but it’s important to measure gold versus its primary competitors such as stocks and currencies. In this, you’re comparing “apples to apples.” When you’re comparing gold to stocks, for example, I don’t advocate that you should be 100 percent in one or another. I could put on my “stock hat” and make a strong case for stocks in some economic conditions (such as the 1980s), and I could put on my “gold hat” and make the case that gold is superior in other conditions (such as 2020–2025). The bottom line is I think both stocks and gold are important and needed in your portfolio. The only thing is that you rebalance the percentages of your portfolio between regular stocks and gold-related investments. You keep more in stocks when times are good for stocks and more in gold when times are good for gold. But always have something in gold (say 2 to 5 percent of your investable assets at a minimum), even when it’s not doing as well because it excels as a hedge and a backup form of “portfolio insurance.” Sometimes you don’t see the market crash or financial crisis coming, and afterward you’ll be glad you were diversified and had some gold and/or silver on hand. Gold plays an important role as money and as a hedge against the issues of government-issued money, which is also referred to as fiat money. As this article is being written, all the major currencies — the U.S. dollar, the euro, the British pound, the yuan, the Japanese yen, and other currencies — are losing their value (depreciating) slowly but surely. Some currencies are rapidly losing their value such as those in Venezuela, Zimbabwe, and Argentina (more to come!). The main reason currencies lose their value is because they can easily be overproduced by the country’s central bank and typically at the behest of the country’s political leaders. Because paper currencies are easily inflated, each unit of currency (dollar, euro, yen, and so on) loses value — not so for gold. As the data from the World Gold Council (WGC) confirms, the mining of gold typically adds about 2 percent to the above-ground global supplies of gold. It’s very difficult to extract it from the earth, which is part of the reason gold can retain its value versus central bank–issued currencies. You can use this article to find out how gold stacks up as a tangible investment amidst all the investment choices available today. Part of what makes “money” retain value is scarcity. If it ceases to be scarce and easily created (usually leading to overcreating it), then this leads to its diminishing value. Some gold experts even make it a big point of their speeches that a paper/digital currency will always revert to its intrinsic value, which is “zero.” Gold, meanwhile, outlived every currency in the past two millennia and likely will do so in this millennium.

Article / Updated 07-19-2022

If you’re more interested in cannabis-focused exchange traded funds (ETFs), venture capitalist (VC) funds, or private equity (PE) funds, than you are in individual cannabis stocks, you can find the best tools for tracking down cannabis funds. Most websites and online brokers that feature stock screeners also include an ETF screener, but they rarely include screeners specifically for cannabis ETFs or for VC or PE funds, which makes the Daily Marijuana Observer’s investment fund databases so unique and so useful to you as a cannabis investor. Before you invest in any fund, research the fund manager as thoroughly as you would research the founders and managers of a business. Make sure the person knows the cannabis industry inside and out. A fund’s return depends directly on the people who are choosing where to invest the fund’s capital. What to screen for Screeners typically feature a variety of filters that enable you to focus on securities based on different parameters, such as region or country, market capitalization, price, sector, and industry. You set the parameters and execute your search, and the screener displays a list of only those securities that match the specified parameters. Not all screeners use the same parameters. In fact, the two screeners covered in this article that are most useful for identifying cannabis investment opportunities support very few of the parameters I describe next. However, if you use one screener to find a stock and another to dig up more details about it, having an understanding of these parameters will help. In the following section, I use the Equity Screener at Yahoo! Finance as an example. First up: The major categories When you first access a market screener, you usually enter some general parameters first to start the process of narrowing your list of candidates. For example, if you go to Yahoo! Finance, click Screeners in the menu at the top, and click Equity Screener, you’re prompted to specify the following parameters (see the following figure): Region: Here you enter data about your chosen country to refine your search. If you’re looking for U.S. stocks, the choice, of course, is “United States.” For cannabis stocks, you probably want to focus on the U.S. and Canada, and perhaps Australia, Germany, and Israel. Market Cap: In the Market Cap category, you choose the size of the company—Small Cap, Mid Cap, Large Cap, or Mega Cap. Looking for growth potential? Go for small cap or mid cap. Looking for more safety? Go to large cap or mega cap. Price: In the Price field, enter a minimum and maximum. For example, if you’re interested specifically in penny stocks, you can enter a maximum of $5. Sector and Industry: A sector is a group of interrelated industries. For example, the health care sector has varied industries, such as hospitals, medical device manufacturers, pharmaceuticals, drug retailers, and so on. After choosing a sector, you can narrow your search further by specifying an industry within that sector; for example, if you choose health care as the sector, you can then choose biotechnology or drug manufacturers as the industry. The main event: specific filters After specifying your preferences, you can click + Add Another Filter to display a pop-up menu containing many additional filters broken into several groups, including Fair Value, Share Statistics, Balance Sheet, Income, and Valuation Measures (see the following figure). Using these filters, you can further narrow the list of stocks. Every screener has a different way to access these filters, and some may not offer certain filters. Share statistics The group of filters labeled Share Statistics contains more than 40 stock-related criteria ranging from share price action (the 52-week high or low) to fundamentals, such as total assets or total liabilities. One area I like to focus on is the price-to-earnings (P/E) ratio. This ratio is one of the most widely followed ratios, and I consider it the most important valuation ratio (it can be considered a profitability ratio as well). It ties a company’s current stock price to the company’s net earnings. The net earnings are the heart and soul of the company, so always check this ratio. All things considered, I generally prefer low ratios (under 15 is good, and under 25 is acceptable). If I’m considering a growth stock, I definitely want a ratio under 40 (unless there are extenuating circumstances that I like and that aren’t reflected in the P/E ratio). Cannabis stocks tend to have much lower P/Es than those of well-established companies in well-established industries, because the cannabis industry isn’t mature yet. More private companies have earnings at this point than do publicly traded companies. Make sure your search parameters have a minimum P/E of, say, 1 and a maximum of between 15 (for large cap, stable, dividend-paying stocks) and 40 (for growth stocks) so that you have some measure of safety (and sanity!). If you want to speculate and find stocks to go short on, two approaches apply: You can put in a minimum P/E of, say, 100 and an unlimited maximum (or 9,999 if a number is needed) to get very pricey stocks that are vulnerable to a correction. You can put in a maximum P/E of 0, which would indicate that you’re searching for companies with losses (earnings under zero). Income The Income group offers some important filters tied to sales and profits. Keep in mind that income in terms of sales and profits is one of your most important screening criteria. Sales revenue (called Total Revenue in the Yahoo! Equity Screener) may be expressed in absolute numbers or percentages. In some stock screeners, ranges may be described as something like “under $1 million in sales” up to “over $1 billion in sales.” On a percentage basis, some stock screeners may have a minimum and a maximum. An example of this is if you were searching for companies that increased their sales by at least 10 percent. You’d enter 10 in the minimum percentage and either leave the maximum blank or plug in a high number, such as 999. Another twist is that you may find a stock screener that shows sales revenue with an average percentage over three or five years so that you can see more consistency over an extended period. Profit margin (called Net Income Margin % in the Yahoo! Equity Screener) is, basically, the percent of sales representing the company’s net profit. If a company has $1 million in sales and $200,000 in net profit, the profit margin is 20 percent ($200,000 divided by $1,000,000). For this metric, you’d enter a minimum of 20 percent and a maximum of 100 percent because that’s the highest possible (but improbable) profit margin you can reach. Keep in mind that the data you can sift through isn’t just for the most recent year. Some stock screeners give you a summary of three years or longer — such as what a company’s profit margin has been over a three-year period — so you can get a better view of the company’s consistent profitability. The only thing better than a solid profit in the current year is a solid profit year after year (three consecutive years or more). Valuation measures For value investors (who embrace fundamental analysis), the following parameters are important to help home in on the right values. In Yahoo! Equity Screener, all of these are in the group labeled Valuation Measures: Price-to-sales ratio: A price-to-sales ratio (PSR) close to 1 is positive. When market capitalization greatly exceeds the sales number, the stock leans to the pricey side. In the stock screener’s PSR field, consider entering a minimum of 0, or leave it blank. A good maximum value is 3. P/E/G ratio: You obtain the P/E/G (price/earnings to growth) ratio when you divide the stock’s P/E ratio by its year-over-year earnings growth rate. Typically, the lower the P/E/G, the better the value of the stock. A P/E/G ratio over 1 suggests that the stock is overvalued, and a ratio under 1 is considered undervalued. Therefore, when you use the P/E/G ratio in a stock-screening tool, leave the minimum blank (or at 0), and use a maximum of 1. Price/Book Value (P/B): This ratio compares a company’s market value (share price multiplied by number of outstanding shares) to its book value (net assets of the company). Anything under 1.0 is considered a great P/B value because it indicates a potentially undervalued stock. A P/B value of 3.0 or less is good. Financial highlights In the Financial Highlights group, Return On Equity % is a useful filter. ROE is a good measure of how wisely a company uses its equity (original investment plus any money it borrowed) to generate profits. Because this is an average (in percentage terms) over five years, do a search for a minimum of 10 percent and an unlimited maximum (or just plug in 999 percent). If you do get one that’s anywhere near 999 percent, by the way, call me and let me know!

Article / Updated 07-19-2022

Tools, data, and analysis previously accessible only to investment professionals are now readily available on the Web 24/7 and are better and faster than ever. Many Web sites even provide free stock screeners that enable you to search for stocks by price, dividend yield, price -to-earnings ratio (P/E), earnings per share (EPS), and more. Using the Internet’s rich financial resources, you can quickly whittle a list of 4,000 stocks down to about 25 in less than a minute. Hunting on Yahoo! Finance The first finance aggregator (easily accessible collection of headlines, articles, and other newsworthy materials from a wide variety of sources), Yahoo! Finance remains the king. It’s chock-full of information on every company, with news and commentary from 45 well-known financial Web sites. It also provides personal finance stories and exclusive videos. To narrow your list of candidates, you start by entering selection criteria in Yahoo’s Stock Screener. Go to finance.yahoo.com, mouse over the Investing tab, click Stocks, click Stock Screener, and then click Launch HTML Screener. The Stock Screener appears, prompting you to enter selection criteria. The Stock Screener displays a list of companies that match the search criteria you entered. Click the ticker symbol for one of the companies in the list, and a new browser window opens with charts and information about the stock and the company. Googling on Google Finance Fans of Google can celebrate the fact that in addition to serving as a killer search engine, Google offers an outstanding and very easy-to-use stock screener. To access it, fire up your Web browser, go to google.com/finance and click Stock Screener so that the Google Stock Screener appears. You can start narrowing your list of candidates by entering selection criteria near the top of the page. As you adjust your criteria, Google’s Stock Screener updates a list of all and only those stocks that match your search criteria. (If the list doesn’t automatically update, press Enter after you change your criteria.) For a quick stock price, go to the Google Finance homepage, type the ticker symbol into the search box, and click Search. Shining a light with Morningstar Well known as the one of the best firms for the analysis of mutual funds and exchange-traded funds, Morningstar also analyzes individual stocks. On top of a stock screener and much of the same information provided by Yahoo! Finance and Google Finance, Morningstar also provides a staff of unbiased analysts offering commentary on the markets and 1,700 individual stocks. Check it out at http://morningstar.com/stocks. Finding the real data at the SEC No matter where you get your stock ideas from, the real hardcore data comes from the companies themselves. According to U.S. law, all publicly traded companies must file financial statements with the Securities and Exchange Commission (SEC) every quarter. These quarterly reports contain the company’s income statement, which tells you if the company posted a profit, and its balance sheet, which lists the company’s assets and liabilities. You can also find filings listing all legal stock sales and purchases by company insiders.

Article / Updated 07-19-2022

Here’s how you start thinking about how to achieve your investment goal, whatever it may be. You may be saving and investing to buy a new home, to put your kid(s) through college, or to leave a legacy for your children and grandchildren. For most people, however, a primary goal of investing (as well it should be) is to achieve economic independence: the ability to work or not work, to write the Great (or not-so-great) American Novel… to do whatever you want to without having to worry about money. For now, the pertinent question is this: Just how far along are you toward achieving your nest-egg goal? Estimate how much you’ll need Please think of how much you will need to withdraw from your nest egg each year when you stop getting a paycheck. Whatever that number is ($30,000? $40,000?), multiply it by 20. That is the amount, at a minimum, to have in your total portfolio when you retire. (Or even 25 times, preferably.) Now multiply that same original-year withdrawal figure ($30,000? $40,000?) by 10. That is the amount, at a minimum, to have in fixed-income investments, including bonds, when you retire. We’re assuming here a fairly typical retirement age, somewhere in the 60s. If you wish to retire at 30, you’ll likely need considerably more than 20 times your annual expenses (or else very wealthy and generous parents). Assess your time frame Okay. Got those two numbers: one for your total portfolio, and the other for the bond side of your portfolio at retirement? Good. Now how far off are you, in terms of both years and dollars, from giving up your paycheck and drawing on savings? If you’re far away from your goals, you need lots of growth. If you currently have, say, half of what you’ll need in your portfolio to call yourself economically independent, and you are years from retirement, that likely means loading up (to a point) on stocks if you want to achieve your goal. Vroom vroom. If you’re closer to your goals, you may have more to lose than to gain, and stability becomes just as important as growth. That means leaning toward bonds and other fixed-income investments. Slooow down. For those of you far beyond your goals (you already have, say, 30 or 40 times what you’ll need to live on for a year), an altogether different set of criteria may take precedence. Factor in some good rules No simple formulas exist that determine the optimal allocation of bonds in a portfolio. That being said, there are some pretty good rules to follow. Here are a few: Rule #1: You should keep three to six months of living expenses in cash (such as money market funds or online savings bank accounts like EmigrantDirect.com) or near-cash. If you expect any major expenses in the next year or two, keep money for those in near-cash as well. When you read near-cash, think about CDs or very short-term bonds or bond funds. Rule #2: The rest of your money can be invested in longer-term investments, such as intermediate-term or long-term bonds; or equities, such as stocks, real estate, or commodities. Rule #3: A portfolio of more than 75 percent bonds rarely, if ever, makes sense. On the other hand, most people benefit with some healthy allocation to bonds. The vast majority of people fall somewhere in the range of 70/30 (70 percent equities/30 fixed income) to 30/70 (30 percent equities/70 fixed income). Use 60/40 (equities/fixed income) as your default if you are under 50 years of age. If you are over 50, use 50/50 as your default. Tweak from there depending on how much growth you need and how much stability you require. Rule #4: Stocks, a favorite form of equity for most investors, can be very volatile over the short term and intermediate term, but historically that risk of loss has diminished over longer holding periods. Over the course of 10 to 15 years, you are virtually assured that the performance of your stock portfolio will beat the performance of your bond-and-cash portfolio — at least if history is our guide. It shouldn’t be our only guide! History sometimes does funny things. Most of the money you won’t need for 10 to 15 years or beyond could be — but may not need to be — in stocks, not bonds. Rule #5: Because history does funny things, you don’t want to put all your long-term money in stocks, even if history says you should. Even very long-term money — at the very least 25 percent of it — should be kept in something safer than stocks.