Commentary (Page 429)

Not all companies deserve your long term investment capital. Just because a company is a Good company, doesn’t mean that you should make a long term investment in the company.

Perhaps you have been reading this site and you found a company that was rated “Good” on the Confident Investor Rating (CIR) scale. You now need to decide if this company is attractively priced for you to confidently make a profit on your investment. Just because a company is well-run does not mean that you should buy the stock. In fact, most well-run companies have a market value that is quite reasonable and may even be a bit high.

A well-run company can be a lousy long term investment if a large number of investors invest in the company. This drives the stock price up and inhibits your ability to get a bargain. Often, investors will invest in well-run companies only because they know that they will not lose a large amount of money as a long term investment. They accept there is a chance they will only receive a small return if the market goes up. If the company loses value, these large investors will use the small loss as a tax offset for their earnings on other investments.

This approach will not work for you! You are a small investor. You know that there is a risk in investing and nothing is a sure thing. You need to be reasonably confident that your long term investment will increase. For this reason, you need to calculate if the company is valued fairly or if you can get a bargain.

You need determine what the stock price should be for a company. You want all of your investments to appreciate at least 10%. You need to locate the companies growing at 10% and then calculate whether the stock price is appropriate based on that level of growth. I put several estimates of the long term price in all of my stock analysis posts that are published on this site. If you read my book, The Confident Investor, you will learn how to calculate these estimates.  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 doesn’t take a huge amount of time to calculate the worthiness of a company as a long term investment. You simply need to follow some simple rules that I carefully cover in my book, The Confident Investor. Once you have mastered these rules, you can be assured that every stock investment that you make will satisfy your needs as a long term investment.

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As you evaluate performance and price, you should take care to compare companies in the same peer group. When you find an interesting company, you want to make sure it is appropriately priced compared to companies that are in the same basic market segment. These other companies may or may not be direct competitors, but rather are similar in the types of products that they sell and the customers that they serve.

It is important that you do not compare companies that are apples and oranges. You will get few insights as to the quality of the stock by doing this comparison.

It is not fair to compare companies to Apple [stckqut]AAPL[/stckqut] PepsiCo [stckqut]PEP[/stckqut], Cisco Systems [stckqut]CSCO[/stckqut], or General Electric [stckqut]GE[/stckqut] if they are not in the same market segment. You need to compare them against their peer group to make sure that they are managed effectively as compared to their industry norm.

You should not to worry about a standard for P/E for all companies. P/E is the market capitalization of the company divided by its earnings. There are analysts that will create some arbitrary standard on what a reasonable P/E should be. This is not helpful. If you compare companies that are not in the same segment, the P/E of the two companies can be wildly different and probably should be different. They are in different markets with different customer needs that are being fulfilled. Why would you expect that when you compare companies in dissimilar industries that they would be priced the same?

It is appropriate, however, to use P/E to compare companies that are in the same peer group. These companies sell to the same customers and make their products in a similar way.

In general, you want to compare companies and choose those that are better respected than their peers. P/E is a sign of respect from the investment community. The higher the price, the more the investment community respects the company and actively buys the stock. So you want your company to have a higher P/E than its peers.

You do not need to be an expert in each industry to identify its peer group. Others have done this work for you. The easiest way to identify the peer group of a company is to go to Google Finance. You can simply type in the company you are interested in exploring and the site will give you 10 companies that are in the same vertical.

My book, The Confident Investor, goes into great detail how to prioritize P/E among its peer group as you evaluate a stock. 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.

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We all want to get the best price to buy stock. We probably try to get the best price for everything that we buy!

Perhaps your research has shown that a company is an excellent purchase, but you can do a bit more analysis to get the best price to buy stock. You do not have to do this work. Your existing analysis has led you to conclude this is a valuable company and should increase in value over time. However, with any company, the stock will go up and down without seeming to reflect the true value of the company. You can take advantage of these market swings to increase your profit potential by finding the best price to buy stock. Effectively, you want to buy the stock at a discount if you possibly can do so.

This technique is the foundation of GOPM (Grow on Other People’s Money)! If you buy a full position in this promising company, then you are employing a pure “buy and hold” strategy. To maximize your profit, you can buy at a bit of a discount and then when the time is correct, let your investment grow while preserving your capital.

The goal is to allow you to manage your money more prudently. You want to invest your money in this company when the price is going up. When the price is flat or moving down, though, you need to to have your money in another company that is moving up. By avoiding the natural downturns in the market, you will maximize your profits.

If you look at any company’s stock price chart, you will see the price go up and then back down. What is the best price to buy stock? Would it not be better if you bought when it was in the valley than when it was on top of the mountain? Don’t you think that the price at the bottom of a valley is the best price to buy stock as opposed to buying at the top of the mountain? Yes, you know that the current price is favorable compared to what it will do in the future, but the markets are not entirely objective, you need to take into account the natural motion of the market. In short, you want to pay the least you can for the company.

To do this, you will use the tools of a technical trader. There are investors in the market that do not care about the quality of the company at all. They use a set of mathematical tools to figure out if the price of the stock is going up in the short term or down in the short term. They buy or sell accordingly.

You do not want to be a pure technical trader. You only want to invest in the quality companies such as those identified on my Watch List, but you also want to use the technical trader tools to get the best price to buy stock.

Many articles or books will advise you against market timing. This is foolish. For most things that you buy, you look for a better price. When you buy a new shirt, you wait for it to go on sale. When you bought your car, you waited for the best rebate and probably went to several dealers to play one against the other. After Thanksgiving, you got up at 5AM to take advantage of the many sales. You went out the day after Christmas in search of bargains. In fact, some retailers even make promises that if you buy from them, they will guarantee the price for a certain number of days.

If you look for a bargain for everything else that you buy, why would you not look for a bargain in your investments? This is how you will use technical indicators, to try to get a bargain. You will not use indicators to blindly drive your investment behavior. Your goal should be to find the best price to buy stock so that your investment return is maximized.

If the adage for investing is “buy low and sell high” then it is perfectly logical to look for the best price to buy stock. My book, The Confident Investor, will help you to accomplish this goal. 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.

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