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Being a confident investor implies that you have enough money to invest. I am constantly getting requests from my site or via Twitter regarding how to get started investing. Many people appear to understand that it is important to invest but do not currently have the funds to do it.

If you read my book, The Confident Investor, you will learn that I recommend that you take 10% of your income out of your paycheck and move it to a separate savings account for investment purposes. I have also discussed this concept on this site. This 10% comes out before you spend a single dime on expenses. You are effectively cutting your income by 10%.

To cut your income by 10%, you will likely need to cut your expenses by at least that much. Recently, I read an article on CNN about the 10 biggest money wasters. These might be areas to consider for you:

1. ATM Fees
2. Lottery tickets
3. Gourmet coffee
4. Cigarettes
5. Infomercial impulse buys
6. Brand-name groceries
7. Eating out
8. Unused gym memberships
9. Daily internet deals
10. Bundled cable or phone services

In each of the above, CNN explains the common waste and suggests a way to save the money. Following all of these suggestions (if you were guilty of all of them) would probably knock of $50-100 per week. $100 per week means $5,000 per year towards your investment portfolio.

I probably could have titled this article, “Why I am concerned with companies that give dividends” since I feel these subjects are intertwined. When a company gives a dividend but doesn’t have a large sum of money going into corporate R&D, I am very concerned about the long-term health of that company. A company dividend is basically saying that the managers of the company cannot think of anything better to do with the money than to give it back to the shareholders. While I have nothing against getting a check from my portfolio companies, I don’t want that check to starve future product development that could make the company even more profit in the future.

It isn’t difficult to measure R&D but it is sometimes difficult to measure its effectiveness. To measure R&D, you should use one or both of the following techniques.

• PRR (Price to Research) – This is the market value of the company divided by its research-and-development expenditure over the last twelve months. Look for companies with PRRs between five and 10 and avoid companies with PRRs greater than 15. By looking for low PRRs, investors should be able to spot companies that are redirecting current profits into R&D, thereby better ensuring long-term future returns.
• Price/Growth Flow Model – Price/growth flow attempts to identify companies that are producing solid current earnings while simultaneously investing a lot of money into R&D. To calculate the growth flow, simply take the R&D of the last 12 months and divide it by the shares outstanding to get R&D per share. Add this to the company’s EPS and divide by the share price.

It is far more difficult to look at the effectiveness of R&D. One way, is to calculate the percentage of sales that come from products introduced over the preceding three years. For the calculation, investors need annual sales information for specific new products and this can sometimes be difficult to find. Sometimes, the investor simply has to read the annual report and take note of the CEO or Chairman comments on new product introductions – a lack of conversation often means a lack of products.

Finally, be careful to not overly reward high R&D industries. For example, the pharmaceutical industry spends a huge amount in R&D due to the nature of its market. Just like P/E analysis that I explain in my book, The Confident Investor, R&D spending needs to be compared among its peer group.

If you are amazed at the high dividend given by a company, take a look at their PRR or Price/Growth Flow.  How does that compare to its peer group?  If it is not keeping up then that dividend could actually be starving the long-term potential of the company.

How many ways can I say, “Take the offer and run?”

I will admit that my analysis tools are not well refined for determining the price of a company that is as poorly managed as DELL [stckqut]DELL[/stckqut]. I have developed my tools to try and deduce an appropriate price for truly well-run companies. Since I never invest in poorly-run companies, I never wanted to spend much time in fine-tuning those rules.

I currently think that Dell Inc. is over-valued at its current price. I wouldn’t buy the stock at this level and I would accept Mr. Dell’s offer if I owned any of the stock (which I do not). I understand that there is hidden and untapped value in the company however that value is only going to be unlocked in a private setting. Trying to make Dell Inc. a well-run company after it has floundered for so long is virtually impossible. Mr. Dell and his partners are likely to change many facets of the company that would be very painful in the public market of quarterly announcements. This is very necessary as the stock would likely be hammered during all of the changes.

So while I understand various institutional investors wanting to get a bit higher return, the average individual investor should take the money and run. If the institutional investors get too greedy then Mr. Dell’s buy-out may not work and then the stock price will almost certainly drop.

There are better companies to invest in then Dell Inc. Even if the company was well-run (which it isn’t), I wouldn’t hold the stock above about $9.40. Mr. Dell is offering $13.65 for the stock. Somehow, Southeastern Asset Management says the company is worth $24 per share. I don’t see the company hitting that price as a public company any time soon. If they really think the company is worth that much then they should do the leveraged buyout and show how great they are at managing!

Since my tools for poorly-run companies are not well-defined, I may be undervaluing the stock. In that case, I could see $13.65 as a reasonable premium. I cannot see the price being justified too much above that.

For your enjoyment, here is a recent report on the company:

Dell Inc. ($DELL) Confident Investor Rating: Poor

MANAGEMENT EXECUTION

ANALYSIS

The following company description is from Google Finance: http://www.google.com/finance?q=dell

Dell, Inc. (Dell) is a global information technology company that offers its customers a range of solutions and services delivered directly by Dell and through other distribution channels. Dell is a holding company that conducts its business worldwide through its subsidiaries. The Company operates in four segments: Large Enterprise, Public, Small and Medium Business, and Consumer. Its Large Enterprise customers include global and national corporate businesses. Its Public customers, which include educational institutions, government, health care, and law enforcement agencies, operate in their own communities. Its SMB segment is focused on helping small and medium-sized businesses by offering products, services, and solutions. Its Consumer segment is focused on delivering technology experience of entertainment, mobility, gaming, and design. In April 2012, it acquired Clerity Solutions. In September 2012, it acquired Quest Software Inc. In December 2012, it acquired Credant Technologies.

Confident Investor comments: At this price and at this time, I do not think that a Confident Investor can confidently invest in this stock.

If you would like to understand how to evaluate companies like I do on this site, please read my book, The Confident Investor.