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Petroglyphs to iPhones

8/21/2013

Petroglyph

If you believe the archeologists, early petroglyphs were created about 40,000 years ago by some Cro-Magnon Dimwit who thought he was smarter than his buddy, another Dimwit of his species. And he probably believed that he needed to pass along some vitally important information to his buddy. He did this by picking up a small rock and scratching some cave drawings onto the side of his cave wall hoping his buddy would understand. This scenario has continued through the ages uninterrupted and today the first Dimwit would be called a college professor and the second Dimwit would be called a college freshman, but you get the picture (pun intended)!

Along with grunting and pointing, communication between humans had begun. Fast forward 40,000 years and things haven’t changed much in all that time. People still think they have something important to say and have this internal urge to “discuss it” like they’re going to explode if they don’t. And over the years the methods of communicating have changed but the act of communicating has basically endured undisturbed.

Now I don’t want to get into a long discussion about human discourse from cave drawings to smoke signals to the internet because there are so many better sources for that kind of information than I can present here. (If you’re really interested try this article on the History of Communication in Wikipedia) The point I want to make is that humans want to communicate more than almost anything else that they do. So much so that it’s often hard to find a nice quiet place to either read or think without that constant low level background noise.

Today this trend is continuing and at a faster pace than ever before. It appears that it’s not about to stop or even slow down any time soon, if ever. Communication today seems to be traveling in multiple directions over the internet, cell phones and to a lesser extent television.

Now when I start to think about things like this I ask myself “How can I, as an individual investor, make a buck here?” Then I ask myself “Who’s making money here?” and “What's the common denominator in all of this?” What company makes money off the internet, cell phones, and television? Are any of these companies listed as a Dividend Aristocrat? Do they increase their earnings and dividends consistently and over time? Will they be around for awhile? Do they have a future?

What I discovered was that there are two companies - Verizon and AT&T - that fit this description. Both appear to be fundamentally sound investments and seem to be worthy of owning if the price is right. The only problem now is determining at what price I would be interested in accumulating a position. For me that can only be answered through a technical analysis of their stock charts and their market indicators. But that will have to wait for another posting.

(NOTE: Please remember that this is my personal blog and it is not intended to be a recommendation for or against any type of investment. Please do your own research and most importantly take responsibility for your own decisions.)

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Binary Analysis

8/20/2013

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Most investors fall into one of two categories, just like politicians. Some consider themselves Fundamental Analysts and some consider themselves Technical Analysts. And, just like politicians, most investors tend to argue their perspective without understanding or appreciating the merits of the other perspective. Both methods claim to have the best ability in both identifying stocks that are undervalued and worthy of owning and stocks that are overvalued and worthy of selling. And both methods claim that the other method is worthless in identifying anything except by accident. Both can’t be right. I personally have never taken a side in this argument and have never fallen into that trap. I have attempted to understand both methods and I have used both methods for different reasons. But what are these two ways of analyzing investments?

Fundamental Analysis. This method focuses on the fundamental aspects of a company to determine it’s intrinsic value and then compares that value to its stock market value as determined by its stock price multiplied by its number of outstanding shares. It does this by looking at the company’s income statement, balance sheet and cash flow. This will include revenues, cost of revenues, operating expenses, non-recurring events, net income, assets vs liabilities, operating activities, effects of exchange rates, etc. You virtually need an accounting degree to understand all of those things. And then you have to compare all that to what a bunch of guys in NY have priced the stock to determine if it’s a worthy buy. And then do it all over again to determine if it’s a worthy sell. It’s a lot of work.

Technical Analysis. This method focuses on the technical aspects of the price of the stock and ignores all those fundamental aspects of the company. It analyzes the movement of just the stock price and tries to predict its future movement, either up or down. It does this by studying stock charts for repetitive and reproducible movements, both up and down. It then tries to determine if the stock has moved up too high or too fast and declares it to be overbought and therefore should be sold. Conversely if a stock has moved down too low and too fast it is declared oversold and needs to be bought. Technical analysis also looks at stock indicators like RSI, MACD, Stochastics, Moving Averages, Bollinger Bands, Channels, Pivot Points, Envelops, Clouds, Resistance Levels, Gaps, Candlesticks, Volume, etc., for additional insight into the future movement of the stock price. It can all be very confusing and intimidating. It’s amazing to me that a pure technical analyst doesn’t even need to know the name of the company or the business it’s in, he just needs to know the stock symbol in order to make the trade.

So here’s what I like to do. I use fundamental analysis when I first screen candidates to determine companies that have those quarterly and annual increases in sales, earnings and dividends that I like so much. By doing this I narrow down the number of candidate on which I need to do further research. Remember, there are approximately 15,000 stocks listed on the various exchanges and I can’t possibly look at all of these. I like to use as much help from as many sources as I can find like those I posted in an earlier post titled “Finding the Right Stock”.

Once I get a reasonably short list of candidates using fundamental analysis, I like to use all the capabilities of technical analysis with its use of charts and indicators to determine the specific timing of my buys and sells. I’ve learned over time that fundamental analysis is best for determining the types of companies and businesses to own but technical analysis is best for determining the specific timing of my buys and sells. And often timing here, as in many other things in life, is everything.

In a later post I’ll discuss the specific chart attributes and stock indicators that I like to use and where more detailed information can be acquired.

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Finding the Right Stock

8/18/2013

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All of my investing starts with finding the right stock. And how do I know if the stock I’m looking at is the right stock? It’s the one that goes up. I generally don’t like the ones that go down. My basic desire, like most investors, is to buy at a low price initially and to sell at a higher price later. Unfortunately that doesn’t always happen or we’d all be millionaires by the time we’re 30.

So here’s what I usually do and where I usually start. I believe, rightly or wrongly, that companies that continue to increase their earnings will, over time, have a similar increase in the market value of the company itself and therefore the value of it’s stock. I generally like companies that increase their earnings by 8% or better per year. That way the value of my portfolio will increase by approximately the same amount.

Young companies tend to keep all their earnings and reinvest them into the company so it can grow, which is a good thing. Unfortunately they usually don’t pay dividends. This is why these companies are called Growth Companies. Other companies, generally old companies, tend to pay a large dividend because they no longer know how to grow their earnings internally so they just give their earnings to their stockholders in the form of a dividend. This is why these companies are called Income Companies. And then there’s a third group. This group pays out part of their earnings in dividends and keeps the other part of their earnings to grow the company. These companies are sometimes referred to as Growth and Income Companies. Each of these types of companies may be of some value to some investors but for me, if they’re not increasing their earnings by at least 8% per year, I’m just not interested.

At my age, I have little interest anymore in the first type. I prefer the latter two types. This is because at my age I like dividends. A lot. I look for companies that not only pay a nice dividend, but companies that increase their dividends annually over a rather lengthly period of time. That way I can see the predictability in their earnings as well as their dividend increases. I am so attached to companies that increase their dividends annually that if a company that I own doesn’t increase their dividend annually, that stock is sold and replaced with another that does. It’s that simple.

Now you would think that it would be tedious to scour the 15,000 or so stocks listed on the NYSE, AMEX and OTC but it’s not. That information is readily available and it’s free. You can Google that information but this is where I usually find it. A website titled Dividend Yield - Stock, Capital, Investment. It’s a terrific site and it lists all kinds of dividend yielding stocks.

My favorites are the Dividend Aristocrats and the Dividend Champions. They are very similar lists with a lot of overlap. The main difference is the pool from which they are sampled. Dividend Aristocrats measures the performance of large cap, blue chip companies within the S&P 500 that have followed a policy of increasing dividends every year for at least 25 consecutive years. Dividend Champions are sampled from the entire pool of stocks and are stocks that have increased their dividends year after year over a period of 25 or more consecutive years.

Since some stocks that have increased their dividends less that 25 years will eventually pass this threshold, and some companies on this list will fall on hard times and not increase their dividend or worse cut their dividend, this list is updated monthly. So it’s wise for me to update my potential investment candidates monthly.

Once I get my list of candidates, I often use a screener, some daily and weekly charts, and my favorite stock chart indicators. I will discuss those in later posts but for now if you are wondering where I find good stock candidates, I usually start with the Dividend Aristocrats and Champions.

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Petroglyphs to iPhones

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