Month: April 2013 (Page 4)

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.

It is important to review your investment choices on a regular basis. If you invest in mutual funds, you should review them each February. I suggest February because you will receive your end-of-year statements by February so that you can pay taxes. You should look at these long-term investments and decide if it still fits your strategy and that your mix of investments is correct. If you want some advice on how to balance your portfolio, check out this article that I wrote. As always, I strongly suggest you confine your mutual funds to index funds rather than actively managed funds.

For stocks, the review needs to be a bit more frequent. You need to get out of stocks that no longer perform to your satisfaction. If you are not sure how to evaluate the growth rate and performance of your stocks, please consider reading my book, “The Confident Investor” as it will help you analyze companies to find the Good ones.

For the next several weeks, I will be doing a daily review of the companies on my Watch List. I will take off those companies that are no longer performing to my satisfaction. As a point of disclaimer, as quickly as possible after taking the stock off of my Watch List, I will also be selling any holding that I have in any of those poorly performing companies. If you would like to make sure you get these updates:

• You can subscribe to my weekly newsletter digest of this site.
• You can follow me on Twitter @ConfidentInvest.
• You can subscribe to my RSS feed.

I regularly enjoy watching Jim Cramer of Mad Money on CNBC. One of the things that I most enjoy about him is that occasionally he admits when he is wrong. While I am not saying that I was wrong to put a company on my Watch List and then eventually take it off, I am saying that the base fundamentals of the company have changed. I am firing that company from my portfolio (I guess that makes me a little like another famous investor, Donald Trump).