By:
On:
In: Commentary
With: 0 Comments

If you want your children to be better off in life than you are or then your parents, you need to teach them to invest and save. The younger they are, the longer they have to accumulate great wealth. It is never too early to start to worry about the rest of your life.

Conversely, it is never too late to worry about your future as well. If you haven’t done a good job of preparing for your retirement and your “golden years” then don’t wait! Start now! If you have violated any of these rules, STOP!

I found these rules on Mint.com. It is a very good article and you should jump over and read more.

  1. Track Your Income and Expenses
  2. Avoid or Eliminate Debt
  3. Set Financial Goals
  4. Buy a Home and Pay It Off As Quickly As Possible
  5. Buy Insurance
  6. Invest Intelligently

The author also talks about buying his book and giving his book to all of your children. I won’t argue that you should do this, but you would be much wiser to buy my book, The Confident Investor. You can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in ebook formats for Nook, Kindle, and iPad.

By:
On:
In: Commentary
With: 0 Comments

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.

By:
On:
In: Commentary
With: 0 Comments

Craig Guillot over at Mint.com had a great article about saving for a rainy day.  In his article, he points out several concerning facts. According to a 2011 survey by the National Foundation for Credit Counseling, 64% of Americans don’t have enough cash on hand to handle a $1,000 emergency.

To handle the crisis:

  • 17% of respondents said they would borrow from family or friends.
  • 17% said they would neglect existing obligations.
  • 12% said they would pawn or sell belongings.
  • 9% said they would get a loan from a cash advance store.

To be perfectly blunt and honest, $1,000 is not enough emergency cash if you are investing in the stock market. In my book, The Confident Investor, I suggest that you have 6 months of cash on hand. At an absolute minimum you should have 3 months.

If you save 10% of your income from your paycheck, it will take you 2.5 years to have 3 months of income saved in your emergency account. The longer you wait, the harder this becomes and the more important it is to accomplish. Jump over and read Craig’s article as it will give you some good ideas to set up your savings.

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

Earlier, I wrote about using the system described in my book, The Confident Investor, to build up your investment in Deckers Outdoor Corporation [stckqut]DECK[/stckqut]. I discussed how much your investment would have risen compared to the traditional method of “buy-and-hold” as an investment strategy.

At the time that I wrote the article, I hadn’t discussed portfolio management on my site to any great detail. Recently, I discussed the concept of doubling your investment to the point that the free stock is equal to one allotment of your portfolio. Now that this concept has been explained, I need to add another metric to the Deckers [stckqut]DECK[/stckqut] analysis.

If you would have invested in Deckers as described in that article, you would have doubled your investment by March 2, 2007. On that date, you would have acquired 150 shares of DECK which were valued at about $67.45 for a total profit of $10,101.75. This means your $10,000 initial investment would have doubled.

This event would have occurred 292 trading days after you initiated trading on DECK. If you followed my advice on portfolio management, you would stop trading in DECK at this point and focus on other stocks to build up equity in them.

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

I encourage people to ask me questions about my book, The Confident Investor, or about the stock market, in general. I am open to questions from Twitter or on this site. I recently received a question about stock splits. The basic question asked if it was a good time to buy immediately after a company split its stock. The purist answer is that it shouldn’t matter but that may not be the complete answer.

First, a bit about stock splits. Companies split shares of their stock to try to make those shares more affordable to individual investors. When a company does a stock split, its share price will decrease, but the market capitalization of the company will remain the same. For example, if you own 100 shares of a company that trades at $100 per share and the company declares a two for one (2:1) stock split, you will own a total of 200 shares at $50 per share immediately after the split.

The reason for stock splits has dropped over the years. Before the advent of easy trading brokerages on the Internet, it was not uncommon to see penalties for buying shares in increments other than 100 shares. With this penalty removed, individual investors are free to invest the amount they can afford – $1,000 of a $10 stock (100 shares) is just as easy to buy as if that stock was $25 per share and the individual investor only purchased 40 shares. This is mostly irrelevant to “institutional investors” that may be buying millions of dollars of a stock.

Some companies now avoid stock splits altogether. The theory is that the stock split doesn’t matter so why do it. Also, if the company is catering more to institutional investors rather than individuals, then the higher stock price doesn’t matter. As further benefit, the higher stock price eliminates some trading strategies and effectively encourages longer term holders of a stock. Some companies like to have a higher per share price and almost carry it as a badge of honor – Google [stckqut]GOOG[/stckqut], Apple [stckqut]AAPL[/stckqut] and Berkshire Hathaway (BRK-A) being 3 of the most well known with a high stock price. To be honest, a higher stock price even slows down the effectiveness of my program described in my book, The Confident Investor. If you want to learn more about my methodology, you can purchase my book wherever books are sold such as Amazon, Barnes and Noble, and Books A Million. It is available in ebook formats for Nook, Kindle, and iPad.

Now to the original question. Should you expect a bump up after a split. The purist answer is no since there is no additional value or wealth being created with a stock split. However, a study of the performance of 2,750 companies from 1975 to 1990 conducted by Rice University professor David Ikenberry found that shares climbed, on average, about 3.4 percent in the days immediately following a stock split.

I could easily argue that this Rice University study is too old to be relevant in the 21st century. This time frame for the study was during the penalty of non-block size trading. It was also a time frame when trades were measured by eighths (1/8) rather than to the penny as they are now (this change happened in 2001).

Bottom line, there may be a small bump up when a stock splits but the markets are efficient enough that this will only be short term and likely not worth trading.