Month: January 2013 (Page 4)

This happens to me frequently and it likely happens to you. All of my friends know that I manage my own investing and so they are constantly giving me tips. They tell me about the latest hot company or the industry that is going to explode soon.

It happens almost any time that friends gather together. I see them at a card party, watching the big game at the local sports bar, or the wedding reception of a friend’s child. The conversation invariably turns to investing because they know my passion for the subject. They decide to give me the latest “hot tip” on a stock.

I rarely take the word for it. In fact, I never take the word for it. I will put the stock through my filters that I describe in my book, The Confident Investor. I judge them by the following criteria:

1. The growth of the company’s sales.
2. The growth of the company’s earnings per share of stock outstanding.
3. The growth of the company’s market value compared to its earnings.
4. The growth of the company’s earnings before taking into account interest and taxes.
5. The value of the company compared to its earnings as compared to other similar companies.
6. The productivity of the company employees relative to industry averages.

If the company survives that gauntlet, I start tracking the stock with my technical analysis tools to find a good time to invest. I want to buy the stock when it looks like the price is increasing rather than when the price is falling. This allows me to Grow on Other People’s Money (GOPM). I will also put the stock on my Watch List for others to learn about this new company.

Right now there are about 50 stocks on my Watch List. If you need to find another stock as an investment, I suggest this list. The list covers a huge cross-section of companies from retail to manufacturing to services to communication to computers to finance.

Be polite to your friend turned stock analyst but don’t just jump into the stock. If you want to learn how to evaluate that “hot tip” then you can buy my book, The Confident Investor, wherever books are sold such as Amazon and Barnes & Noble. It is available in paperback and ebook formats such as for the Kindle, Nook, or iPad.

Most financial articles, financial writers, and stock theorists will include some type of phrase that past performance does not equate to future performance. Basically, just because we did well or the stock did well (or poorly) in the past that doesn’t mean that the same will be true in the future.

This is great advice even if it is hogwash. It reminds me of noise that was written by lawyers. Yes, I have similar phrasing on my site and in my book. Let’s be truly honest though – the past is the best way for us to predict the future. In a few weeks, I will be publishing some historic back testing of my investing strategy and I have already published an example of IBM. There is simply no better way to understand how a strategy worked in the past as to how it will do in the future. It won’t guarantee success but what test is more reliable?

Let’s talk about a few examples that you probably can relate to that have nothing to do with stocks.

If you are hiring a new person at your company then you will inquire about that person’s past. There are many questions that you will ask to ascertain if that person has the traits to be successful in the future. Most of those questions are about what the person did in the past that would give you some inkling as to what they will do in the future at your company. You might ask, “How did they handle this type of situation?” or “Give an example when this happened.” These are valid interview questions that provide some idea of past performance and how it would result in future performance.

In the US, we just finished a Presidential election. While US politics is pretty ugly and vicious, part of the conversation was what the candidates did in the past which gives some voters some idea of what they will do in the future. Some voters don’t use this information to make an informed decision but some will use it. It is valid to say that a candidate supported a certain law or effort which means they are likely to act a certain way on a certain type of legislation.

If a stock is trading in a range between $7 and $10, you would not expect it to go to $20 in the next 90 days without some instigator to change its behavior. Similarly, if a stock has been growing at 20% per year, you would not expect it to drop 50% in the next 4 weeks unless there was a particularly bad piece of news affecting the company’s health.

Any good analysis of a stock needs to have some historical perspective, For this site (and my book) I look at 10 years worth of data. I weight the most recent years more heavily than years 8, 9 and 10. Sometimes that means that I ignore the hot company that went public last month but that is okay. I want to be confident that the company I invest in has a track record of success. I look for good past performance because anything else is just a guess. I don’t guess with my money and I don’t think you should guess with yours.