Finding Stocks

Part Two: Finding Stocks

Welcome to part two of my guide to investing in the stock market. Today I will be reviewing some methods I’ve used for choosing stocks. Remember, I’m not a professional. I’m an amateur like you and I’m speaking from my personal point of view. I make no guarantee of accuracy or effectiveness for this information. That said, let’s press on.

Look up Local Companies
Keeping your eyes peeled when you’re driving to work or school can help you spot obscure companies that may be on the verge of or already offer stock. Buying stock in local companies is a good way to invest in your own community and find otherwise obscure investing opportunities. I find companies this way all the time! My drive to work takes me past a company called Vulcan Materials (VMC). If I didn’t drive past that company everyday I would have never known about it.

Hear out Your Friends
Sometimes friends will come to me and tell me about a company that’s “supposed” to do well. Sometimes your friends are credible, sometimes they’re not. No matter what, if somebody mentions a company, industry, or stock to me I always investigate it, if only to broaden my knowlege of the market.

News and other Mass Media
This is a more traditional approach and shouldn’t be neglected. This is where a lot of the professionals like Jim Cramer from Mad Money provide you with analysis of the markets and provide you with their best advice. They’ll mention several companies and guess at how the stock will perform.

Your Own Research
Okay, you’ve looked up basic information on several stocks you’ve heard about. Now it’s time to do some more detailed analysis. I’ll use Vulcan Materials as an example.

Company PerformanceI examine how the stock has performed recently and historically. In this case, Vulcan Materials’ stock is up about 25% and up 560% since 1996.

This company shows an up trend over the past 10 years! That’s a good sign!

Read the News and Be Observant
Most quotes display related news. Sometimes these articles nothing more than “and Vulcan Materials donated a $1000 to a local little league team.” But, sometimes it’s serious like “Mr. So and So, the best raw materials salesman in the world and head of sales for Vulcan Materials took a long vacation and died on his way home.” Sudden developments like that can seriously impact a company for better or worse.

Community Trends
If you’re thinking about buying a stock from a local company examine the tastes, values, and preferences of your community. Vulcan Materials operates a quarry within a few miles of my home at the base of Azusa Canyon. Let’s say Azusa residents decided they didn’t want a quarry so close to their homes because of the noise, dust, or pollution it generates. The residents could make life very miserable for Vulcan to do business by organizing protests against mining, raising taxes targeted at Vulcan products and services, or preventing them from expanding into nearby property. This could reduce the profits of Vulcan Materials or even put Vulcan out of business!

On the other hand, what if the residents of Azusa weren’t so concerned about the environment and Vulcan wanted to buy nearby properties to reach a large deposit of highly valuable raw materials? That could pave the way for Vulcan’s best year ever!

Stuff You Would Use
I touched on this a little bit already, but I want to expand on it. Find companies that offer a product or service you believe in and invest! A company called Tempra Technology is developing a self cooling beer / soda can. I think this invention is up there with beer and the wheel! I believe this product will be popular, long lasting, and most of all, profitable and plan to invest accordingly.

Ask the Experts
You can literally ask Jim Cramer on his show Mad Money about specific stocks. Professional traders have a lot more time than typical people like you and me to research companies, examine board members, and look at market trends. Weigh your judgment against theirs. If most experts don’t like a company or stock, then it's probably a bad idea.

Do Some Number Crunching
Last but not least, you’ll want to look at some numbers for yourself. Find companies with good numbers. I go down the list of all the stocks I’m considering and look at things like their P/E, or stock price compared to earnings. If it has a low P/E, it’s a good candidate for my portfolio.

That’s my process in a nutshell, I’m sure there will be more on each of my methods in the future. I hope this helps you all out.

Quotes Related to This Post

Sincerely,
John Bravo
The Investing Sensei

Getting Started in the World of Finance Part 1

Part 1: Getting Started

Family and friends often ask me how to invest in the stock market and how to choose a good stock. So, I’ve decided to write a two part series on investing and choosing stocks. This brings me to my first part in the series, Is Investing in the Stock Market Right for You? Before you even think about buying stock, examine yourself and your personal situation. If you’re seriously considering investing, ask yourself these questions:

1: Do I have money to throw away?
When deciding if investing in the stock market is for you consider your kids responsibilities: kids, bills, spouse or significant other. If you don’t have any money left at the end of the month after taking care of all the necessities, investing probably isn’t right for you.

Some people make the mistake of telling themselves they’ll invest and buy the things they need on credit. This is a bad choice! If your interest rate is 5% that means you need a return of 6% or more to justify your investment. It’s even worse for people who are paying 26% or more on their credit card bills. Before you know it, you won’t be able to make the minimum payments, you’ll go over your credit limit and they’ll start charging you a hundred bucks a month on top of the interest that has to be paid. Think of it this way, paying off your high 26% interest credit card is like having a guaranteed 26% return!

On the other hand, if all your bills are covered, your children have clothes, and you’re happy with your standard of living, then investing may be a good option for you.

I figured out that high school was a great time to start investing. I was under my parent’s roof, had a part time job making decent money, and could afford to buy a video game and an In-N-Out burger every so often. After that, I still had money left over. I started to see my savings account grow so I decided to invest.

2: What kind of investor am I?
If you’ve thoroughly examined your situation ask yourself “What type of investor am I?” If you’re used to taking big risks and prepared to suffer the consequences of a bad pick, then an aggressive, high risk portfolio may be just what you’re looking for. If you’re not a big risk taker, you’ll want to stick with relatively low risk stocks issued by companies that have been around for a while.

I’m slightly more inclined to take risks. About 1% of my personal portfolio consists of an assortment of very high risk stocks from the pink sheets with a potential for huge gains. More often than not, these stocks stay flat or go belly up. Another 30% rests on small to mid cap moderately risky stocks I plan on selling within a year, depending on their performance. The bulk of my portfolio (About 50%) lies in mid to large cap stocks backed by companies with consistent growth. I keep the rest in cash to seize on opportunities that may present themselves as each trading session progresses.

3: What are your investing goals?
Identify goals, set benchmarks and stick to them. Are you looking to save up for a comfortable retirement? Or, do you want extra cash for that trip to Jamaica? Exit strategies are one of the most overlooked aspects of an investing strategy. If you haven’t already done so, get out a sheet of paper, your cell phone, or open up an excel spreadsheet and set reasonable goals. Use timelines, dates, portfolio gains, or portfolio losses to establish an exit point. Being worth millions on paper is meaningless if you never convert your paper money to cold hard cash.

I didn’t think about this until a friend and close mentor (Who is also an investor.) advised me that I need an exit point at which I would sell my stocks and do something with my earnings. I decided to cash out when I was worth $10,000 so I could take a really fun, long trip to Japan right out of high school.

Anyway, that’s all I have on the subject. You can catch part two of this series tomorrow. I’ll have more on the Investing Sensei’s Million Dollar Challenge.

My Thoughts on The Housing and Oil Bubbles

David Wyss brought up these interesting points, here are my thoughts on the Subject.

The Housing Bubble
It gets on my nerves when people call it a housing bubble. Sure, the market may be softening up, and some prices may be falling, but nothing burst. Its not as if people across the country are getting the boot from their homes by banks who can barely afford to do it. As a matter of fact, in places like San Francisco and the suburbs of Los Angeles home prices are still greatly inflated and finding a decent home in a nice area for a reasonable price is still an ungodly task.

Granted, some housing markets are cooling down and new homes aren't being built at the pace they were. But when you read an article about home prices falling remember to take into account that the thousands of new home owners who bought in the sizzling housing market still haven't gotten the new home smell out of their two car garages, guest rooms, and dens. After a few years when their obnoxious neighbor threw one too many keg parties, they find better jobs, or they simply want a fresh start somewhere else the housing market will white hot again.

Ultimately, prices in most markets have bottomed out, of course there will be some areas that continue to see declines for whatever reason, a lazy police force goes soft on crime or the city decides to dig out a dump a mile away from your home, or prices were, admittedly, a little high. But things will stay relatively stable for the next several years so long as the economy keeps growing at a moderate pace.

The silver lining in all these doom and gloom reports is all those construction workers that were building new homes are now free to rebuild New Orleans, construct badly needed schools, or renovate and create infrastructure essential for an efficient and successful economy. The slowdown in new home construction also frees up resources for building new business structures like condos, office complexes and football stadiums. (Los Angeles, I'm looking at you.)

Bottom line, there wasn't a bubble, and nothing is close to bursting. Home prices will remain stable so long as the economy in general is stable.

The Oil Bubble

I never thought there was an oil bubble either. I'm sorry to say oil is undervalued. Oil certainly had and still has a myriad of other reasons for soaring so high. Oil could easily fetch up to $100 a barrel in today's markets. Consider just a few of the factors that were driving and in some cases still driving the oil prices:

Terrorism: Unfortunately for capitalists, a bulk of the world's oil is in the increasingly volatile Middle East. (Invasion of Lebanon, War in Iraq, (Warren Iraq?) the nuclear standoff with Iran, need I say more?) It doesn't take much more than an effigy of Muhammad these days to justify shutting down an oil well.

Asia: The rapidly industrializing nations of Asia who suddenly woke up and said in one loud voice "Success is my only mutha f**king option, failure's not" are sucking up oil at a rapid rate. (I'm sneering at you China.) They're building factories, cities, and cars along with power plants to keep them humming. This requires vast amounts of energy and raw materials, a large part of which comes from oil.

Oil Itself: If we're honest with ourselves, we know oil is going to run out one day. Probably in my lifetime. As supply shrinks, oil futures will skyrocket.

Though I may disagree with him on a few trivial things, he was right on the money when he was talking about oil. However, I strongly disagree with his assertions and bleaker outlook on the U.S. housing market.

"That's all I have to say about that." - Forest Gump

Graciously,
Johnny Bravo
The Investing Sensei

Google Stock Analysis and Rating

Stock Analysis: Google Inc.
Symbol: GOOG

Profile
If you haven’t heard of Google you’ve probably been living with the sewer people or at least under a rock. If you still need an introduction, Google is one of the few internet companies that emerged from the dot com bubble burst. It provides one of the most used search engines built around their patented PageRank technology, designed to provide users the most accurate search results for their queries.

Google generates revenue by selling add space on search engine results pages and through other sources including the highly successful Google Network. One of Google’s most successful and innovative partner programs is AdSense, a system that allows publishers of online content to earn revenue for displaying Google’s ads. (This site is “monetized” by Google AdSense.)

Google's Outlook
I guess the real question is “Am I going to buy it?” The answer is probably. Lets step away from the tremendous buzz this company has generated and look at this stock objectively.

Google’s P/E
Compared to some other big tech stocks like Yahoo! and Microsoft, Google has a very high P/E. Was it hype or a well run company that quadrupled Google’s share price?

I’m willing to say it’s a mix of both, leaning in favor of a well run company. Google has a track record of success such as their acquisition of Pyra Labs. Pyra Lab’s Blogger system was a great compliment for their AdSense revenue sharing program, it allowed bloggers to capitalize on their blogs and helped create a whole new niche in E-Commerce. The Google Earth project was an excellent marketing move. This morning, as I watched CNN and Fox News break the North Korean proliferation news, I saw the Google logo at least 10 times an hour as they zoomed in on crystal clear satellite images of Pyongyang and the alleged nuclear testing facility, bearing witness to Google's unparalleld software quality.

Final Review
Google was an excellent stock to buy a year or more ago, though there is definitely potential for this stock to grow over the long term (5 years or more). Short term, Google’s stock price is inflated. I have a hunch that this stock's price is going to fall as the hype winds down, and if it does Google would be an excellent stock to get into!

Rating
Long Term: Buy / Hold

Short Term: Don't Buy / Sell

Scincerely Your Sensei,
Johnny Bravo

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Have criticism, compliments, or corrections? Email Me!
investingsensei@yahoo.com

Yahoo! Finance - Stock Quotes for your Blog

After about 15 minutes of searching, I found out that Yahoo! provides quotes for your blog. (I was actually hoping Yahoo would provide it, mostly because they do things like that better.) Anyway, if you have a blog or site you want quotes for you can get at the Yahoo! Fiance Badge Page. The Only downside is that a lot of the minor indexes, exchanges, etc. are not available.

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The Sensei's Million Dollar Challenge Investing Challenge

I've been telling myself I'm going to test several market strategies and track them for an entire year since high school. I'm finally going to do it! Starting December 1st I will track 3 radically different strategies and give myself a million bucks to invest for each one. I'll track every trade I make and note every dollar I do and don't make. I'll provide a detailed analysis of my performance every other week and you can see what did and did not work for me.

This is my dream portfolio. If I had 3 million dollars to risk in the stock market (or futures markets or precious metals markets.) these are the investments I would make this year.

The next step of course is choosing my first stocks. I guess I have roughly 2 and a half months to do this. So, expect a lot of stock profiles and analysis within the next few days. Here is the spreadsheet I'll be using to track my progress.