By:
On:
In: Commentary
With: 0 Comments

A stock’s price is not calculated. It also is not set by a governing body. Rather, the stock price is developed in an incredibly efficient method of supply and demand. The more investors want to own a piece of a company, the higher the price will be, and it will continue to rise until investors no longer want to own the shares at that price.

You may think that supply and demand would equalize and make for a stable stock price for many companies. However, an auction allows for relatively large movements in price. Many companies are significantly affected by the moves of commodity prices, government economic indicators, or the stock price of other companies. If you combine those influences with a large and diverse investor community, there can be a wide degree of opinion as to what the company’s stock price should be at any given time. In these situations, one investor may consider a stock price to be expensive while another considers it cheap. This difference in perspective causes constant movement of a stock price.

Many influences from outside the company affect the stock price. Changes in the pricing of competitive companies or suppliers can make a stock price look attractive (or less attractive). Also, the general news of the day regarding raw materials, consumer spending, labor issues and geo-political confrontations can cause investors to re-evaluate the value of a company. This requires a level of omniscience to interpret the best value that most investors simply do not possess.

Some investors, typically known as technical traders, do not look at the value of a company’s operations but only consider its stock price and trading volume. They make guesses as to the direction of the stock’s movement for the next minute, hour, day, week, month, or longer. Technical traders use indicators that are built by mathematicians to try to interpret a company’s price based on price changes without regard to the fundamentals of the company. They may then trade that stock based on this prediction of future stock price levels. Typically, technical traders are not investors, they are not taking a long-term holding in the company but rather are going to flip the shares quickly in response to their favorite technical indicators.

I try to put some rationality into establishing a stock price in my book, The Confident Investor. I don’t assume your omniscience; you don’t have to understand every possible variable to arrive at a reasonable price. You also do not need to understand all of the technical math theory of the technical traders.

My technique that I call GOPM (Grow on Other People’s Money) allows you to find high-quality companies that are fundamentally well-run. You then use a focused set of technical trading skills to know when to buy and when to sell that stock. This allows you to take advantage of the rises and falls of the stock market. These rises and falls are caused by the various theories of the value of the company that I describe at the beginning of this article.

You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad.

By:
On:
In: Commentary
With: 0 Comments

As a stockholder (or partial owner) of a company, it is your responsibility to give the managers of the company advice on how to run the company. Since there will be hundreds of thousands of “partial owners” of a company, the company will set up a board of directors to represent your interest. These directors are usually elected by you and your fellow owners. You have one vote for each share that you own.

A shareholder will typically be asked to vote on board members and other issues that the board feels needs the input of the owners. Typically, these issues include the selling or buying of divisions of the company, compensation questions for key managers and board members, and company dividends. It is your responsibility as a company owner to vote when you are sent these requests.

There are some companies that have different types (or classes) of stock. For example, it is common to have voting stock and non-voting stock. If you have non-voting stock, you will not have the right to vote on issues nor will you be asked for your opinion on the board members. In general, you should avoid these types of companies since they almost always have interests that make them non-responsive to the best interest of the majority of their stockholders.

A company’s board of directors provides the company with direction and advice. It is the responsibility of the board of directors to ensure that the company fulfills its mission statement. The board of directors frequently sets the company’s overall policy objectives. A well-functioning board of directors acts as a top-level adviser to the company. A good board of directors will let the company know when it is drifting away from its goals and objectives. For these reasons, a good board of directors includes knowledgeable and experienced business people.

Typically, only one member of the board of directors is involved with the day-to-day activities of the company. This person is the Chief Executive Officer (CEO), and he or she acts as a liaison between the board of directors and the rest of the company. The CEO is responsible to the board of directors for the daily status of the company, and for the implementation of the vision and policy objectives of the board of directors. It is also the responsibility of the CEO to hire the other managers in the company. These managers, in turn, are responsible for the various departments and related employees.

It is becoming common for the board of directors to be held fiscally responsible for the performance of the company. While it is still rare for directors to be sued for something the company has or has not done, it can happen. Directors who have allowed a company to drift into bankruptcy have also been sued by the shareholders for negligence.

By:
On:
In: Commentary
With: 0 Comments

Obviously, I do not want you to destroy your retirement! However, it is good to think about what you can do incorrectly that will hurt your financial future. By studying the mistakes, you can hopefully avoid them.

Yahoo Finance had a great article on the subject. You should jump over and read the entire article but here are the five ways that were identified.

  1. Too much debt.
  2. Spend your retirement savings on college.
  3. No emergency plan.
  4. No long-term investment strategy.
  5. No retirement plan.

All of these are bad choices. If I had to pick a 6th one it would be to trust that the US government was going to provide for you. This is not a political site and I do not want to get into political arguments. I do encourage you to be pragmatic if you are under the age of 55 and definitely under the age of 40. Assume that Social Security as it exists at this writing will likely change before you need it.

By:
On:
In: Commentary, Content for book owners
With: 0 Comments

I am regularly asked about the indicators that I use in my investment strategy. To refresh your memory, GOPM (Grow on Other People’s Money) is the strategy that I teach in my book, The Confident Investor. It has a couple of main tenets:

  1. You should only invest in truly Good Companies.
  2. You probably do not have enough money to have a balanced portfolio of “buy-and-hold” positions in truly Good Companies.

To get around the realities of the second tenet, I have developed a trading methodology to help. This methodology allows you to invest in companies that are currently experiencing a bull market. It also avoids those that are in a bear market. Almost all companies experience times when their stock price drops. This means that you have your money invested when the stock is going up, and it is invested elsewhere when the price is falling.

For the balance of this article, I am going to explain why I have modified some standard indicators. These indicators help to signal the bull and bear action of the stock. This explanation will only be available for registered owners of my book, The Confident Investor. If you own the book, you can register and log in to see the balance of this article. If you don’t own the book, you can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in e-book formats for Nook, Kindle, and iPad. [s2If current_user_can(s2member_level1)]

The three main indicator types that I use are EMA, RSI and MACD. I suggest you set these indicators to use a multiple of 5 in the analysis. If you read some of the theory behind these indicators and the original math from the creators, you will find that none of them use a multiple of 5 as I suggest. My reasoning is important to understand.

In nearly every case of common usage, the popular value is larger than 5. In the case of RSI, it is 14. In the case of MACD, it typically is 12/26/9 (for the three different signal lines). In the case of EMA, you will often see values as high as 50, 100 or even 200. In my case, it is always 5, 10 or 20.  Why do I suggest a different time frame for all of these?

First let’s look at EMA of 200 or 100.  There are 250 trading days in a year or about 21 trading days in a month. This means that EMA(200) and EMA(100) are basically telling you if the stock has moved up in value for the past 10 or 5 months, respectively. This has almost no relevance if you are trying to decide to buy that stock today, tomorrow, or next Tuesday. The time frame that is relevant to that decision is this week or this month but not 5 months ago.

If you are trying to decide to buy today or not buy today, you need to look at what is happening now versus where the stock was a few days ago. There are 5 trading days (or bars) in a typical week (assuming no holidays). There are 10 days in 2 weeks and about 21 in a month. What is happening within the last week is very relevant. This week is more relevant than what happened 2 weeks ago which in turn is more relevant than what happened last month this time.

Most government indicators e.g. inflation rate, unemployment, etc. are on a monthly basis. By looking at 20 trading days, we are including a full cycle of most government indicators but not two or three. This is important as we want to make a decision based on what is happening now and not in history.

Not insignificant in this timing analysis is that the stock market is incredibly quarterly driven. Looking at a metric that is longer than a quarter is simply not relevant for understanding how most professional investors, mutual fund managers, and company executives are paid. They are paid to influence and capitalize on immediate returns.

Once you are comfortable with the concept of what is happening this week in a stock, you can quickly get comfortable with a 5 day increment. From that basis, it is easy to jump to 10 and 20.

Finally, it is important to remember that these three indicators were originally built in a different era. These indicators were developed when trades were in fractional increments of 1/8 rather than our current system of pennies. This means that stock movement was not nearly as fluid. A stock would jump by 12.5 cents per increment where today it moves in increments of 1 cent. That change in increment calls into question the original logic of the creating mathematician in suggesting the default time frame. Combining that change with the accelerated decision-making of the Information Age and a much larger marketplace, implies that a shorter time frame is necessary.[/s2If]

By:
On:
In: Commentary
Tagged: ,
With: 0 Comments

It is no secret that two of the hottest stocks in technology are Google [stckqut]GOOG[/stckqut] and Apple [stckqut]AAPL[/stckqut]. Google leads in market share between the two companies by offering the Android OS, which is free. Which causes an investor to wonder, is Google really capitalizing on the mobile trend that it is leading?

This infographic from Wordstream shows that Google does just fine in capitalizing on the mobile market.

Google mobile solutions
Find out how Google’s mobile solutions could work for your business.