Stock Investing: FAQ (cont'd)

Answers to more questions I get asked routinely:

1. Should I just go ahead and buy the stock I want, or should I wait for a price drop? What if it's really expensive? 

Stillborn Qwikster: Even the name was a terrible idea

I've told the story before of my Netflix gaffe: owned it in 2009 and 2010 and saw my investment increase over 300% in that time. Then in September 2011 Netflix announced it was splitting off DVD rentals from on-demand, such that existing customers would effectively pay double current prices for to keep their existing arrangement. It was such a bone-headed, greedy, out-of-sync-with-the-customers move that I lost all respect for CEO Reed Hastings and his previously brilliant management team, and I sold my shares immediately. A month later Netflix reversed course, apologized to its customers, and started building back the trust. I should have bought it back but I was skeptical ... Now the stock is up another 400% since my sale and I'm still waiting for that buying opportunity. Worse, Netflix is not the only company I've made that mistake on.

Some people have to feel they got a bargain. But for me, I generally don't worry about timing my purchase to a price dip. I'm buying companies I intend to hold for a very long time-- 3 years or more, on average. Longer if possible. Warren Buffet says, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” In my current portfolio, the stocks I've held more than 6 months average a 34% annualized gain. If there's a company I've been watching and understand, which makes amazing things, and crushes their competition, and carries little debt, their stock on the rise, then I have little interest in timing the purchase just so.

2. I've heard people say "Sell in May and go away." Is there a time of year when things usually drop, so I shouldn't invest?

No, there is no such time of year. That's an old legend, once sort-of true, when the world moved slower and news was once or twice a day and traders spent half their summer at the beach club on Long Island. Those days are gone. Now things move fast and they change constantly. It never slows, not really. Get in as soon as you can, because the power of compounding will increase your invested savings exponentially over your lifetime. The sooner you get into the market, the wealthier you'll be when it's time to retire.

3. Do you have any tips? What's hot right now?

Disney never disappoints

This is one of those useless questions that everyone asks, because their investing philosophy is different from mine-- or more likely-- they do not yet have one. The answer is dependent on things only they know: what they do for a living; the industry or industries they understand and follow; the companies they already do business with; their savings and investing timeline; their patience with volatility, or their "risk profile." What I (seasoned and tolerant of risk) might recommend would likely make them seasick with wild price swings. What they (new to the stock market and accustomed to having a managed IRA) might find interesting would make me sleepy with the boring steadfastness of a dividend-based, low-growth return.

Generally I duck the question entirely by pushing them to a familiar name which grows pretty consistently despite a steady, blue-chip status: Starbucks, Disney, Berkshire-Hathaway (Buffet's conglomerate). A little something for everyone.

4. A lot of stuff I read says I should diversify across industries, like a little bit each of energy, biotech, banks, manufacturing... What do you think?

Short answer is Yes, you should diversify across industries, as well as across nations, growth stages, market caps, even asset classes (bonds, real estate, etc). But the reality is most of us know some areas a whole lot better than others. I've mentioned before that I know nothing, repeat nothing, about commodities. Or insurance. Or medical/health care. So while I should own stocks in those areas, I do not. Because at the end of the day, the single most important rule for me is Buy what I know. That's it. How can I possibly do a deep analysis-- either prior to purchase or later, when I'm keeping track-- if I don't genuinely understand the product they make, or the process by which they make money?

So I have industries I feel I get. Auto manufacturing, online retail, social networking, finance, entertainment, and so on. Limited, but within my wheelhouse.

5. If you only had enough money for one investment, would it be real estate, stocks, bonds, gold... ?

Stocks. Hands down. Nowhere else can I average over 20% per year on my capital. Even in a bad year I eke out 10% overall. The only thing which comes close to that would be private lending, which is very risky and a totally different kind of investment.

Looks great but it's not for everyone

Gold, it should be noted, has historically been a safe haven for cash in an unsafe or unstable financial world. Lately gold prices have dropped hard. But if you look back 100 years or 5,000 years, gold has been a great place to put your money. On the other hand, gold earns nothing. It just sits there. You have to have total faith that it will appreciate over time. Unlike a stock, there is no management team working their asses off to earn shareholders a return on that gold. So while there's virtually no risk that you'll lose your entire investment, there is also no promise that your asset will appreciate.

Real estate is generally a good investment, but again, it's a specialty requiring different skills and different expertise. Buying shares in a REIT (Real estate investment trust: many are traded over the counter as an exchange-traded fund) is not a bad idea if you are looking for broader diversification.

6. Choosing stocks and managing a portfolio looks confusing and difficult. Why can't I just put it into an index fund or a mutual fund and forget it?

You can do that, of course. Choosing stocks and buying for a long term hold is not for everyone. Direct stock ownership requires diligent research at the front end followed by years of tremendous patience and often a strong stomach after that. I do it because I make far better returns choosing my own stocks and managing my own portfolio than I would any other way. I also enjoy the process. But if you're the sort of person who is terribly busy, or easily distracted, or who would forget to look in on their stock holdings, or who hates that particular brand of responsibility-- yes, there are other ways to be in the market which require less from you. You will have to determine your own priorities and your own temperament and go from there.

7. How do I know when it's time to sell a stock?

There are only 4 reasons to ever sell:

• Your original investing thesis has changed or was incorrect;
• One of your holdings has grown too big and your portfolio needs to be rebalanced
• You found a better place for the money 
• You have a need for a tax loss to cancel some other substantial gain

I go into more detail regarding each of these reasons in a previous post, which you can find here.

Stock Investing: Fun with Financials

Let’s say you’ve been doing your qualitative research and have found several companies whose stock looks very interesting to you. These are businesses you understand at a basic level. They make a high quality product or service—and hopefully you’ve experienced that firsthand as a customer. You’ve decided that these companies have a wide moat, or a sustainable advantage, against their competitors. You’ve read up on their executive management and find them to be smart, capable, and relatively transparent leaders whose moves and choices make sense to you even as an outsider. Finally, you can see that these companies are growing both in size and popularity, or at least you see no obvious red flags pertaining to their potential.

Fantastic. You’re ready for some basic arithmetic. You may have been putting this off, or you may have been looking forward to some hard numbers. Different strokes. So let’s have a look at the companies’ financials to see how they’re doing on their ultimate purpose: making money for their shareholders.

First up, visit Yahoo Finance, enter the name or stock ticker of a company you want to look at and pull up their summary page. Down the left column is a list of 3 types of financial reports the company puts out quarterly: the Income Statement, the Balance Sheet, and the Cash Flow Statement. I find it easiest to copy these into an Excel spreadsheet to simplify and speed my analysis.

First let’s have a look at Return on Assets, which is simply the Net Income figure on the Income Statement divided by the Total Assets figure on the Balance Sheet. It represents the efficiency of the company in utilizing its assets to make a profit. You’d like to see upwards of 10%.

Return on Equity, another marker of efficiency, this time the company’s ability to use the combined equity of all current shareholders to make money, is Net Income divided by Total Shareholder Equity, another Balance Sheet item. Again, you’re looking for something above 10%.

Debt is a measure of all substantial borrowed money held by the company (to buy equipment or raw materials, to finance hiring or marketing or research) should equal less than 25% of Total Revenue. If a company is ringing up sales 3 or 4 times its total debt, that’s a good sign (though some capital-intensive industries, like heavy manufacturing or airlines, require more borrowed money). Ideally, Debt should be close to zero.

Debt-to-Equity Ratio, which is Long Term Debt divided by Retained Earnings and Total Shareholder Equity added together, measures the same debt against ownership equity in the company. For obvious reasons, this number should be as low as possible, but let’s be on the lookout for companies with a Debt-to-Equity ratio of 40% or less.

The Current Ratio is a simple one—it’s the measure of a company’s ability to pay off its most immediately-due debt with cash on hand. Using the Income Statement, just divide Cash and Equivalents (usually stocks or bonds or other asset which are effectively liquid) by Total Current Liabilities. You should see something higher than 2, or more than twice as much cash as current debt. This is important if those current lenders (many of whom may be vendors selling materials or labor to the company on payment terms) call the debt: in other words, if those lenders need the money immediately, can your company just pay them or is it going to mean trouble? A good indicator of the quality of financial management.

Next up is Accounts Receivables Growth: Is the amount owed the company by its customers—credit extended by the company—rising over time? On the Income Statement, locate the Accounts Receivables line and check to makes sure each successive year is higher than the previous. On Yahoo Finance you can click around to locate the quarterly reports from the company as well as the annual ones, and make sure the number rises quarter by quarter as well.

Next we’ll visit an area in Yahoo Finance’s company coverage called Key Statistics, a link on the left of the company summary page. Here you can find other very interesting data, some of which you could calculate but is easier just to look up.

52- week Price Change is in a block on the right margin. It’s simply an indicator of how far the stock price has moved up (or down) in the past year. You’d like to see the stock price rising over that time, of course, even if you’re considering buying on what you expect is a temporary price drop.

Also on the Key Statistics page you’ll find the PEG Ratio, in the middle-top section. This is an indicator of the Price-to-Earnings Ratio divided by a company’s expected growth rate.  The P/E Ratio (Price per share divided by earnings or profits per share) is a common old-school measure of a company’s profitability, a less useful marker now in the tech and information economy than it was in the days of manufacturing, but it’s still a good benchmark. The PEG ratio looks at that figure in light of the company’s growth rate. In general, the lower the number the better, as it indicates that the company is possibly undervalued by the market.

In my next post, I’ll detail some additional metrics I’ve found useful in choosing companies with the potential to completely upend the marketplace they operate in, changing the rules  of their industries or even inventing entirely new ways of doing business, and leaving others in their wake.

Drifting to Fifty | Random unrelated nugget of the week

The single most useful tool in your kitchen is a good, generally expensive, 9-inch chef's knife. If you never drag the blade edge sideways on a cutting board and you hone it briefly after every use it will stay sharp 4 times as long. 

Stock Investing: When to Sell

So you've got a portfolio now. You have 1 stock in it or 50 stocks in it. You're doing okay, not as well as you'd hoped, which is natural and normal. This is a long long ride, as I've said. There a likely some up and some down overall among your holdings. When do you sell one?

It's very simple, very straightforward, and easier to know when to sell than it is to choose to purchase a particular stock. You'll still get it "wrong," of course-- either selling near a bottom or selling too soon or too late or whatever. Nothing you can do about that without a crystal ball to know the future. Let it go. You can only operate on the information currently available.

Markets rise, markets fall-- but overall they rise. Never sell on market movements, you won't know when it's time to buy back in and you'll miss the rebound.

There are only 4 reasons to ever sell a stock you own.

RIM Blackberry Z10 - oops

1: Thesis Wrong/Thesis Changed: the reason you bought that stock in the first place-- your thesis-- has changed, or was incorrect in the first place. So say you bought because you thought the new product line was going to a be a sensational hit, and it turns out to be a dud. Or you loved the CEO's track record and now she's leaving the company. Or you thought they had a wide competitive moat, no real competitors, and months later some other company is rapidly taking market share from yours. Whatever: if you check what's happening with the company you own and something substantial has changed since you bought, and it worries you, that's a good reason to get out.

2: Rebalancing: your stock has risen so much that it's now a big percentage of your entire stock portfolio. Imagine you started with 10 stocks of more or less equal dollar weight, so each held about 10%. But now months or years later one company is worth substantially more, and holds close to 40% of the portfolio by dollars. Yes, it's a good problem to have. But if you're managing risk, you'll be worried that that one company could run into trouble, causing its stock to fall and making a lot of your paper profit disappear. Rebalancing means selling that company down to be more level with the average dollar size of the rest of your holdings, thereby minimizing the risk overall. I hate to bail on clear winners, but sometimes there's just too much unintended exposure on one stock. Gotta do it.

Common mid-life crisis solution

3. Better Place for the Money: Obviously it's always better to let a winner ride; that is, let a rising stock keep rising, theoretically forever. You sell it and you will make nothing on any coming rises in valuation, no matter what that company does in the future, and you'll have a capital gains tax to pay on your stock's appreciation since purchase. (You'll pay even more if you held it less than 12 months, as that gain is now classified as regular income). But sometimes you just have to sell: Maybe you found another company you like, and you need capital with which to buy it. Or perhaps your eldest child is ready for college and needs tuition. Maybe you want to reward yourself with a trip, or a new car or boat (depreciating assets = BAD). Whatever the need, that's what you invest for: to make a little money into a lot more money. Just do it is as infrequently as possible and plan for the tax hit. (Sophisticated investors will calculate the tax into the purchase price of the thing they need the money for, and then choose based on the combined cost.)

4. Need the tax loss: Finally it may be that you have a substantial tax you wish to offset by claiming a loss on your investment. If you have a stock that's declined since your purchase, even if your thesis is still solid and you believe in the company's future success, sometimes the loss is helpful from a tax perspective so you dump it. You can always buy it again later (wait 30 days!), and maybe at a better price than the first time.

That's it. I would never sell with the idea that the company has reached my desired valuation, a common reason. That sounds to me like unnecessary churn, exposing you to higher trading costs and the possibility of missing out on a great run by a company you've already vetted and enjoyed.

If I'm thinking of selling and my reason can't be squared with one of those above, I hold.

Drifting to Fifty | Random unrelated nugget of the week
An asset is something that is worth more than you paid, or which puts money in your pocket every year: a rising stock, treasury bills, fine art, long-held real estate. A liability takes money out of your pocket every year. Which one is your car? Exactly. What about your house? Hmmm...

Stock Investing: FAQ

I've been doing this a long time. Since 1992, in fact, and I beat the S&P 500 about 77% of the time. I do my own research. I read a lot of business news, I argue with other investors, I do the math (well, most of the math). I get it wrong, but more often than not, I get it right. At least in the long run.

I also collect questions. A stock investor is like a real estate agent or fitness coach: everyone wants to hear some tips, tell you their story, explore their own (sometimes harebrained) ideas, ask your thoughts. It's great, I love to talk about it. Some of my favorites:

1. I've been thinking about getting into the stock market, but I'm afraid we're in for a big market drop and I can't afford to lose the money. When is a good time?

Now. Now is just about always a good time to begin investing in stocks. For you, for your kids, for your mom and your next-door neighbor. Doesn't matter if the market drops, it always comes back and, if you choose the companies you invest in carefully (or if you buy the whole haystack) you are unlikely to lose. It's not that easy, of course: the trick is going for the long term. If you want to dabble, just triple your money quick and get out, go ahead and try Las Vegas. But if you are willing to commit to a 5-year minimum (50 is better) and you can afford to leave your money in the market, you'll do great. If you buy in and the market slides, great! Because now it's on sale! Buy some more.

2. How do I teach my kids about stocks? I want them to learn about proper saving and investing but I don't know where to start.

Open each of your kids a small portfolio of their own. Fund it with a chunk of their savings (again, think L-O-N-G term) and then add whatever you can part with to start them off. It can be a total of $500 or $5,000. Easy to do on E*Trade or TD Ameritrade. Show them how to research the companies that interest them. Teach them the kinds of things to look for, like a wide competitive moat and low debt and smart managers and a great brand. You can guide their research or not, that's up to you. The #1 goal is to give them a sense of ownership, and of self-determination. The #2 goal is for their stocks to increase in value. Be prepared for them to lose the money, at least on paper in the short run. Show them how to check up on their holdings (preferably monthly, not more than weekly). Let them discover the excitement and pride— and the pain— of their own great choices.

3. What does it mean when the stock splits? Does that make it a better deal? Should I buy more? 

A stock split means nothing. You can slice a pizza into 6, or 8, or 12: it’s still the same pizza. So if you think 4 quarters are worth more than a dollar, you'll love stock splits. But beyond the price of entry to own a bit of the company, a split changes nothing.

4. My buddy's cousin works at an investment bank and he says XYZ company is a great buy at the current stock price, it's about to pop. Should I pick some up?

I never act on tips I get. When I buy a stock, it's nearly always a company I've been watching for a long time. It's often a business of which I am a customer. It's a company with a brand most people know or will know, with an excellent executive team and very little long-term debt on their recent balance sheet. When I deviate from this method, I tend to get my hat handed to me. Unless I have a damned good reason, these days I stick to my script.

5. How much of my savings should I put into stocks? My broker (boyfriend, sister, dad, colleague, barista, hairstylist) says I should have __% in the market but I should also have some in bonds and leave the rest mostly in cash...?

Everyone's least favorite answer: it depends. There are many considerations here, like your age, income level, expenses you face regularly and expenses you see on the horizon. Your risk tolerance needs to be looked at, as well as your financial goals and timeframe. We should even talk about the stocks you're looking at, because there are very stable ones that grow only a little and there are volatile ones that (often) grow faster. As a rule of thumb, leave enough cash to get you through 3-6 months at your current living standard, in case of trouble, and invest the rest. Where to invest it, however, is a long discussion.

6. Wouldn't it be easier to buy a mutual fund or two rather than spend all that time choosing the right stocks? I don't want to get it wrong. Maybe I should just hand it all over the professionals.

It would certainly be easier to give your money to a professional fund manager. But if your goal is to substantially increase your wealth over time, you might want to reconsider: Approximately 80% of mutual funds underperform the average return of the stock market overall. Think about that: you give your money to a professional investor, who has analysts and specialized computers and reams of data and access you don't have; but 4 times out of 5 he can't even keep up with his benchmark, the S&P 500. One reason of course is you have to pay for the fund manager's services, often 1.5% of your assets. So not only does he need to beat the market, he has to pay for himself as well. A great article about this problem: http://www.fool.com/mutualfunds/mutualfunds01.htm

If you want to get into the market, and you really don't want to pick stocks, buy an index fund ETF (an automatically-trading fund, with no manager, which mimics the overall market and which you can buy or sell like a single stock). An ETF has an extremely low cost to the investor (maybe .25%). Just choose a broad one, with 100 or more diversified businesses. 

7. How often do you trade?

Weird question, but I get it a lot. The answer I generally give is, "As little as possible." By that I mean I buy whenever I have cash to spare and I see a price I like on a company I admire, or already own and I want more of it. I sell on only four occasions, and mostly on just two: 1: something in my investing thesis has changed (new products suck; sales/profits have been falling over quarters; major lawsuit against the company; merger I was counting on didn't happen; competitor is gaining fast and stealing market share...). 2: I need the money for something else, like tuition or a car purchase or another stock I like better. Trading is generally not good for long-term portfolio returns. As a rule, heavy traders earn less. I study the companies I want, I buy, I hold if I can. That's it. The less involved I am, the better I do.

I'll ask myself more questions in a future post.

Stock Investing: Preparing for a crash

The stock market does not always rise. We know it, we fear it. Many investors are kept on the sidelines, or kept from committing wholly to their portfolios because of the uncertainty, and because of the memory. I got killed in the last big market drop. What if I blow the timing and invest just as the next fall comes? 

Over the past 100 years, the stock market has offered higher returns than just about any other asset class. And if you're choosing the companies you invest in-- researching them as I've discussed here: vetting their performance, their management, their products and their competitive edge-- then you have substantially improved odds of doing even better.

US stocks have now enjoyed more than a huge 6 year bull market. In that brief time the S&P 500 stock index, a standard measure of the broader market, has risen over 200%.

But it won't last forever. In fact, the market has made almost no headway at all since the start of 2015. It could see a correction, or a short drop, anytime. We could even get into "bear" territory, during which the index falls 20% or more. What many people don't realize is that this necessary from time to time in order to eliminate the excess confidence and money in the market that has accumulated since the last downturn. Think of it like a forest fire: massive tree damage and scorched earth, but ultimately essential to clear out the deadwood and put nutrients in the soil for new growth. 

How does one prepare for such an event? There are three general approaches, and each has its advantages and disadvantages.

Option 1: Sell everything. In this scenario, I’ve decided the market is just about to plummet, and I want to protect my gains over the past few years so I sell my holdings to cash and wait for the market to do its thing and then rise again. At that time, I tell myself, I will repurchase my holdings at a big discount and hold them until the next drop.

chart from AspireByTCI.com

This plan requires several incorrect assumptions. 1: I will know the top. It is, of course, totally absurd to think that I will know when the market has peaked. There is no bell or warning light that things are about to take a turn. The list is long of supposedly wise and experienced managers who thought the fun was over and sold out prematurely to lock in gains. Imagine if you sell and the market continues on to far greater heights? You’ll have missed it, and you’ll have no discounted entry point at which to reinvest. 2: I have no problem paying 15-20% or more in capital gains on my sales. Remember, a long-held stock is an asset and there are no taxes until sale. If you plan to sell a winner and face the tax, I would hope its because you have a better place for the money, one which is so valuable to you that it's worth the capital gains on your stock sale to get the money to pay for it. 3: I will know when the market hits bottom so I can buy back in. How will you know? Did you know when the Great Recession ended? Did you reinvest in March 2009? Hindsight is 20/20 but in the moment few can see a shifting tide. And if you aren’t sure when to reenter, what will be the catalyst for you to do so? Again the list is long of wise and experienced managers who went to cash in 2007 but didn’t fully recommit until 2010 or later, missing most of the market's early recovery.

Option 2: Do nothing. Here, I have wisely recognized that the market is more often up than down, climbs higher than it falls, and that the downturns always hit bottom eventually and start to climb back. If I sell to protect my gains I will just worry about the right moment to sell, the taxes I owe and then the timing to get back in. So I'd prefer to do nothing at all.

This is not a terrible way to go. Generally speaking the assumptions are correct: when the market has fallen and then recovered, and all is said and done, your diversified portfolio will be pretty much intact.

That hurts

The primary disadvantage to this method: pain. You will watch your assets drop in value, often very substantially, and you’ll feel the pull to sell them and stop the bleeding. Worse, your friends and colleagues will tell you stories about when and how they got out and they may even say you’re nuts to try to ride it out. You’ll worry that you’re throwing your savings away, or burning the kids’ college fund or your retirement. You’ll feel foolish and arrogant for not listening to reason. You may have to defend your decision to a spouse or a parent. If the downturn continues, you’ll begin to question yourself, as well. It’s a difficult ride.

Option 3: Keep the winners, sell the losers. This approach splits the difference between the first two options, and it’s a good exercise in emotional discipline and forward thinking. Here, I maintain my holdings if they are higher than my purchase price and I sell any stocks which have fallen since purchase. 

Presumably, you're holding onto some stocks that have gone against you not out of stubbornness or pride, but because you believe they will turn around and rise. But if you believe the market will head downward before your losers come back up, theoretically putting those stocks deeper into the red, why not sell them to protect yourself? As there are no taxes when there are no gains, you can sell the losers without penalty beyond trading costs. And holding on to the winners and riding out the storm means no capital gains tax there either. 

The primary disadvantage to this approach is, again, the pain of watching your assets reduced. But I find that to be more than offset by the key advantage: you now have cash from the sale of those losers with which to buy the newly discounted companies you’ve been watching. You will not know the precise timing to buy those, of course, but generally speaking that’s not critical since you know the market overall will recover and the prices are temporarily lower. Don't try to be perfect; a good deal is a good deal.

In the end, the market downs are a necessary evil to make room for new growth. Do not fear them. Look at them as buying opportunities-- everything on the discount rack-- and try to use them to pick up a couple companies you did not previously own. Your overall portfolio returns will be much healthier as a result of your strong stomach and your commitment to the long term. 

Drifting to Fifty | Random unrelated nugget of the week
Never loan money to close friends or family. If the loan comes between you later it could ruin a critical relationship. If your best friend or your sister needs cash, give her the money. Maybe someday she will repay you, and won't that be a lovely surprise. 

Stock Investing: Buying on a whim

In future posts I will continue to teach analysis of companies you're interested in adding to your portfolio. There will be some discussion about financial math (mostly very easy, don't fret). There will be discussion about understanding the marketplace and how to make deductions about which way it's heading. There will be discussion about setting up an online portfolio so you can execute your own trades.

But for a moment I want to detour to a subject I've been asked about many times, and that is whether it's ever okay to buy a stock just because-- either your analysis indicated a low chance of success but you still wanted it, or you haven't actually undertaken any analysis, or maybe someone you trust just told you to buy a few shares.

It happens. I make speculative moves in the market too, though I've spent decades trying to resist the temptation and follow my training. When I do it, I'm often wrong and come up with a loss. But not always.

Look at it another way. Ultimately, stock market investment is a form of gambling, right? I mean, you're putting money on the table, betting a company will go up and not down, and you have effectively no power to influence the outcome. Might as well be roulette in that way--- except of course you do your research and so reduce the chances that you'll hit on Black and not Red. But things still go against you all the time, so it's still just an "educated" bet. Therefore, if you're going to do it anyway, be smart and limit your risk. Allocate a tiny percentage of your investment funds.

A purely speculative stock play is when you buy (or sell short, or whatever) a long shot. It could be a long shot for any number of reasons: tiny player against a market behemoth; inexperienced executive team; great idea but basically no funding; millions of customers but loses money nonetheless; "overpriced," so more likely to fall than to rise much from its current level; brand-new stock in the market, so very limited financial information to go on. But for whatever reason, you want it anyway.

an Audible book on an old iPod

I bought Audible.com many years ago, in the late 90s when few had heard of it. This was a company that allowed you to download digital audiobooks via the internet and copy them to your harddrive or a CD (pre-iPod). I read about it, tried it, and was blown away. I thought it was the wave of the future: everyone is busy, everyone is multitasking, no one has time to sit and read anymore, they can listen in the car, and so on.

Audible dropped about 20% in the next few months, then fell another 10-15%, and sat there. I held it for about 3 years, waiting for it to finally pop. It never did, and I ultimately gave up and sold at a loss. In 2008 Amazon picked up the company for a song. Hardly surprising in retrospect.

I knew it was a long shot-- in fact, I thought at the time it had gone public too soon, before the market was really clamoring for the products, before it was hot. But it was so terrfic I thought I had stumbled onto the next big thing and I could get in early and ride it all the way up.

I did the same thing with Netflix in about 2004. Shockingly easy to use, fun, and growing fast, but still a very cheap share price in my mind. (One reason it was cheap was the analysts all said it would get killed by Blockbuster, so no one wanted the stock. See what you learn if you bother?) I jumped on that train too and got squashed over the next few years as Netflix and Blockbuster duked it out, then Netflix and Walmart. Should have sold out and put my money elsewhere until Netflix stock finally caught fire, which was more like 2008. By then they were slaying everyone else in the video rental space (before they went to on-demand video). I eventually did well with it but I was forced to absorb a substantial opportunity cost for several years because I let my eagerness have its way.

The original Tesla Roadster

Speculation has worked for me as well, but less often. I bought Tesla the day it went public because I felt the initial offering price was too low for the crazy market buzz surrounding the company. I was right that time: the stock rose very fast and I got out less than 48 hours later with more than a 50% gain. (It has since been a rocket ship, but I missed the ride because my analysis of the company has never adequately explained its sky-high price since 2012.)

Bottom line: if you're going to play market roulette, use just a tiny chunk of the money you generally invest. Think of it as a bit of play money, maybe 5% of your portfolio. That way, when you get your ass handed back to you on a plate, you won't have really damaged your long-term success. And if you get lucky-- because that's what it is when you hit it on a speculative buy-- you can treat yourself.

Drifting to Fifty  |  Random unrelated nugget of the week
Invest in high-optical-quality, UV-blocking sunglasses and wear them outdoors at all times. You only get one pair of eyes. Take good care of them. If you damage them there are no second chances. 

Stock Investing: Yahoo! Finance is a supertool

Today I want to back up a little and take a closer look at one of the primary tools you'll use in researching companies whose stocks you are considering: the Yahoo! Finance company summary page. The image below is from today's Apple (AAPL) summary, which I chose because it is by far the largest company in the world by market cap and its stock is widely held.

This is where most of your reading will begin. If you ultimately purchase stock in a company you've researched here, you will also likely return for periodic checkins. No other single spot on the web amalgamates more critical and live-updating information regarding US public companies. The interface is pretty dated as the site hasn't really had an update in over a decade, but it's nonetheless easy to navigate.

I described in a previous post how to get here-- just search for Yahoo! Finance, then enter the company name you want in the Lookup box. Now I want to spend a few minutes exploring this page and all it offers.

  
1: Headlines. As I also mentioned previously, the Headlines section is a hub of up-to-the-minute published news articles, essays, and analysis containing the company's name or ticker symbol. From a wide variety of general news and financial news and blog sources, Yahoo collects and lists a vast trove of documents for your convenience. Twitter and Facebook mentions do not show up here but legitimate published works generally do.

2: Key Statistics. Click here and you'll find all sorts of detailed financial data plucked from the company's most recent financial reports, like total enterprise value, annual revenue, profit and profit margin, earnings per share, EPS divided by growth rate (called PEG ratio), cash on hand per the most recent balance sheet, return on assets and return on equity (how much they make relative to the resources at their disposal), and current ratio (the company's ability to pay 12 months' worth of it's current debt with current cash flow). Much of this information can be found by digging through the company's financials themselves, and a little simple math. But this area provides simplified financial highlights.

3: Competitors. This is really more of a guideline comparison chart tool, often less about actual competitors than about companies occupying a similar space or role in the marketplace. For example if you look up Google (GOOGL) competitors, it will list Facebook (FB), which really is not a competitor to Google in a traditional sense, but certainly competes for "eyeballs" or consumer time spent online, and is likewise funded by advertisers. Again, the charts in Competitors will allow you to compare head-to-head a company's size (by dollars by number of employees), profits, price-to-earnings ratios, and other such straightforward metrics. It's always important to know what sort of field your company is playing on.

4: Analyst Opinion. This is a very simple 5-point scale of desirability of ownership of the stock, an average of the Wall Street professional analysts who cover this company. 1.0 = Strong Buy (analysts generally recommend buying the stock at its current price), 3.0 = Hold (don't buy or sell, but stay tuned), 5.0 = Strong Sell (recommend selling at the current price). This particular tool is generally oversimplified for my taste but useful if you want a quick-and-dirty glance at what the pros are thinking about a company's value at the moment.

5: Major Holders and Insider Transactions. This area is extremely useful if you want to know what individuals and institutions hold big chunks of the stock of this company, which I always do. These folks have outsize influence on company decisions and directions, so knowing a little about who they are can be very helpful in figuring out what sort of company it is and what will likely happen in the future.

For example, if we open Major Holders for Apple Inc, we find first that Arthur Levinson, Chariman of the company, holds the most Apple stock of any individual. Second place is Tim Cook, CEO. This is good news, we want companies whose executives hold a lot of shares-- they are far more likely to act in our best interests as shareholders if their actions affect their own portfolios!

We can also click on Insider Transactions and see whether the largest shareholders have been buying or selling shares lately. This can be a great place to discover trends which could be a cause for excitement or concern. For example if you learned that several key executives have been selling a great number of shares, it could be a sign that those managing the company have lost faith in the business. Likewise, if executives are buying up shares for their personal holdings, it's generally a sign that they believe the current price is too low, and they are expecting great things for the stock. Who would know better than they what's coming?

6: Balance Sheet, Income Statement, Cash Flow Statement. As I've indicated, this is the location of all the public record financial statements the company reports quarterly and annually to comply with public company regulations. I will not spend significant time here going into what you can learn from these documents (that's another post) but you can certainly have a look and very quickly deduce trends: are revenues going up year over year? Is R&D spending going down? Is debt increasing or decreasing? We'll tackle more substantial analysis of these later.

7: Charts. This section is just fun to play with. Click on any of the time periods below the chart on the summary page and you'll get a new, large, customizable chart of the stock's rises and falls. You can see the stock price on any day going back years, redraw the chart a dozen different ways, compare charts of different companies or against the S&P 500 index, examine different time periods and so on.