Investing in Stocks Pt2
Created | Updated Jun 25, 2007
As an investor you should buy stocks for the long run but this doesn’t mean that you should put them away in a shoe box and forget about them. You will need to keep close to information about your stocks and be ready to react. You will ideally treat your investment as a business in which you will have to pay close attention, and adjust to the market.
In any worthwhile business you need to keep books that track your performance with milestones towards the year end objectives. Your spread sheet will show prices compared to the index and this will help show the leaders and laggards. You will also need a short list of key indicators on a dashboard, that are meant to drive the business forward. You will carry out an "Operating" Review of your successes/failures and opportunities on a monthly basis.
A number of financial sites provide portfolio facilities and give you all the advice necessary to get you started. If you choose an online broker you will have the tools needed to buy and track your stocks. Like a supermarket it will also reduce your costs, benefitting from massive sales in getting lower trading prices.
If you look at the High Street you may identify a good stock. You may want to choose a company where you have some first hand knowledge. Start by making gradual small purchases ramping up gently; this will give you time to see how the particular investment is performing.
You can use the Price/Earnings Ratio PER to compare different stocks. If the P/E is high it could be that people are willing to pay more for quality or future high growth. On the other hand if a company has recently reported disappointing earnings its P/E will be also high although this won't last as the market readjusts and the price falls. You can compare the P/E ratio of a stock to its competitors. You can also use the inverse namely the earnings / price as the yield of the stock to give you an idea on how it compares with long term interest rates. With rates at say 5% this would be equivalent to a P/E of 20 but you might settle for a P/E of 17 to allow some margin for the extra risk in stocks.
There are also mutual funds that cover sectors or the whole index but these maybe somewhat blunt instruments. Mutual funds are good if you want to invest in other markets where you are unlikely to have sufficient knowledge such as foreign stocks or raw materials, gold etc.
If you want to spread your risk you may also consider trackers, which combine the lower risk of mutual funds but are traded as ordinary shares. They may cover a particular sector like pharma or financials etc. You don’t have a fund manager and consequently you do not pay an entry, exit or annual fee.
The on line broker will provide information such as news on the stocks within your portfolio. You will quickly appreciate the importance of company or market news when you make a movement such as buying or selling a stock when something is imminent and you have not been aware. There will also be charts for technical analysis plotting the share price over various periods and tracking also the moving averages for values over 20 days 50 days or 100 days and a longer 200 day curve. These curves are indicators that you may use for performance. If the stock is above its 20 day moving average then it is a positive indication of its market value and you will have to look and find a historically previous higher value as the next aiming point. The 20 day curve should be above the 50 day etc. If a stock has fallen through the 20 day then you may consider the longer 50 day value as support.
There are also other tools used to analyse the technical performance which have some value when used together with fundamental analysis of the market, the product, the competition, etc as well as the company financial performance in terms of earnings and returns on capital and on equity as well as its debt.
In the end you will choose a solid company that has leadership in its sector. Using the P/E and comparing the inverse with long term interest rates is one criterion but there are others such as the PEG which compares the P/E with the percentage growth so that you may well accept a higher P/E for a company that has a higher growth. A P/E of 20 would be acceptable if the growth in earnings is forecast as 20% giving a PEG of 20/20 = 1.
In the end you will end up with a balanced portfolio of companies who are market leaders in their sector and have a historical record of steady growth denoting well managed companies that have good products with pricing power. You may select sectors either by reesearching future trends or using your own estimation of the future. For instance you may choose such sectors as water, energy, insurances, banks, pharmaceuticals, housing, or any other sectors that you think will grow in the future such as environmental products etc. You will also need to look at the people running the companies you choose because they will have the biggest impact on the performance through their decisions.
As an investor you have to aim at the long term but you should be also aware that this is made up of a number of short term segments and when making investment decisions you should maintain some liquidity to take advantage of low price opportunities. Abnormally bad weather may well cause falls in insurance prices or political upheaval may well change oil prices. Pharmaceutical companies may well temporarily suffer over product news.
In any worthwhile business you need to keep books that track your performance with milestones towards the year end objectives. Your spread sheet will show prices compared to the index and this will help show the leaders and laggards. You will also need a short list of key indicators on a dashboard, that are meant to drive the business forward. You will carry out an "Operating" Review of your successes/failures and opportunities on a monthly basis.
A number of financial sites provide portfolio facilities and give you all the advice necessary to get you started. If you choose an online broker you will have the tools needed to buy and track your stocks. Like a supermarket it will also reduce your costs, benefitting from massive sales in getting lower trading prices.
If you look at the High Street you may identify a good stock. You may want to choose a company where you have some first hand knowledge. Start by making gradual small purchases ramping up gently; this will give you time to see how the particular investment is performing.
You can use the Price/Earnings Ratio PER to compare different stocks. If the P/E is high it could be that people are willing to pay more for quality or future high growth. On the other hand if a company has recently reported disappointing earnings its P/E will be also high although this won't last as the market readjusts and the price falls. You can compare the P/E ratio of a stock to its competitors. You can also use the inverse namely the earnings / price as the yield of the stock to give you an idea on how it compares with long term interest rates. With rates at say 5% this would be equivalent to a P/E of 20 but you might settle for a P/E of 17 to allow some margin for the extra risk in stocks.
There are also mutual funds that cover sectors or the whole index but these maybe somewhat blunt instruments. Mutual funds are good if you want to invest in other markets where you are unlikely to have sufficient knowledge such as foreign stocks or raw materials, gold etc.
If you want to spread your risk you may also consider trackers, which combine the lower risk of mutual funds but are traded as ordinary shares. They may cover a particular sector like pharma or financials etc. You don’t have a fund manager and consequently you do not pay an entry, exit or annual fee.
The on line broker will provide information such as news on the stocks within your portfolio. You will quickly appreciate the importance of company or market news when you make a movement such as buying or selling a stock when something is imminent and you have not been aware. There will also be charts for technical analysis plotting the share price over various periods and tracking also the moving averages for values over 20 days 50 days or 100 days and a longer 200 day curve. These curves are indicators that you may use for performance. If the stock is above its 20 day moving average then it is a positive indication of its market value and you will have to look and find a historically previous higher value as the next aiming point. The 20 day curve should be above the 50 day etc. If a stock has fallen through the 20 day then you may consider the longer 50 day value as support.
There are also other tools used to analyse the technical performance which have some value when used together with fundamental analysis of the market, the product, the competition, etc as well as the company financial performance in terms of earnings and returns on capital and on equity as well as its debt.
In the end you will choose a solid company that has leadership in its sector. Using the P/E and comparing the inverse with long term interest rates is one criterion but there are others such as the PEG which compares the P/E with the percentage growth so that you may well accept a higher P/E for a company that has a higher growth. A P/E of 20 would be acceptable if the growth in earnings is forecast as 20% giving a PEG of 20/20 = 1.
In the end you will end up with a balanced portfolio of companies who are market leaders in their sector and have a historical record of steady growth denoting well managed companies that have good products with pricing power. You may select sectors either by reesearching future trends or using your own estimation of the future. For instance you may choose such sectors as water, energy, insurances, banks, pharmaceuticals, housing, or any other sectors that you think will grow in the future such as environmental products etc. You will also need to look at the people running the companies you choose because they will have the biggest impact on the performance through their decisions.
As an investor you have to aim at the long term but you should be also aware that this is made up of a number of short term segments and when making investment decisions you should maintain some liquidity to take advantage of low price opportunities. Abnormally bad weather may well cause falls in insurance prices or political upheaval may well change oil prices. Pharmaceutical companies may well temporarily suffer over product news.
