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Mike
 May 8, 05 - 10:02 PM |
I'm new here
Hi! I recently found this wesite from alink on the TMF site, so I thought I would share what I know about investing. I'm fourteen, and wrote this about a month ago. Stocks, Numero Uno Over the Long Term Since 1921 Stocks have returned 11% annually, while funds have returned 8% and bonds 6%. The reasons for this: Mutual funds generally have a lot of money to manage. They have strict guidelines where they can't own too much of anyone company or have anyone company be too much of its portfolio. All this diversification keeps the fund from increasing. Also the turnover for funds is usually high, the taxes when stocks are sold are paid by the investors. All of this is enough to slow down returns, without mentioning the fees. And bonds are usually just slow, all though they are good during certain economic cycles and have good yields. When Investing, Invest for the Long Term Day Trading, Momentum Investing, Investing without doing your own DD. The three things above have two main things in common: One, they are good ways to go broke, fast and easy. Secondly, using these ways of investing, is not investing it is simply stock trading. To be able to invest successfully, you must invest. You must buy business, not trade stocks. You must be willing to hold these stocks for at least three years, if not you would be better off just putting your money into a money market fund. If you can find good quality companies to hold for the long term, then make sure you can hold them for the long term. Pay Off All Short-Term Debt before Investing If you say $10,000 in credit card debt at a 13% interest rate, and also have $10,000 in cash saved. You should put that cash towards paying off all short-term. If you have a 13% interest rate on your debt than you must earn thirteen percent per annum just to break even. Screening Out Losers There are A LOT of public companies out there, it would be impossible to research all of them. That's why we should use screens. You can use screens in two ways: You can use a computer-generated screen to give you the, say top 25 companies that match your investment criteria or you could find companies and run them through a screen to see if they have good investment potential. Using a combination of the two is perfect. You could, for example, use MSN or Yahoo! To screen out all of the companies that match some criteria -- Low Price/Book Value; High ROE and ROA; Low Debt/Equity. Then, after you have narrowed it down to a lower amount of companies, you could screen out the companies with criteria that isn't able to be used in a computer screen. Such as stock dilution, business quality, a thumbnail valuation or harder to do comparisons like ROIC and WACC. Evaluating the Company The Business Reading The Warren Buffet Way , by Robert Hagstrom, you see that Buffet looks for companies that: Show consistency, Have favorable long-term prospects and Are easy to understand. Showing Consistency: Buffet doesn't like buying companies that are “hot” at the moment. Rather he buys companies that, over the long-term, have grown year to year and have not shown signs of change. He also avoids turn-around's, which , apparently, rarely turn. Favorable Long-Term Prospects: This is probably most famous as being one of Phillip Fisher's 15 points. This goes along with consistency. To be a good investment a company must have favorable long-term prospects, by saying this it must have a niche that provides competitive advantages, or a product that has the ability to grow incredibly, and it could simply have a revenue model good enough that it will be able to continue to profit for a long time. Easy to Understand: How could you evaluate a company without understanding how it makes money and how it will have good long-term prospects? Peter Lynch said it best, “Invest in a company that any idiot could run.” Those probably not his exact words, but he continued to say, “… because someday any idiot will be running it.” I never understood why it would be good for any idiot to run your company ;^). Management After you have mastered the concepts of the company's business it's time to access management, and perform a little Scuttlebutt. First look for management that is candid to shareholders. It wouldn't be good for a company to write in its annual report that an awesome year, when it did not. Also avoid companies that are consistently blaming their bad results on El niňo, hurricanes or tariffs. Scuttlebutt: Scuttlebutt was originated Phillip Fisher, it is a way of evaluating management by talking to employees, former employees, suppliers and the people Fisher like the most, competitors. He said if you go to five companies in an industry and ask them good questions about the other four a very good analyses of the companies will emerge. Lastly, do not invest with management that give out to many stock options to employees, diluting the compan |
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