Stock Investing: Study time

Let's assume you have some good stock ideas, companies you like at first blush which you think you would consider owning. How to assess if they make good assets?

There are, of course, hundreds of ways to go about this part. You'll hear about the P/E ratio (share price divided by profits per share). You'll hear about the stock chart and where it has historically bottomed and what the current plateau means. You'll hear about free cash flow and debt-to-earnings and coverage and analyst recommendations to buy/sell/hold. Most of this is really good, useful information. But none of it is the deciding factor.

You need to start reading. That's all it is, just reading. You don't need to sign up for a special advisor service or the newsletter of a particular brokerage or an recommendation service. You can, of course, but it's not necessary. Nearly all the information you need to learn details about a particular company is available online, for free.

Let's say you're interested in General Motors because your dad has owned a series of GMC trucks over the years and has never so much as glanced at a Ford, and you were pleasantly surprised with the Chevy you rented recently on a business trip to Atlanta. (As of this writing, GM is about to be criminally indicted for negligence for failing to report and misleading investigators regarding 10 years' worth of faulty ignition switches, but whatever.) Just an example.

First, you can visit their website, GM, and find out just about anything they can think of to tell you. Revenues and profits, product lines, plant locations, partners and competitors, ecological impact, big ideas they're working on. Lots of propaganda, too. While you're there, locate the Investor Relations area-- every public company has one, usually easy to find. There you can download the latest financial statements direct from corporate HQ: Balance sheet as of the end of the previous quarter, income statement, cash flow statement, etc. You can read last year's 10K, which will tell you in excruciating detail how the company did their last calendar year and what management sees on the horizon for this year and next. Good background information, freely available to anyone interested, and worth a look. But as it's written by the company's leadership and accountants, not to mention a team of spin-meisters, it's hardly unbiased.

Next, visit Yahoo Finance. For close to 15 years, Yahoo Finance has been the best starting point for public company information, bar none. Much as I depend on Google, they don't even come close on this. At Yahoo Finance you can search by company or ticker symbol (GM for General Motors, AAPL for Apple, XOM for Exxon, etc) by entering it into the Quote Lookup box. You will find a treasure trove of information. The first page you see will summarize the company from a stock investor's perspective. You can examine at customizable charts, learn about executive leadership and how much stock they own, revenues, earnings, debt, total market cap (how big is the company in dollars?), and on and on. This site is an investor's data paradise.

My personal favorite section of Yahoo Finance is what they call Headlines. Here they've linked articles mentioning each company by name or by ticker, as well as opinion pieces and in-depth analysis by experts on what the company is up to, how it's doing, and what will likely happen over the next few weeks and months, and importantly, why. The links take you out of Yahoo Finance to the sites of the article authors, and these are the heavy hitters of stock analysis: Forbes, Fortune, the Financial Times, CNBC, The Wall Street Journal (some WSJ articles require a subscription), The Motley Fool, Bloomberg, Reuters, AP, TheStreet, Investopedia, Investors Business Daily, and on and on. Hundreds of pages of discussion, explanation, analysis, assessment, and prediction, largely in plain English, nearly all of it for free and instantly available.

Where to begin? Start by perusing the list of article headlines regarding the stock you're interested in. Some will discuss the company's financial positions, some will look at a legal development. There will be pieces on the company brand, product changes, leadership changes, competition, new markets. Just dig in. I will get specific on what to look for in a future post, but for now, your job is just to get to know the company: its leaders, its plans and its track record, the markets it does business in, the companies it competes with.

Ugh, sounds like a lot of work. Of course it would be so much easier to just plunk your money down on a recommendation from a knowledgable broker referred by a friend, or from your boss who's been "playing the market" for years and who dresses better than you. But you're thinking about buying into a business. You're going to be betting money that the company you choose will be more valuable tomorrow than it is today.

So do the reading. It's not difficult, it's not expensive, it's rarely confusing, you can do it in your pajamas. It will turn you from a speculator-- a trader-- into an investor, selecting companies you understand and admire. You'll be able to defend your reasoning for buying those companies and keep track not only of how your stock is doing but why. And it's the first step toward making you wealthy.

Drifting to Fifty  |  Random unrelated nugget of the week
Pay it forward: once in a while, buy the cup of coffee for the woman behind you in line, or the next guy's hamburger, or movie ticket. You'll feel great, and you just might start an epidemic.

Stock Investing: Identification

The infamous Trans-Alaska Pipeline

Now that you've begun to see how much of that which surrounds us can be bought and sold (not the least cynical of viewpoints, I know) you can start getting to know the companies who make and provide these things. A good place to start is with something you're already keeping track of, whether you are doing it for investing purposes or not. For example, residents of Alaska have for many years received an annual dividend check from the state for what is considered to be that resident's share of revenue derived from the state's vast oil reserves. As a result, most Alaskans pay fairly close attention to the state's oil industry and the market swings pertaining to it. Naturally they are at least passingly familiar with all the oil industry giants and their impact on that dividend.

Personally, I try very hard to invest in companies I've done business with directly or whose products I've purchased. At the very least, I invest in companies which occupy industries I'm long familiar with. Most investors think that's too limiting, as the universe of public companies is vast and we as consumers tend to do business only with a few brands in the scheme of things-- and then, by definition, only with companies which do business with consumers. (Many businesses, of course, sell only to other businesses: component manufacturers, for example, sell primarily to other manufacturers. Many financial or technological services are provided only to corporations, and so on.) But I feel strongly that as a customer of a particular business, I am in a unique position to be personally familiar with its products or services, and with at least some of its corporate culture as well.

Front-end loader? Backhoe?

Let's say you get a tip on a stock, and let's assume it's for a company called Intuitive Surgical, which makes a sort of robotic surgical system which translates a human surgeon's hand movements into corresponding micro-movements of surgical instruments inside an operating room patient. Great company, making amazing products. But as I've never undergone that type of surgery, and I'm no doctor, I have no personal experience with the product or with the business. The same goes for Kyocera, a highly reputable manufacturer of ceramic industrial components. And for Caterpillar, which everyone knows makes those huge yellow pavers and backhoe loaders. I've never bought one, never driven one, never had a service issue with one. In all these cases, I must rely on the companies' balance sheets and income statements, their revenue projections, their analysts, their reputations, and my own assessment of their competitive environment. When I buy the stock of a company I've done business with, I have all of that-- which is a tremendous amount, all freely available, and I'll come back to that in another post-- plus an entirely new set of experiences, giving me an altogether more comprehensive level of familiarity with that company.

Let's look for a moment at Netflix. I started renting DVDs from them online back in 2003, when most folks were still spending a couple of evenings a month shuttling to and from the video store. I was stunned with the quality and simplicity of Netflix's service. (Enter a list of films you want to see into your online profile and they mailed them to you, up to 3 per month, sending you the next one on your list as soon as you send back the last, all postage paid). I knew intuitively that this thing would catch on, that the days of millions of people endlessly wandering the aisles at Blockbuster were numbered. I researched the company, learning what I could about their debt structure and their per-customer acquisition cost and their founder/CEO's background and so on. When I liked what I saw, I bought the stock. Then I waited 2 or 3 years for the stock to rise (I was way too early... a recurring theme in my investment history). I held onto that stock for the better part of a decade. Blockbuster was eventually sold for parts and then shuttered.

Remember that feeling?

All the research in the world would not have told me what is was to be a customer of that business, how it felt. It was astonishingly easy, and it was fun! Every time that red envelope showed up in my mailbox it was like I had received a mystery gift. It was an experience so good-- you've had these, I hope-- that it became something I wanted to tell friends about. Like those stories you hear about people who showed up at the car rental counter to discover there were inexplicably no Ford Tauruses available, would a Jaguar be acceptable? Not only did I want to continue to do rent movies from Netflix, but I wanted others to do so as well. And I wanted to own a piece of what I saw as a tiny business revolution underway, David going after Goliath.

That's what you're looking for. A business you can understand, for sure (if you can't explain what they do, how will you know when they cease to do it well, or start doing it differently?). A business with a strong financial and competitive position. A business with a superior product or service-- which you know firsthand because you've tried it. There are a ton of them: the stores you like to shop in, the shoes you prefer on your feet, the brand of computer you use or the kind of car you drive, the athletic apparel you prefer, the soda or coffee or spirits you drink, the detergent or toothpaste you use. Go with what you know. If you like what that company sells, chances are very very good that you aren't the only one, and if the company is well-run, the stock will withstand market pressure and competition and will rise over time. Which is exactly the point.

Stock Investing: Awareness, or Where to Begin

All right, let’s start here: it’s not rocket science. Anyone can learn to choose stocks to invest in and you don’t need an advanced mathematical model or a degree in economics. First up, you simply need awareness.

Neo's perception evolves

Surely you remember The Matrix? The central conceit was that humans are pod slaves, nothing but electrical generators connected to a massive power grid controlled by the machines. The world we think we know is actually a virtual reality program pulled over our consciousness like a security blanket, making us think we are productive and enjoying life.

Science fiction, mostly. We are living the lives we think we are of course, but there is actually a matrix overlaid on everything: the marketplace. Some of us see it plainly, but others don’t really notice. It’s all around us. Nearly everything you see (outside of the wilderness) had to be paid for by someone, which means it was sold by someone.

Have a look. Take a walk down your street, and notice the marketplace. You see light-up shoes on that toddler, and a stroller his baby sister squirms in. You see the cellphone in their dad’s hand and the leash on the dog. There’s a tired black hatchback on the corner and a new bicycle on top of it. The woman across the street is carrying a purse and a computer bag, which presumably holds a laptop. All these had to be purchased so all had to be sold. The marketplace.

Tom Brady (not my neighborhood)

But what about the flowerpots and the welcome mats? The landscaping in the front yards, doors and windows, siding and paint, and the houses themselves? The lampposts and the electric cables that run between them. The driveway pavement and the curb, even the ground it all sits on. All of it makes up the marketplace, all of it was bought and sold.

Some folks see it that way naturally and some don’t. Once you see it, you can start looking at things a little differently. Are you seeing fewer hatchbacks, more small SUVs? Different types of strollers? Bigger cell phones?

Now we’re beginning to get back to stocks: I see trends, largely because I’m actively hunting for them. What’s changed this year from last? What is there more of, what seems to be everywhere all of a sudden? That’s where my stock investing ideas come from.

Where I live, in the Northwest, I’m noticing a lot of big construction cranes in the downtown area. New buildings going up all over, probably “mixed-use”—that is, retail stores at ground level, and condos or offices above, or both. That’s interesting. I notice that no one I know buys much recorded music anymore—no CDs, no iTunes, but we’re all still listening to music. Yoga pants, gourmet coffee and craft beer. No one writes checks anymore, it’s all credit cards and electronic payments. Organic food, social networking, hybrid cars. You’ve noticed a lot of this too.

All these trends are market forces at work. All of them are driven by cultural shifts and consumer preferences. All are happening in real time, right in front of us, and all are the beginnings of investing ideas. If you spot the trend, you can follow the chain and begin to identify the businesses that benefit from that trend.

Take the new construction in my downtown area for example. Construction means there is demand for housing, and for office space. That implies rising rents for existing units, as demand must currently outstrip supply. It also means demand for construction materials, for heavy equipment, for labor to build it all. All those new units will need services—electrical, water and sewer, heat, cable for internet and TV. The companies that supply all those things are going to do more business because of those buildings. As an investor, those companies interest me.

Look at craft beer. In most of the country, mainstream American beers like Miller and Coors and Budweiser sell very well and lead the market by a wide margin. But on the coasts, upstart brewers are making products with new varieties of hops or a lot of roasted grains, resulting in a huge variety of flavor profiles. As they have multiplied, these companies have made a significant dent in the sales of the traditional brewers, such that the big guys are worried and have started to answer with new recipes of their own-- or have begun buying up the tiny players to eliminate competition and produce their products on a larger scale. Clearly consumer tastes are shifting.

How about the way people consume music now. Music stores have largely gone the way video rental shops went a few years back. It’s all internet radio and on-demand streaming services. We all know the companies that provide these services, because we all listen to music. But are you paying for it, or putting up with ads instead? There’s money in there somewhere. Follow the money and you’ll find companies worthy of investment consideration.

Not rocket science, as I said. But awareness of the marketplace and the players in it is just the first step. The last thing you want to do is leap before you look. You want to buy stocks of companies that are growing, companies which are well-managed and have vision and whose business model you understand. Companies which are dominating their competitors. I can help you find them.

Stay tuned.