These are tempting times for investors.
It seems that every few days, the Dow Jones Industrial Average hits a new all-time high. Analysts are predicting 20 percent profit growth this year in the technology sector.
So it’s beginning to feel a lot like the late 1990s, when there was a lot of money to be made by picking the right stock. Then again, it feels a bit like the early 2000s, too, when those right stocks suddenly turned very wrong.
To help you deal with your conflicting feelings of greed and fear, and to help you make money, I’ve come up with a 10-point investing survival checklist. It will help you identify which stocks to buy.
1. Never buy or sell based on anyone’s (including your own) market predictions.
Turn on CNBC and, almost without fail, some guy who predicted the last market crash, bull market or whatever is telling you that the market is getting ready to (a) soar, (b) crash or (c) remain in a trading range. Same thing for interest rates, value of the dollar, oil prices, gold prices, you name it. If these guys really knew, the last thing they’d do is tell us.
Instead of predicting the market, focus on the individual stocks that you’re following.
Their profit margins, sales forecasts and stock-price gyrations contain important clues about what lies ahead for them — and probably their entire industry.
2. Stick with uptrending stocks.
A stock’s price action tells you what the market thinks about its outlook. Stocks move up in price when most players see good things ahead, and down when they don’t.
It’s tempting to think you’re smarter than the market. Especially when you’ve done your homework and scrutinized a firm’s fundamentals. But all too often stocks move because insiders are acting on information that hasn’t yet hit the news.
How do you know if your stock is moving up or down?
Strong stocks are trading above their moving averages, and weak stocks below. Stick with stocks trading above their 50-day and 200-day moving averages. The 50-day reflects relatively short-term price action, and the 200-day gauges longer trends.
3. Never buy stocks in danger of filing for or actually in bankruptcy.
It’s tempting! Stocks fetching $25, $50 or even $100 a few months ago can be had for pennies. Surely, they’ll be worth more when the firm exits bankruptcy. Alas, most often, the stock ends up worthless.
Most bankruptcies happen when a firm’s debt and other liabilities exceed its assets. That means that there’s not enough cash to pay off the creditors. Usually the company continues to operate, is eventually reorganized and comes out of bankruptcy. However, in the process, the old shares are wiped out.
The creditors get new shares in the reorganized firm and the old shareholders get experience.
4. Never average down.
Averaging down means buying more shares after a stock you bought went down instead of up. Say you buy 100 shares of a stock for $20 per share. Then it drops to $10. To get back to break-even, the stock would have to double.
By averaging down, which in this case means buying 100 more shares at $10, you can break even if the stock pops back up to $15, instead of $20.
Bad idea! The stock dropped because something went wrong. Chances are, the stock will drop even further.
5. Always sell when management cuts sales or earnings forecasts.
Top executives tend to be an optimistic lot.
Thus, when they’re forced to cut sales or earnings forecasts, they typically portray the causes as short-term fixable problems. Don’t believe them! Bad news usually leads to more bad news. As painful as it seems at the time, your first loss is usually your best loss. Sell at the first sign of faltering growth.
If you’re lucky, a competitor will sound the alarm and take the hit before your company does. When that happens, your stock’s execs will say that the competitor’s problems are company specific and don’t apply.
Since everybody in the same sector faces the same problems, take advantage of your good fortune and sell before your company issues similar bad news.
6. Only buy stocks with real sales and real earnings.
It’s easy to fall for a great story, a sure-fire new concept that’s about to come to market. But somehow, they often don’t happen. In the end, earnings propel stock prices, so your best bets are stocks with already strong but growing earnings.
But you can’t have earnings without sales, so start there.
Require at least $10 million sales in the last quarter. Next, make sure that sales are growing from year to year and are translating into positive and rising earnings.
7. Always diversify between industries.
You might find it hard to believe now, but a year or so ago, it would have been tempting to load up on home builder and energy stocks, the hot industries of the moment.
If you’re like me, by the time you realize an industry is hot, everyone is piling in and you might be closer to the end than the beginning.
There still could be money to be made, but don’t go overboard. Don’t put more than 5 percent of your funds into any single industry, e.g. semiconductors, oil drillers, clothing retailers, etc.
8. Don’t buy stocks just because they’ve gone up.
It’s tempting to jump on the bandwagon when all your friends are talking about how much money they’ve made on a stock. But, oftentimes a stock’s price momentum attracts investors who jump in without doing much research.
Without strong fundamentals to back up the price action, such stocks always crash and burn. Do your homework before you jump on that hot stock.
9. Never sell a stock because an analyst proclaims it is overvalued.
Part of the fallout from the tech bubble is that analysts, instead of just guessing, must now have a defendable approach for coming up with their “buy” or “sell” ratings.
They satisfy that requirement by calculating the “fair value” of the stocks they cover.
They advise buying stocks trading below fair value. But when a stock price surpasses fair value, they deem it overvalued and advise selling.
While that sounds reasonable, the fair-value formulas require making assumptions about acceptable return rates that have no basis in fact. By manipulating those assumptions, you can come up with just about any fair value you want.
In my experience, analyst downgrades based solely on valuation are excellent buying opportunities.
10. Always look for companies with new ideas, new styles or new products.
The best stocks are those that have something new to offer. It doesn’t have to be high tech. by HARRY DOMASH
These are tempting times for investors.
It seems that every few days, the Dow Jones Industrial Average hits a new all-time high. Analysts are predicting 20 percent profit growth this year in the technology sector.
So it’s beginning to feel a lot like the late 1990s, when there was a lot of money to be made by picking the right stock. Then again, it feels a bit like the early 2000s, too, when those right stocks suddenly turned very wrong.
To help you deal with your conflicting feelings of greed and fear, and to help you make money, I’ve come up with a 10-point investing survival checklist. It will help you identify which stocks to buy.
1. Never buy or sell based on anyone’s (including your own) market predictions.
Turn on CNBC and, almost without fail, some guy who predicted the last market crash, bull market or whatever is telling you that the market is getting ready to (a) soar, (b) crash or (c) remain in a trading range. Same thing for interest rates, value of the dollar, oil prices, gold prices, you name it. If these guys really knew, the last thing they’d do is tell us.
Instead of predicting the market, focus on the individual stocks that you’re following.
Their profit margins, sales forecasts and stock-price gyrations contain important clues about what lies ahead for them — and probably their entire industry.
2. Stick with uptrending stocks.
A stock’s price action tells you what the market thinks about its outlook. Stocks move up in price when most players see good things ahead, and down when they don’t.
It’s tempting to think you’re smarter than the market. Especially when you’ve done your homework and scrutinized a firm’s fundamentals. But all too often stocks move because insiders are acting on information that hasn’t yet hit the news.
How do you know if your stock is moving up or down?
Strong stocks are trading above their moving averages, and weak stocks below. Stick with stocks trading above their 50-day and 200-day moving averages. The 50-day reflects relatively short-term price action, and the 200-day gauges longer trends.
3. Never buy stocks in danger of filing for or actually in bankruptcy.
It’s tempting! Stocks fetching $25, $50 or even $100 a few months ago can be had for pennies. Surely, they’ll be worth more when the firm exits bankruptcy. Alas, most often, the stock ends up worthless.
Most bankruptcies happen when a firm’s debt and other liabilities exceed its assets. That means that there’s not enough cash to pay off the creditors. Usually the company continues to operate, is eventually reorganized and comes out of bankruptcy. However, in the process, the old shares are wiped out.
The creditors get new shares in the reorganized firm and the old shareholders get experience.
4. Never average down.
Averaging down means buying more shares after a stock you bought went down instead of up. Say you buy 100 shares of a stock for $20 per share. Then it drops to $10. To get back to break-even, the stock would have to double.
By averaging down, which in this case means buying 100 more shares at $10, you can break even if the stock pops back up to $15, instead of $20.
Bad idea! The stock dropped because something went wrong. Chances are, the stock will drop even further.
5. Always sell when management cuts sales or earnings forecasts.
Top executives tend to be an optimistic lot.
Thus, when they’re forced to cut sales or earnings forecasts, they typically portray the causes as short-term fixable problems. Don’t believe them! Bad news usually leads to more bad news. As painful as it seems at the time, your first loss is usually your best loss. Sell at the first sign of faltering growth.
If you’re lucky, a competitor will sound the alarm and take the hit before your company does. When that happens, your stock’s execs will say that the competitor’s problems are company specific and don’t apply.
Since everybody in the same sector faces the same problems, take advantage of your good fortune and sell before your company issues similar bad news.
6. Only buy stocks with real sales and real earnings.
It’s easy to fall for a great story, a sure-fire new concept that’s about to come to market. But somehow, they often don’t happen. In the end, earnings propel stock prices, so your best bets are stocks with already strong but growing earnings.
But you can’t have earnings without sales, so start there.
Require at least $10 million sales in the last quarter. Next, make sure that sales are growing from year to year and are translating into positive and rising earnings.
7. Always diversify between industries.
You might find it hard to believe now, but a year or so ago, it would have been tempting to load up on home builder and energy stocks, the hot industries of the moment.
If you’re like me, by the time you realize an industry is hot, everyone is piling in and you might be closer to the end than the beginning.
There still could be money to be made, but don’t go overboard. Don’t put more than 5 percent of your funds into any single industry, e.g. semiconductors, oil drillers, clothing retailers, etc.
8. Don’t buy stocks just because they’ve gone up.
It’s tempting to jump on the bandwagon when all your friends are talking about how much money they’ve made on a stock. But, oftentimes a stock’s price momentum attracts investors who jump in without doing much research.
Without strong fundamentals to back up the price action, such stocks always crash and burn. Do your homework before you jump on that hot stock.
9. Never sell a stock because an analyst proclaims it is overvalued.
Part of the fallout from the tech bubble is that analysts, instead of just guessing, must now have a defendable approach for coming up with their “buy” or “sell” ratings.
They satisfy that requirement by calculating the “fair value” of the stocks they cover.
They advise buying stocks trading below fair value. But when a stock price surpasses fair value, they deem it overvalued and advise selling.
While that sounds reasonable, the fair-value formulas require making assumptions about acceptable return rates that have no basis in fact. By manipulating those assumptions, you can come up with just about any fair value you want.
In my experience, analyst downgrades based solely on valuation are excellent buying opportunities.
10. Always look for companies with new ideas, new styles or new products.
The best stocks are those that have something new to offer. It doesn’t have to be high tech.
by HARRY DOMASH
These are tempting times for investors.
It seems that every few days, the Dow Jones Industrial Average hits a new all-time high. Analysts are predicting 20 percent profit growth this year in the technology sector.
So it’s beginning to feel a lot like the late 1990s, when there was a lot of money to be made by picking the right stock. Then again, it feels a bit like the early 2000s, too, when those right stocks suddenly turned very wrong.
To help you deal with your conflicting feelings of greed and fear, and to help you make money, I’ve come up with a 10-point investing survival checklist. It will help you identify which stocks to buy.
1. Never buy or sell based on anyone’s (including your own) market predictions.
Turn on CNBC and, almost without fail, some guy who predicted the last market crash, bull market or whatever is telling you that the market is getting ready to (a) soar, (b) crash or (c) remain in a trading range. Same thing for interest rates, value of the dollar, oil prices, gold prices, you name it. If these guys really knew, the last thing they’d do is tell us.
Instead of predicting the market, focus on the individual stocks that you’re following.
Their profit margins, sales forecasts and stock-price gyrations contain important clues about what lies ahead for them — and probably their entire industry.
2. Stick with uptrending stocks.
A stock’s price action tells you what the market thinks about its outlook. Stocks move up in price when most players see good things ahead, and down when they don’t.
It’s tempting to think you’re smarter than the market. Especially when you’ve done your homework and scrutinized a firm’s fundamentals. But all too often stocks move because insiders are acting on information that hasn’t yet hit the news.
How do you know if your stock is moving up or down?
Strong stocks are trading above their moving averages, and weak stocks below. Stick with stocks trading above their 50-day and 200-day moving averages. The 50-day reflects relatively short-term price action, and the 200-day gauges longer trends.
3. Never buy stocks in danger of filing for or actually in bankruptcy.
It’s tempting! Stocks fetching $25, $50 or even $100 a few months ago can be had for pennies. Surely, they’ll be worth more when the firm exits bankruptcy. Alas, most often, the stock ends up worthless.
Most bankruptcies happen when a firm’s debt and other liabilities exceed its assets. That means that there’s not enough cash to pay off the creditors. Usually the company continues to operate, is eventually reorganized and comes out of bankruptcy. However, in the process, the old shares are wiped out.
The creditors get new shares in the reorganized firm and the old shareholders get experience.
4. Never average down.
Averaging down means buying more shares after a stock you bought went down instead of up. Say you buy 100 shares of a stock for $20 per share. Then it drops to $10. To get back to break-even, the stock would have to double.
By averaging down, which in this case means buying 100 more shares at $10, you can break even if the stock pops back up to $15, instead of $20.
Bad idea! The stock dropped because something went wrong. Chances are, the stock will drop even further.
5. Always sell when management cuts sales or earnings forecasts.
Top executives tend to be an optimistic lot.
Thus, when they’re forced to cut sales or earnings forecasts, they typically portray the causes as short-term fixable problems. Don’t believe them! Bad news usually leads to more bad news. As painful as it seems at the time, your first loss is usually your best loss. Sell at the first sign of faltering growth.
If you’re lucky, a competitor will sound the alarm and take the hit before your company does. When that happens, your stock’s execs will say that the competitor’s problems are company specific and don’t apply.
Since everybody in the same sector faces the same problems, take advantage of your good fortune and sell before your company issues similar bad news.
6. Only buy stocks with real sales and real earnings.
It’s easy to fall for a great story, a sure-fire new concept that’s about to come to market. But somehow, they often don’t happen. In the end, earnings propel stock prices, so your best bets are stocks with already strong but growing earnings.
But you can’t have earnings without sales, so start there.
Require at least $10 million sales in the last quarter. Next, make sure that sales are growing from year to year and are translating into positive and rising earnings.
7. Always diversify between industries.
You might find it hard to believe now, but a year or so ago, it would have been tempting to load up on home builder and energy stocks, the hot industries of the moment.
If you’re like me, by the time you realize an industry is hot, everyone is piling in and you might be closer to the end than the beginning.
There still could be money to be made, but don’t go overboard. Don’t put more than 5 percent of your funds into any single industry, e.g. semiconductors, oil drillers, clothing retailers, etc.
8. Don’t buy stocks just because they’ve gone up.
It’s tempting to jump on the bandwagon when all your friends are talking about how much money they’ve made on a stock. But, oftentimes a stock’s price momentum attracts investors who jump in without doing much research.
Without strong fundamentals to back up the price action, such stocks always crash and burn. Do your homework before you jump on that hot stock.
9. Never sell a stock because an analyst proclaims it is overvalued.
Part of the fallout from the tech bubble is that analysts, instead of just guessing, must now have a defendable approach for coming up with their “buy” or “sell” ratings.
They satisfy that requirement by calculating the “fair value” of the stocks they cover.
They advise buying stocks trading below fair value. But when a stock price surpasses fair value, they deem it overvalued and advise selling.
While that sounds reasonable, the fair-value formulas require making assumptions about acceptable return rates that have no basis in fact. By manipulating those assumptions, you can come up with just about any fair value you want.
In my experience, analyst downgrades based solely on valuation are excellent buying opportunities.
10. Always look for companies with new ideas, new styles or new products.
The best stocks are those that have something new to offer. It doesn’t have to be high tech.
