How To Make a Choice In The Stock Market
Have you thought of investing in the stock market?
Now, taking that first step is a challenge for many of us, because we’ve been led to believe that investing involves risk. Yes, you can lose money in the market. But with the right approach, there’ll be smooth sailing, as long as you don’t gamble away your money as Wall Street would have you do. By now you see that the real risk is doing nothing, because then you’ll have zip for your future.
If you have any negative feelings about the market, and many women do, it’s probably because of a handful of bad-boy—and bad-girl—brokers, who give the industry a black eye. It’s not the stock market—it’s those roguish, rascally retailers. The problem is not the message, but the messenger. I talk to many women who say they don’t trust the brokerage community because they see investing as a win/lose process: Someone else wins; they lose.
When I worked as an investment banker, municipal bond trader, and money manager, I saw how consumers were treated in what was, and largely continues to be, a white-male-dominated, ego-driven business. Let me tell you, my pet frog got more respect than most investors got from their brokers. I’ll be talking to you about how to find a financial advocate who will encourage and support the growth of your Money Machine, in another article on this website.
But it’s essential to understand and stay focused on the importance of the stock market to your financial growth and your Money Machine. There is no magic in the consistent results the stock market has provided, and its benefits reward everyone—when it hands out its returns to investors, it does not discriminate by gender, race, or religion. Over the years, the market has created tremendous wealth for many people, despite some corrections or dips. And what’s exciting about the market is that every time it dips, you see from historical performance that it has come back even stronger and has progressively reached higher levels.
Knowing When a Stock Is Valuable
How do you know when you’re buying a stock of value? Do you simply trot after the herd as it races toward the hottest technology company because someone told you that you could “make a killing”? Do you put on a blindfold and play a game of “pin the tail on the stock”? How do you know if a company is going to grow well?
The first thing to remember is that when you invest in stocks, what you’re doing is investing in a company; you become a shareholder and an owner. That means that when you buy IBM stock, you actually own a part of the company. And when you own a mutual fund, you own many pieces of different companies. Therefore, when deciding what stocks to buy, think about what companies you’d like to own.
To begin with, use your intuition and womanly insight. Ask yourself, what do people need in order to be happy, productive, and comfortable? What do many people in the world yearn to own? Do they yearn for items that you and I take for granted? What do you see that other people value, not just for the moment but for the long term? The companies that create this value are those that are likely to grow and proﬁt.
Invest in companies you know about: Check out the clothes you wear, the car you drive, the electronic equipment you use, the restaurants you frequent. When you go to see a movie, which movie studio has consistent box-office hits? When you travel to another country or another part of the United States, look around and see what’s happening and which companies are providing what’s most badly needed or wanted, whether it’s telephones, computers, pharmaceuticals, or blue jeans.
Riding the Investment Waves
When you put your canoe into the investment waters, it’s really splendid when a wave or swell comes along to push you forward. You might even get a rush as you cascade over the waters. I like to call this the “wave theory.” The idea is to get in front of an investment wave and then ride it all the way to profitability. You won’t have to paddle a whole lot with this type of momentum.
It’s easy to see the great investment waves of the past. If we look back to the early 1970s, hindsight shows us that a great wave to catch was the burgeoning computer, semiconductor, and software industries. Consumers wanted to spend their money to join the computer revolution. I spent a lot of money on computers during that decade—more than I did on cars. That says something, particularly since computers, which people flocked to purchase, were brand new. The question to ask now is, what are the “waves” of the future, and which ones should you get in front of? Here are some waves I see:
Between 1990 and 2010, the number of Americans over sixty-five doubled. That should signal new trends and wants to you. Now this large group has a changed set of needs and desires. For instance, this group of Boomers uses health care the most and they will create an enormous demand for companies to produce goods and services to meet their health-care and also lifestyle needs.
Health care is a high priority and a long-term trend. The price of health-care stocks took a tumble in 1995 as the nation debated nationalized health care and how to change our national delivery system, and as HMOs, with their new approach to cost cutting, spread. As a result, there was a liquidation sale in health-care stocks, but the long-term prospects for the industry remain great. Innovative people are going to figuring out how to profitably provide health services to a hugely growing segment of the population. Thus, the value of worldwide health-care companies is sure to grow.In December of 2015, two pharmaceutical stocks topped the list of the the 10 stocks that rose the most in price on the S&P 500 index. This is a trend that will extend into the future as the population ages.
A second wave is the spread of telecommunications. If you’ve been to Europe, you may have noticed there are few Touch-Tone phones. The business of providing updated telephone and communications equipment in Europe, Brazil, China and Mexico is a likely growth industry.
In Mexico, until late 1996, Teléfonos de México S.A. (TeleMex) had a lock on all long-distance calls in the country. Its forty-eight-year-old monopoly ended when competing Avantel S.A., with an investment of about $900 million, started its network which links thirty-three of Mexico’s largest cities. Because of this increased competition, things changed and you can expect telecommunications in Mexico to grow even more.
In the United States, almost 58 out of 100 people have a phone; in Mexico only 8 out of 100; in
Brazil, only 7 out of 100; and in China, only 1.5 out of 100. India has the fastest growing telecom network in the world with its high population and development potential. All of that is changing—and we haven’t even talked about how computers and satellite technology will expand telecommunications even further which is also an investment wave.
So you could pick a mutual fund specializing in telecommunications stocks or health care stocks as excellent waves to ride. A word of caution: while these are examples, do your own research, develop your personal convictions about future waves in the market — so that when you invest you can evaluate how well you perceive the future and waves of potential. If it turns out that your insights weren’t as good as you would like, you can change course. All of this is about forming your own opinion, and then testing it out. Sometimes waves crash before they hit the shore. And often, with patient observation, the wave rolls right up onto the sand and reaches your feet on dry land.
Other waves of the future are natural resources and waste management. As the population on the planet grows, companies have already begun explorations to tap into newly found natural resources. This could also be a folder in the stock drawer of your investment file cabinet.
Not all investment waves are obvious. You’ll always use your feelings, intuitions, and any insights and observations you soak up on your way through life to pick the right industries. But also read, think, and, do research. Pick up your local newspaper or scan a national paper, such as The New York Times, The Wall Street Journal, Investor’s Business Daily, or Barron’s, to see what’s happening elsewhere in the world and in the technology centers such as the Silicon Valley.
Read magazines—not only news magazines, but also, for example, entertainment magazines. When three titans of ﬁlm and entertainment—Jeffrey Katzenberg (Disney), filmmaker Steven Spielberg, and David Geffen (MCA)—join to form their own company, bells might go off in your head. All three men were already mega successes before they united to form DreamWorks SKG. Maybe their stock is worth looking into when it’s made public.
Or how about the the trends in big data management, new Internet software, and consumer products that you keep reading about? Or pay attention to those fashion magazines—who’s on the rise, just as Chanel was more than a half century ago with classic clothes and designs with universal appeal, clothes and designs that are likely to be with us for decades? Even Ralph Lauren is now a publicly traded stock. Gossip columns and people-in-the-news pages often provide grist for investment mills: Read about who’s having dinner with whom to discuss new products or mergers. This is all fun— and opens your eyes to what is going on in the world around you. Give up the awful news reports, and focus your attention on the great changes, movements and innovations that are occurring all of the time and speak to the enormous potential and productivity of people on this planet. We are all one, and together we have the resources, skills, and compassion to care for each other—focus on this and expand your life and your investments.
Finally, don’t be afraid to tackle the business pages of newspapers or national newsmagazines. Often, they have lively reports on companies that are worth investigating. Your opinion matters, make your investments a reflection of your opinions and perspectives. This way you’ll decide when to buy and when to sell. You’ll be in the driver’s seat.
Picking a Stock
Beyond the ideas that intuition and research give you, you must develop objective criteria for selecting a particular company and buying its stock to build your wealth. I’m going to tell you about a model I use to evaluate stocks. I’ll run through the criteria so that you can ask the same types of questions a fund manager asks before buying a stock for her or his fund. This will also give you a good idea of the type of evaluation you need to make if you decide to ﬁll your Money Machine with individual stocks.
The benefit of buying an individual stock is that you can put what’s called a ‘stop’ trade in place when you buy the stock — and this will initiate a sale of the same stock at a price that you pre-determine. This is a very good way to protect your exposure and limit the risk of loss. You can not put a similar ‘stop’ trade with a mutual funds — as this protection is not available for mutual funds. In theory, the mutual fund has more diversification because you are the owner of many more stocks, so the stock prices of all of the stocks can temper your risk.
The challenge of buying a stock is that you can buy what you think is the right stock but it is in the wrong industry. It’s better to start your analysis with a global perspective, from a large place, and then pick the stock that is best in light of the trend you see. The danger is that someone, like a rouge broker recommends a stock, but the industry is tanking. This happened to me when I first purchased a stock. I bought a stock called Bolt, because the brokerage firm recommended it as a growing stock and I depended upon them and not my own research. Sorry to say that shortly after I bought it news abounded about the problems in the industry and my stock tanked with the industry.
After reading this, you may be inclined to choose mutual funds for most of the investments for your Money Machine. But if choosing stocks intrigues you, this will show you how it’s done.
The basic rule of thumb: You want a quality company whose stock is priced within an acceptable range for you, one whose stock price can grow to give you an annual return of about 15 percent so
that its price doubles in five years.
Why five years at about 15 percent or better? Because you want an investment that grows the volume of your Money Machine and, as the Rule of 72 shows, you’ll double your investment in five years (72 divided by 14.7 is 5). It’s a slightly ambitious but very achievable goal for the smart stock market investor.
The stock evaluation model is basically a “filtering” system that asks the following questions about a company and its stock:
- Is it a quality company?
- What is the right price to buy this stock at?
- What is your subjective evaluation of the company?
Let’s examine these questions individually, shall we?.
First: Is it a quality company?
The most important consideration is whether the company you have in mind makes a proﬁt and whether it offers goods and services that you believe will make it more proﬁtable in the future. It’s also important to know whether the company is well managed. Finally, it is important to know whether its leaders can anticipate future trends in its industry. How can you determine this? Read whatever you can, and ask questions. Go to your local library and peruse The Wall Street Journal, Fortune, Business Week, or The New York Times, or log onto the Internet and look up the company. See what is written about its managers and how they handle the company’s helm. You can also read a copy of a company’s annual report, which you can obtain from any brokerage house or the company itself. Now you can get tons of information by doing a web search, for instance using google, on the company, it’s products, management and financials. This is a ‘must’ place to start your investigation journey.
Personally I take the “quality filter” several steps further to evaluate stock purchases by looking at reports issued by Value Line: a company’s sales and earnings history and its industry ranking—how it compares to other companies in the same industry; its projected earnings; timeliness—how fast, according to stock analysts, the price of the stock will increase in the next year; safety— how much, according to analysts, the price is expected to fluctuate in the next year; the company’s long-term debt (too much is not good); and growth trends in the industry.
Value Line is a research company that issues reports based upon data secured from a company and assesses what that company’s earnings and profits should be in the future. Value Line is a marvelous resource for any investor, and its company reports are available on-line and in almost every public library. If you’re considering buying stock in a company, check out the most recent Value Line Report on that company—you’ll surely learn all types of worthwhile information. Check out various Internet sites for information, such as valueline.com, stocksmart.com or; researchandmarkets.com, forbest.com. You’ll have to decide for yourself how deeply you want to analyze a company’s performance. Some people find it a fascinating endeavor. If that’s you, there are books, magazines, and other resources that can show you how to evaluate company stocks which interested you. If this is not your cup of tea, you can go the mutual fund route. Once I determine that a company’s stock is a good investment, I move on to the next filter.
Second: What is the right price to buy this stock at?
Here one goal is to determine at what price to buy the stock, at what price to continue to hold the stock, and at what price to sell it. It’s very important to know your strategy before you buy a stock. I use a mathematical formula based on information from Value Line to estimate how much the stock price is likely to increase. This helps me not only to decide whether I should buy the stock, but also to reevaluate the investment and to establish when I should take profits and sell the stock.
How do you decide when your stock no longer has the potential to grow in price and it’s time to consider selling it? You’ll ride its wave as long as you think there are growth opportunities. If you think the wave is diminishing, then get off and catch the next one. Let’s say a decade or so ago, you purchased stock in a company when the. video market was beginning to boom, and you were right there to catch the wave. A few years ago, you noticed that laser discs were being made of your favorite movies. You noticed also that they cost a lot less than videocassettes and produced superior copies of films. Now DVDs (digital videodiscs) have taken over the video market. Your videocassette stock did well, but then you moved to catch the laser disc or DVD wave. This was the time to sell one stock and to buy another. And now the trend has changed again. Netflix built a big business on the DVD market, and then had to rethink its business model and make a radical shift. The shift was to the download format, where consumers could pay a monthly rate and then download their favorite movie to their TV or computer. In this next move, you would want to own a company that was keeping up with these changing times, or sell and invest in a new company that was smart about reading the consumer trends and adapting technology.
Furthermore, your DVD stock may have hit a plateau—a price that it’s unlikely to exceed. Just as you purchased the stock at a low price before everyone else was buying it, you might want to sell it now that everyone else is buying. You’ll be able to ascertain this by simply checking the stock listings and monitoring the rate of change for a few weeks. You can even log onto the Internet at NASDAQ.com, GoogleFinance.com, YahooFinance.com, StockCharts.com, Investopedia.com, or MarketWatch.com for stock quotes. There are some great websites to find the best stock information. There is an excellent wealth of investing knowledge on the internet today, and easy surfing.
As you see, when you examine the stock price, considerations about buying and selling are important.
In order to evaluate the price of a stock, my ﬁrm also considers the following:
- Whether a company pays out less than 50 percent of its earnings in dividends. You’re looking for a company that puts most of its earnings back into the company to finance future growth rather than chisels away its profits by doling out hefty dividends to shareholders. You stand to earn more on your investment if the company can increase its value because it was wise enough to reinvest its profits in the company.
- Sales-earnings comparisons, also provided by Value Line. You want to invest in a company whose profits are growing at the same rate as sales, or better.
- Estimated high and low prices—that is, the probable high and low of a stock’s price over the next five years. Value Line provides such estimates. You can also get a research report with similar estimates from a stock analyst; ask your broker to send you his or her research department’s report on the company in which you’re interested, or check the Internet.
Naturally, these are just estimates; investment analysts, like weather forecasters, are often wrong. Still, the weather report can be helpful before going out in the morning.
Third: What is your subjective evaluation of the company?
This is when your gut gets to speak. How do you feel about a company, based on everything you’ve learned? And just as important, do you believe in the company’s products and its mission? For example, I wouldn’t buy stock in a ﬁrearms company or a tobacco ﬁrm, regardless of profits, because I don’t like the nature of their businesses. This is a visceral objection, not a fiscal consideration. It’s part of the economic power I talked about earlier: You get to vote both as a consumer and as an investor. But if you like and respect a company’s product and how the company governs itself, go for it.
Your subjective evaluation can also include an assessment of information from other sources, like annual reports, newspaper and magazine articles, and so on. If you see any red flags, such as major lawsuits, internal bickering, unrest, or anything else that might derail a company from its positive mission, then you might ask yourself whether the company’s stock is a worthwhile investment. For example, Best Buy Co. Inc, the electronics company, was battered trying to compete in a low profit margin business where consumers are all too happy to “showroom” them by looking the goods over in stores, then buying cheaper online. And then the company President stepped down after allegedly having an inappropriate relationship with an employee which rocked the company. If you know someone who works for the company, ask about morale. How optimistic is the atmosphere at the ﬁrm? Are the best people staying or leaving? Answers to questions like these can tell a lot about a company’s long-term prospects.
These three evaluation filters are essential to buying stock and will also help you to broaden your knowledge of its industry. This is the fundamental groundwork that it takes to buy the right stock—not a hot tip. If you’re still serious about buying individual stocks, check out other resource materials that go into more depth and continue to increase your knowledge about buying and selling stocks. And/or you can take a different direction: You can choose a mutual fund and leave the stock selection up to the fund manager. If you belong to an investment club, you can get a similar model for stock selection from the National Association of Investors Corporation.
Choosing a Mutual Fund
There’s a whole big universe of mutual funds on the market—in fact, there are more funds than there are individual stocks listed on the New York Stock Exchange, American Stock Exchange, and Paciﬁc Stock Exchange. But many of the more than eight thousand mutual funds available to you don’t perform as well as the overall market.
You can go to several places to check out good funds. Your broker or adviser can tell you about several selections that ﬁt your criteria. You can also check out the financial pages in your newspaper for mutual fund listings, or you can surf the ’net to come up with some options. The most comprehensive list, though, can be found at your public library in the Morningstar report. Much like Value Line reports for stocks, Morningstar is a reference for all mutual funds and check it out online at MorningStar.com. It includes information about each fund’s portfolio, its manager, its historical performance, and other helpful data. Morningstar rates mutual funds on a scale of one to five stars. The number of stars given to a particular fund does not relate to how well it will perform for the investor in the future, however.
One way to sort through the galaxy of funds is to pick a good fund family, then decide on two or three investment waves you’d like to ride and find a fund that has performed as well as the stock market. Compare the performance of the fund to the performance of a relevant index like the Dow or the S&P 500.
Looking at the Current Growth Trends is Key
Ask yourself what you see as the waves of the future. If you were to make a list, would you include health care? Telecommunications? Financial services? Would your list include small and growing companies and international corporations?
Let’s say you’ve put together a list representing the investment waves of the future and you’ve decided to seek funds that concentrate on investing in health care, telecommunications, and financial services, and that also invest internationally. How will you know what types of stocks are in a specific fund? Sometimes the fund name will give you a clue. You may also request a copy of the fund prospectus, which will give you information about the fund, including where it invests its money. After a little sleuthing, you’ll be able to determine whether the fund supports your waves of the future.
If the fund does reflect your investment philosophy, you’ll need information on how well the fund has grown over the past five years. You can obtain a fund history from the fund manager, your broker, or Morningstar. You can also log on to the Internet at Morningstar.com for mutual fund prices and historical performance information. Find out the fund’s year-to-date return, as well as its one-year return, three-year return, and five-year return. Keep in mind the Rule of 72 to determine how fast your money should double in the fund. The fund’s history gives you an idea of how the fund has been managed in the past. If you’re looking at three health-care funds, and if one of them has a consistently better return than the other two, then you’ll know that the first fund has done a better job choosing health-care stocks.
You can also review the fund family. One fund family might offer anywhere from three to over one hundred different mutual funds. So it’s possible to find health-care, telecommunications, and financial services funds all within the same family. Unless you have a substantial sum of money to invest, you’re better off investing in only one family, because if you choose to move your money from one mutual fund within that family to another in the same family, there will generally be no charge. So if you invest in the ProFunds Small Cap fund and then decide that the place to be is in the Europe small cap fund, you can easily make the move.
When you buy a mutual fund, another consideration is the type of sales charge, or “load,” you will be asked to pay. Many funds use letters of the alphabet to designate different types of loads. If you buy A shares, a sales charge is deducted up front from the money you invest. Thus, if you invest $1,000, the actual amount that goes into the fund may be only $970—$1,000 minus a 3 percent sales charge.
If you buy B shares, all of the money you invest goes into the fund. However, a load is assessed when you sell your shares, unless you remain in the fund family for a specified period, usually five or more years.If you buy C shares, a load (usually 1 percent of the value of your holdings) is assessed each year you’re invested in the fund.
No-load funds are not necessarily cheaper than load funds, because of annual fees and charges that are included in no-loads. Don’t be fool, thinking you are getting something for free.
Choosing an ETF | Exchange Traded Fund |
There’s a whole big universe of exchanged traded funds on the market too—as of December 2014 there were fourteen hundred exchange traded funds, and investor interest in ETFs has grown rapidly over the last decade. These ETFs offer you the opportunity to invest internationally and domestically—in countries, groups of countries, types of economies and industries and much more. ETFs have gained their popularity because they are a cost-effective way to invest your money, and they give more flexibility and options for ways to invest than mutual funds.
You can also go to several places to check out good exchange traded funds. Your broker or adviser can tell you about several selections that ﬁt your criteria. And, a good way to explore this myriad of opportunity is to log-on to your computer and do a google search on ETFs, and many will pop up for your review. Go to YahooFinance.com and MotleyFool.com to get educated about ETFs. You will learn how they work and see information for your considered ETF, including its historical prices and trading patterns. Has the ETF that you are considering risen in price over the past year, and where is the price now relative to its historical price pattern?
The same strategies that we talked about for mutual funds apply also to ETFs. Ask yourself what you see as the waves of the future. If you were to make a list, would you include China or Australia? Banking? Housing? Biotech? Metals? Would your list include small and growing companies and big international corporations? Decide on two or three investment waves you’d like to ride and find an ETF that fits your criteria.
Let’s say you’ve put together a list representing the investment waves of the future and you’ve decided to seek ETFs that concentrate on investing in Biotech, Gold, the Australian stock market and the global economy. With your ‘wave’ in mind—there are likely to be investment choices for your Money Machine that can fill your particular interests. This is the fun of picking ETFs—they make the whole world available to you.
Like a stock, you can put a ‘stop’ trade in when you purchase your ETF choice, which can later initiate a ‘sell’ at your predetermined price. This ‘stop’ protects your downside risk in the investment because you are giving instruction to sell your ETF if the price falls (or rises) to a certain level. The beauty of ETFs are these advantages of protecting equity in your investment, while at the same time investing in a diversified way. It is the best of both worlds—the advantages of a stock and the broad range of investments of a mutual fund, which make ETFs excellent choices for your Money Machine.
I have purposely discussed the stock market in international terms. It is no longer sensible for an investor to restrict herself to the U.S. stock market. Think globally—the U.S. market is not necessarily the best and certainly not the only one.
Did you know that from 1985 to 1995, the U.S. stock market ranked among the five best-performing stock markets in the world for only three years? In 1995, our stock market’s performance ranked second, and from 1991 through 1992, it ranked third. In the seven other years, it didn’t even make the cut. But stock markets in Spain, Switzerland, Japan, Germany, Austria, Norway, and Hong Kong did. Rapidly growing economies in Asia and Europe fueled those markets, and the Third World and the former Iron Curtain countries are showing signs of becoming similarly dynamic. So you can easily see that investing internationally is a key strategy for growing your money.
In 2015 the ten best stock market in the world were
The next two that were in line were Portugal and Vietnam. (Via Christian Science Monitor).
The best way to invest internationally, though, is through mutual funds that offer international portfolios. For example, you can buy telecommunications mutual funds that invest worldwide. The basket of stocks in such a fund could include Paciﬁc Bell, AT&T, the phone company of Brazil, and the phone company of Australia.
Learning to Love the Market
By pursuing your investments domestically or internationally, the most important consideration is to use the stock market to build your Money Machine. It is a best proven wealth builder, and it will ably take care of your financial needs.
Think of this. Think of the stock market as you would a lover. You must build a relationship that will survive the ups and downs of investing. The same patience and steadfastness that are essential to a relationship are also essential to investing in the market. If you headed for the door every time your partner yelled at you, you’d constantly be starting over. Maybe you’d have blown what could have been a very good relationship. And if you had never tried again, you’d have missed out on a potentially wonderful part of life.
Just as you have to ride out some hard times with a partner or husband in order to build a committed, long-term bond, so, too, do you have to weather the blustery times of investing—to commit seriously to your investment strategy in order to experience long-term success. It is the woman who is willing to watch, wait, and work on the challenges and difficult areas, and to assess where the relationship is going, who eventually begins to experience the real potential of the union. Similarly, it is the patient investor, not the speculator, hunch player, or panicked seller, who reaps the most benefits from the upward trends of the stock market.