dennis mccain
  • Home
  • Investing
    • Dividend Kings
    • Div Aristocrats
    • Div Champions
    • Business Dev Cos
    • Monthly Dividends
  • Options
    • Weekly Options

Investing

Ideas and Strategies on Investing.

Previous Articles

Price per Earnings Ratio (P/E)

10/27/2013

0 Comments

 
 “Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed."
--- Benjamin Graham, Investor and Author.

  A market indicator that was in vogue for a century but has lost a lot of appeal over the last couple of decades is the price per earnings (P/E) ratio. It’s calculated by simply dividing the price of a stock by it’s earnings. Seems simple enough but any discussion of P/E ratios quickly leads to which earnings? Last years or next years? The market has found a replacement for this indicator in the PEG ratio, which is simply the P/E ratio divided by the stock’s growth rate. This new indicator now compares the company’s P/E ratio to it ability to grow those earnings. It’s a nice twist and it actually puts meaning to a company’s P/E ratio. 

  Here’s the result of the change. If a stock’s P/E ratio is higher than its growth rate, it’s PEG is greater than 1.0 and is considered over priced in relation to its expected future growth prospects. If a stock's P/E is lower than it's growth rate, the PEG is less than 1.0 and is considered underpriced for its expected future growth prospects. This new indicator individualizes P/E ratios for each and every individual company. It was a truly amazing improvement of an old indicator.

  This is all well an good but the P/E ratio of the entire stock market has been recorded for well over 100 years so there’s plenty of historical information going back through all those periods of war and peace, expansion and depression. As can be seen in the chart, the overall market’s P/E ratio has spent the majority of it’s time between 10 and 20. Periods outside this range quickly fell back into the range. On this past Friday, 25 Oct 2013, the P/E ratio of the DOW Industrials is 17.42 and the S&P 500 is 18.63. I use this information as a check to let me know from an overall market perspective if the market is overbought or oversold and whether I should be putting new money into the market. It gives me that strategic perspective or outlook I need to evaluate the overall health of the market.

  For researching individual stocks, as opposed to the overall market, the PEG ratio is probably more appropriate. I always check that ratio first when I’m looking at the fundamentals of a company. But in the back of my mind I still have that old idea that if a company’s P/E ratio is  over 20 (regardless of its PEG ratio) it’s telling me that the company may be overpriced at this level. This is especially true for larger, established companies like those found on the list of Dividend Aristocrats. If a Dividend Aristocrat has a P/E above 20 I tend to withhold any attempts to accumulate additional stock unless there’s a convincing argument being made by its other fundamentals or its chart.

Picture
0 Comments

Weekends Were Made For Thinking

10/26/2013

0 Comments

 
 "Know what you own, and know why you own it." 
-- Peter Lynch, Investor and Author.

 "It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for."
-- Robert Kiosaki, Investor, Businessman, Author.

 Weekends were made for research and reflection. It's a time for slowing down the brain and seeing things long term. The markets are frozen in time and there's not that constant pressure of a changing market. I like weekends, but I understand why all those market junkies hate weekends. There's no action.


 I like to review the current list of Dividend Aristocrats on the weekends and the place I like to start is FINVIZ. I generally start by plugging in all of the stocks on the Dividend Aristocrats list into the query box on FINVIZ so I can review the chart, all the descriptive, fundamental and technical filters, the recommendations, the news and the insider buys. It's a great place to start to get an overall update on each of the Dividend Aristocrats.

 Here's a URL for a screen of the current Dividend Aristocrats (http://tinyurl.com/nm8bke2). That's where I'll usually start and then from there I'll screen for these stocks using the stock screener in FINVIZ (http://tinyurl.com/mwdu5zc). Finally I'll go over to StockCharts.com and look at specific stock charts where I can add dozens of market indicators to determine if any of the stocks are within a buying or selling range.

 If there's any time left I'll move over to Seeking Alpha and Yahoo! Finance to read various in-depth news articles. Throw in a good cup of coffee and some good music and I end up with a very relaxing and financially beneficial weekend.

 Good Luck and Good Trading!
Picture
Picture
Picture
0 Comments

Comparing Charts

10/18/2013

0 Comments

 
 "90% of the people in the stock market, professionals and amateurs alike, simply haven't done enough homework."
-- William J. O'Neil, Investor and Founder of Investor's Business Daily. 

   Here's two charts of the DOW Industrials that are approximately two weeks apart. The one on the left is from October 3, 2013 and the one on the right is from October 18, 2013. They are both very similar and yet exactly the opposite at the same time.
Picture
October 3, 2013
Picture
October 18, 2013
  The one on the left is falling while the one on the right is rising. A trader on the left should be short, a trader on the right should be long. Days after the chart on the left the INDU continued to fall as can be seen in the chart on the right. On the left the RSI was falling but not in oversold territory. The MACD was falling but there was no indication that a turn was imminent. The MACD Histogram was still expanding lower, and the ADX had flipped a week earlier and gaining momentum. All things looked like it was going to continue down, which it did.

  About a week later everything reversed and the chart was telling you that everything was different, so any short positions needed to be reversed also. The RSI hit 30 and rose above it, the MACD Histogram turned up and the ADX reversed and crossed.

  Now we're in a similar yet opposite situation from October 3rd. The RSI is rising but not in overbought territory. The MACD is rising but there is no indication that a turn is imminent. The MACD Histogram is still expanding higher and the ADX has flipped with the up momentum above the down momentum. Similar to two weeks ago the INDU will probably continue to move higher until there is an indication of a turn. 

  I have no crystal ball and this is not a recommendation but it really does appear that the INDU is continuing to move higher and will probably do so for awhile. A smart trader would be long in this market because being short would only get that trader in trouble. However, these things can change on a dime so they need to be followed at least on a daily basis. Otherwise gains will quickly turn into losses. Being on the right side of a trade will not guarantee success in the stock market but it will increase your odds of being successful. 

  Learn to read the charts. They'll usually tell you everything you'll need to know to give you the confidence to make your trades and more importantly will signal you when you need to exit those trades as well. Charts are a wonderful thing for a trader!
0 Comments

Candlestick Charts

10/15/2013

0 Comments

 
  Creating stock charts by hand was an onerous task in its day but it’s been simplified over the years through the use of modern day computers. In fact today most chart readers use an online charting site that does most of the work for them. Personally I like to use StockCharts.com when I want to review a particular chart. Unfortunately the automated development of charting software has led to an explosion of capabilities that didn’t exist just a few years ago. One of these is the type of price plotting that can occur when laying down the markets daily price swings. Options include OHLC (Open, High, Low, Close), Line, Dash, Dots, Area, Histogram, CandleVolume, EquiVolume, Kagi, Renko, Cumulative, Performance, and others. It can all be way to confusing.

  I use Candlesticks. I like to research hundreds of stocks daily so I have to standardize on a particular type of stock chart and specifically one that provides me with as much visual information as quickly as possible. Otherwise I’d spend the whole day reviewing charts only to start over again the next day. What a tremendous waste of time that would be.

  Candlestick charts are especially helpful in identifying reversal points and signals. They display an extremely large amount of detailed information in a simple colored candle. They pictorially display the supply/demand balance and quickly show if the stock is being pushed up or down. They can also reveal the force or indecision behind the day’s activity. Candlesticks also reveal information in a more timely fashion and allow for a quicker realization on my part of a change in market sentiment.

  Candlesticks use all of the same information found in bar charts so all the rules and tricks that apply to bar charts pertain to candlesticks as well. In addition, candlesticks contain so much more useful information.

  I don’t presume to be an expert in candlestick charting and I really don’t have the desire to use this ancient theory of Japanese Charting as my single set of rules for my trading plan, but there are a lot of ideas behind the rules of Candlestick Trading. If you want to learn more about candlestick trading I highly recommend Steve Nison’s book “Japanese Candlestick Charting Techniques” since he was the individual that studied this method and brought it to Wall Street. For me personally I have incorporated the logic behind candlesticks into my own trading plan and I use it every day to screen charts.
0 Comments

Options are Derivatives

10/14/2013

0 Comments

 
Picture
 Options for the most part are pretty easy to understand. They’re just a derivative. They have no independent life of their own. They’re just a derivative. They’re simply something that changes in response to the changes in some other quantity (a first order derivative in Calculus, remember?) It’s the second order effect. For most options that means that any change in the price of the option is a response to the change in the price of the underlying stock. To understand which way an option is about to move is to understand which way the underlying stock is about to move. They move directionally together.

 Options are valued (priced) based upon two components - the inherent value of the option itself and the time premium associated with the time risk of buying and selling options. For simplicity, I’ll discuss buying a call option. If a stock XYZ is selling at $42 per share and I wanted to buy a call option with a strike price of $40, the inherent value of the call option is $2 ($42-$40). If I could buy the option at $2 (the inherent value) then I would have the right, but not the obligation, to buy the underlying stock for $40 (the strike price) for a certain period of time (the expiration date). I would be controlling but not owning a $42 stock for $2.

 As the underlying stock moved up in value the option would likewise have to move up in value because it’s inherent value increases with the increase in the price of the stock. I could essentially double my money with the simple move of the underlying stock of only $2 from $42 to $44. Simple enough to understand. Unfortunately the option would also fall in value as the underlying stock falls in price and would eventually be worthless (inherent value) if the underlying stock falls below $40 (the strike price). At this point I would have lost all of my money ($2). My protection is that I can only lose my $2 regardless how far the underlying stock drops in price because I’m not obligated to but the stock.

 So far this all seems so simple. For a small amount of money I can control a large amount of stock. This is what leverage is all about. But this is not what the fun is all about in options trading. Options are not priced simply based on their inherent value (if they were, no one would sell them). They’re priced based upon their inherent value plus a small associated time value. It’s this time value (premium) associated with the buyer’s ability to leverage over time that creates the fun. It’s the idea that this time premium is limited and deteriorates over time is what motivates the seller as much as the leverage excites the buyer.

 A call buyer will pay for both the inherent value as well as the time premium when buying an option. If I buy a call and the stock moves up, it’ll move right through this small time premium quickly. In the example above, if I paid $2.20 for the option and the underlying stock rose to $44, the option would be worth $4+ and I would have a $1.80+ increase on a $2.20 investment. That’s a 80+% increase instead of the 4.76% increase if I had just bought the underlying stock instead of the option. This is exactly what leverage will do for the trader.

 What I’ve learned over the years is that the time premium associated with an option is the highest when the stock is priced at the option strike price. This premium will deteriorate as the underlying stock begins to move away from the strike price. Visually this is like seeing a bell curve in my head placed over the price of a stock at any given point. As the stock moves away from the center point the premium decreases continuously just like a bell curve. In addition, I visualize in my mind that same bell curve melting away as time passes. What’s happening is that both as the stock moves away from the strike price the premium is shrinking and as the stock move through time the premium is shrinking. That premium will continue to shrink so the option is really dependent on the movement of the underlying stock (it’s a derivative).

 It’s that shrinking premium that’s working against the call buyer. He has to be right on the underlying stock’s direction because it’s so critical to his success. It’s the movement in the stock which will drive both the inherent value as well as offset the deteriorating time value.

 Needless to say options begin to become exponentially more difficult to understand as you start to think about buying puts as well as selling both calls and puts. Sophisticated traders even do combinations of buying and selling both puts and calls simultaneously on the same underlying stock. I generally don’t do that. I like to keep my life simple.

 For the most part I don’t buy options. I sell options. I like selling and collecting the time premiums associated with options. I feel that the odds are more in my favor selling options rather than buying them. I read somewhere sometime that most options expire worthless and most covered calls are sold by retirees trying to pick up some extra cash. Both of those ideas have stuck with me.

 Options are a risky investment primarily due to their eventual expiration. It’s not recommended for beginner traders and most traders have to be approved by their brokerage house prior to being allowed to trade options. I was very cautious before I ever traded my first option. I read about 20 books on options trading and even then I only traded a couple of options. Even today I trade options with less than 10% of my portfolio because that’s all I’m prepared to lose in such a drastic way.

 Options have been very good to me over the years and can be a strategic part of a trading plan. It has been part of my trading plan for years.
0 Comments

August-September 2013 Investing Articles

10/13/2013

0 Comments

 
 Below is a list of articles I've written over the last couple of months and posted here on my website. My articles are written in the hopes that one day my kids will get interested in investing and wonder how I got interested in it. Hopefully they'll read these articles and begin to understand the methods and strategies that I used throughout my lifetime. I hope you enjoy them too!

September 2013

Jesse Livermore
Swing Traders
PerfectStockAlert.com
The Long and the Short of Investing
Relative Strength Index (RSI)
MACD
Risk
Inverted Analysis
Adapt and Change
The Market is Always Right
Proctor and Gamble
Capabilities and Comfort Level
Trading in Two Time Frames
Watch the Charts, Not the News
Dividend, Growth Rate, & Payout Ratio
Dividend Aristocrats vs S&P 500
GeoPolitics
Compound Investing
The Bell Curve
Prospect Capital Corp
Calls are Not an Exit Strategy


August 2013

Trading Options with the MACD
MACD
Double Entry Deviants
Covered Call Writing
Dividend Aristocrats
Retirement Income
Patience
An MBA won't help
Go Short to Go Long
Selling Puts for Income
Petroglyphs to iPhones
Binary Analysis
Finding the Right Stock


0 Comments

Losses

10/9/2013

0 Comments

 
“You can’t make money if you are not willing to lose. It’s like breathing in, but not being willing to breathe out.”
--Ed Seykota, Commodities Trader.

  Trading in the stock market involves risking your equity in order to generate income. The income just cannot be generated without the risk. If an individual is not interested in accepting any risk at all, then the investment of choice would probably be Certificates of Deposit at the local bank. Unfortunately the interest received on these certificates is hardly ever higher than the rate of inflation. While the certificates will have an increased face value at maturity, the purchasing power has been greatly diminished. The risk for these “secure” investments is ultimately inflation.

  With risk comes eventual losses. It’s inevitable. No one is perfect at trading. The trader’s ability to quickly recognize losses and act upon them as they’re happening is the key to his success. Recognizing gains and his ability to let the gains continue is the other key to his success. Unfortunately beginner traders seem to do just the opposite. As one of their investments begins to increase in value, they lock down the gains by selling the stock and declaring victory. They’ve mastered the stock market with their gain. Their losses, unfortunately, are left to sit in their accounts as they whittle away into oblivion. The beginner trader has trouble comprehending how he made an error in judgement when he bought the stock. Surely the stock will turn around and do as expected, but they rarely do. Eventually capitulation occurs and the stock is sold at a major loss. Enough of these kinds of mistakes will eventually eliminate the trader from the market.

  The only salvation for the trader is developing a trading plan. Know the exit before the entry. In the end, the losses are not the problem. It’s all how the trader deals with the losses. A trader with a good trading plan in place will rarely have a large loss because his plan will protect him. 
0 Comments

Cash Flow

10/6/2013

0 Comments

 
 “Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
--John D. Rockefeller, Philanthropist and Industrialist.

 Cash moves constantly. It’s either moving toward me or away from me like the moon moves the oceans. And like the tides coming in, my efforts in life are to have cash moving toward me rather than away from me. When I buy a stock cash moves out of my account and when I sell that stock cash moves back into my account. If I’m trading for capital gains I send cash out of my account to buy stock with the intent of selling the stock later at a higher price and have more cash flow back into my account. If I buy a stock for dividends I’m expecting a steady stream of payments deposited back into my account on a regular basis. When I sell options cash comes into my account and I don’t expect to send cash back out to buy them at all. Selling puts money into my account, buying takes money out. Selling is better.
Picture
The Moon and the Tides
0 Comments

Always Have an Exit Strategy

10/6/2013

0 Comments

 
 “Affairs are easier of entrance than of exit: and it is but common prudence to see our way out before we venture in.”
-- Aesop, Ancient Greek Philosopher and Story Teller.

  An exit strategy is always a precondition for any trade I enter.

  All other strategies have disaster at their core. All other strategies are simply an emotional reaction to external events. All other strategies accentuate reward while ignoring the damage incurred by accepting extensive risk. These are strategies I refuse to implement in my trading strategy. My trading and investing success is based on controlling risk, preserving capital, and increasing gains where possible. Once I survived those freshman errors of the beginner trader I began to survive as a investor.

  All beginner traders are emotional when they begin their trading career, regardless of how long or short their trading career lasts. It’s not their fault. It happens to everyone. It’s caused by the excitement of “easy money”. Most beginner traders worked hard to put together a sum of money to afford them the ability to establish their first trade and what they often discover is that by simply clicking a mouse a few times they can open an brokerage account, buy a stock and, if they’re correct in their decisions, sell their stock realizing both a profit as well as the excitement of receiving easiest money they’ve ever made in their life.

  That type of situation is extremely addictive to the beginner traders. It provides an emotional high and an enormous boost to self confidence and enhances their self image. It’s an enormous and transformative ego boost and a confirmation that they are smarter than the average trader. They conclude that trading is easy, obvious, and they wonder why they hadn’t done this long before now. But like most things that are addictive, the emotional high only lasts so long before an ugly reality begins to set in.

  As a stock moves up in value, greed begins to creep into the psyche of the beginner trader. He begins to calculate how many years will it take before he’s a millionaire. He begins to calculate how he can double down on his investments to speed up this accumulation of wealth. Greed becomes the single most important factor in his trading decisions. Risk is ignored and disaster enters stage left.

  Sadly many beginner traders will eventually lose all their capital and exit the market forever. They will end up blaming the markets for what is actually their own inability to control risk. They've let their emotions control their trading decisions because they didn’t have a plan to control the risk associated with any trade. As much as their greed encouraged increased trading when the trades were successful, fear now discourages their trading when their trading becomes unsuccessful.

  Trades that are going poorly bring to the surface of the trader’s psyche his inherent fear of bankruptcy and a life of poverty. As much as greed makes the beginner trader dream of becoming a millionaire, fear makes the beginner trader anxious over losing everything and falling into that abyss of poverty. It’s the natural psychological conclusion for a trader whose trades are based on emotions and his emotions are out of control. An experienced trader would instead simply accept the loss, sell the position, and move on to the next trade. A beginner trader who had been bolstered by earlier successes interprets this situation as the market being wrong, he is still right, and the market will understand and correct itself over time. His fear traps him into holding onto a losing trade until his account is decimated. In the end these stocks often lay dormant in his account for years because he’s unwilling to declare defeat and sell. It’s a sad situation but it occurs everyday in the markets. The only value these trades may ever have will be as a tax offset for future successful trades.

  There is only one way that I know of to stop this disastrous style of trading based on emotions and that’s having a trading plan in place before the initial trade is executed. A good trading plan will have specific conditions for entering a trade as well as the resultant conditions for exiting a trade. A good trading plan will have a back up plan for when the trade act differently than originally expected. A good trading plan will be simple, and it should be written down as a set of simple rules and conditions. And finally it’s one that can be executed successfully.

  It is this exit strategy of how and when to exit a trade that makes a trader successful. It’s this exit strategy that keeps a trader trading for decades instead of weeks. It’s this exit strategy that eventually turns the trader into the successful investor.

Picture
0 Comments

Predicting the Future

10/4/2013

0 Comments

 
Picture
 "A man should look for what is, and not for what he thinks should be."
--Albert Einstein, Physicist

 Predicting the market has always been a fool's game. If you know anything about the stock market and investing, someone will eventually ask you your prediction of where the market is headed. The answer is that it's either going up, down or sideways. No matter what you say you'll be right only 1/3 of the time. And if you're wrong, you've set yourself up for ridicule. That's why I never predict the market. I'll leave that for others.

 One of the things I've learned to do is look at a company's history of revenue, profit and dividends to make sure they have continued to increase over time. Another thing I've learned is to view the company's stock chart to see if the stock is currently overbought or oversold. Finally I try to determine what I think the company is really worth and then I put in a buy or sell order, whichever is appropriate. It's a simple plan but I've learned that simple plans are usually the best. 

 If you're buying into a stock because you think you know what it's price should be rather than what it's price is then you'll soon be in for a big surprise. Do the fundamental research to screen for a list of candidate stocks and then research the charts to determine entrance and exit points. Most importantly make sure your decisions are based upon your own trading plan. There is no better expert on your investments than you. 

0 Comments
<<Previous
    Print Friendly Version of this pagePrint Get a PDF version of this webpagePDF

    Picture

    Author

    I am an Individual Investor with specific interest in long term growth and then enhancing my returns with income from dividends and derivatives. I don't recommend stocks to anyone (it's a good way to lose friends) and no one reading this should misinterpret my blog as a recommendation for any type of investment. I am writing this solely for myself and my kids.


    RSS Feed


    Picture
    Top 100 Blogs for Dividend Investors

    Picture
    Follow Me on StockTwits!



    Dividend Growth Stocks
    Dividend Growth Investor


    Picture
    I'm on Seeking Alpha too!

    Archives

    August 2018
    July 2018
    June 2018
    May 2018
    April 2018
    March 2018
    February 2018
    January 2018
    December 2017
    November 2017
    October 2017
    September 2017
    August 2017
    July 2017
    June 2017
    May 2017
    April 2017
    March 2017
    February 2017
    January 2017
    December 2016
    November 2016
    October 2016
    September 2016
    August 2016
    July 2016
    June 2016
    May 2016
    April 2016
    March 2016
    February 2016
    January 2016
    December 2015
    November 2015
    October 2015
    September 2015
    August 2015
    July 2015
    June 2015
    May 2015
    April 2015
    March 2015
    February 2015
    January 2015
    December 2014
    November 2014
    October 2014
    September 2014
    August 2014
    July 2014
    June 2014
    May 2014
    April 2014
    March 2014
    February 2014
    January 2014
    December 2013
    November 2013
    October 2013
    September 2013
    August 2013


    ADDITIONAL RESOURCES:
    4 Month INDU Chart
    Dividend Ex-Dates
    Bidness Etc
    SharpCharts Voyeur
    StockCharts.com

    FINVIZ
    Seeking Alpha
    BDC Reporter
    Roadmap2Retire
    DivHut
    Dividend Growth Investor

    Dividend Yield

    Stock Market Mentor
    Chart Swing Trader
    Dividend Announcements
    IBD TV
    Stocks to Watch Today
    Dividend Detective

    DISCLAIMER
     I am not a licensed investment adviser, and I am not providing investment advise for you on this site. Please consult with an investment professional before you invest your money. Any opinion expressed here should not be treated as investment advice. I am not liable for any losses suffered by any party because of data or information published on this blog. Past performance is not a guarantee of future performance. Unless your investments are FDIC insured, they may decline in value.

    Picture
Powered by Create your own unique website with customizable templates.