Investing in Equities–Looking for Value
Posted by Gail | Filed under Investing
Y’all, I need you to be patient with the site for the new few days or so. It seems we’ve outgrown our server’s capabilities and we’re looking for new options for hosting. If you have trouble getting on or commenting, just take a deep breath and try again later. As a result, I’m suspending the Sticky Situation that has become a Tuesday treat. And I’m going to hold off on the Thinking Things Through question. We’ll resume normal programming as soon as we have this glitch ironed out. Oh, while I’m at it, wrap those arms around yourself and give yourself a hug from me.
In choosing a stock to trade, you could simply follow the herd, buying what’s tipped as hot in the newspaper, on your local investment television show, or through an expensive investor newsletter. However, those sources are far less accountable if their suggestions prove to be worthless or, worse, damaging to your portfolio. If you’re taking your role of investment manager to yourself seriously, you’d do well to heed the wise words of Mark Twain:
“There are two times in a man’s life when he should not speculate:
when he can’t afford it, and when he can.”
You’ll actually want to learn about stocks and determine what your investment style is so you can not only enjoy your online activities, but profit from them.
Your investment style speaks to how you like to buy and sell stocks. Are you the type of investor who likes to pick a good stock and hold it forever? Or do you like to see a stock’s price rising before you jump on to take advantage of the upward trend? Or maybe you enjoy trying to find the trend that shows where the market’s going next? Knowing your style is key to being able to develop an investment strategy that works for you. The stock market works in cycles: sometimes small cap stocks do great, other times it’s the large caps that are The Street’s darlings; sometimes momentum is the ticket to success, other times value pays off. So it’s important to know how you “feel” about investing, what intrigues you about the market, how you like to analyze your choices.
In the old days, you’re the guy who was willing to load up the pick-ax, ride the mule, and work for hours in the broiling sun to hit the jackpot. Today, you’re looking for companies whose stock prices are lower than that of comparable companies’. The shares may have simply fallen out of favour with The Street. Or maybe the company has been through a tough time and investors got bored, impatient, or angry and punished the company by dumping their shares and driving their share-value way, way down. Whatever the reason, this stock is On Sale at 25-, 40-, 60% off. And you know it’s only a matter of time before The Street recognizes it’s true value an runs up the price.
If you’re picking a stock because you can’t believe a stock that good is trading at a price that low, you’re making a value play. You’ve been attracted because this company’s price-to-earnings ratio is trailing other stocks in its peer group. Or you’ve been attracted because when you add up the individual components that make up the company — the cash in the bank, it’s inventory and the land it occupies — the company is worth more than reflected in the current share price.
Value investing is hard work. It takes time to study the figures and decide if the sum of the parts is greater than the whole. That’s why a whack of strategies have developed around value investing. There’s the Dogs of the Dow which encourage investors to buy the worst performers on the Dow Jones Industrial Average hold them for a year. The SAPI Slugs follows the same strategy for the Standard & Poor’s 500 Index. Other strategies suggest you look for low price-to-sales ratios, or low price-to-book value ratio. Whatever the strategy, the objective is to find cheap stocks, buy them and then hold on until they make good.
Since you’ll be buying when everyone else is selling, you’re the contrarian. So you really have to believe in this strategy. You’ll take a lot of flack from other investors because you’ll be out of step with the market. And since you’re likely to be out of step for more than a few weeks, you’ve got to make like Jason and close your ears to the cacophony from The Street.
A word of warning: sometimes companies are On Sale because they’re about to tank completely. You have to be sure that the company you’re buying has the ability to turn around. The story its management is telling must make sense. The management itself must be strong (perhaps it has just changed). And it can’t be burdened by an albatross of debt if it’s going to succeed in meeting its goals. Long-term debt is bad. Short-term debt is worse. Low debt is best. Remember, not everything that’s On Sale offers value. Be discerning.
Also keep in mind that a value play doesn’t work well when the economy is slowing down or when the market can’t make up it’s mind what’s good and what’s bad news. And if the whole world is in love with the Fad Of The Moment, your value stocks will languish. Be patient. If you’ve chosen wisely, you will be rewarded over the long term.
Next Week: Investing for Growth
Last Week: The Risks with Bonds
August 3, 2010 at 8:02 am
I know I don’t have the time to pick my own stocks and to spend time in front of a computer at an online trading site. I’d like too but I fear my job makes me more money then I ever will from trading stocks.
regards,
Jason
August 3, 2010 at 8:44 am
If you dont have the time, patience, or skill to trade stocks, you can allways invest in mutual funds that track the major stock indexes. This is called the “couch potato portfolio”.
August 3, 2010 at 8:54 am
There’s also a stratedgy of “dividend investing” as well… but it is difficult to time if you’re hopping in and out just for a dividend.
I find that if a stock is losing money, it’s alot easier to sleep at night when the stock gives you a dividend.
August 3, 2010 at 9:22 am
At 35 I often thank the stars the stock market has been doing so poorly the past couple years. As long as people aren’t losing their jobs, personally I want the stock market to flatline until I’m about 55 and then take off. I don’t get why young people are so concerned about poor (paper) returns if they’re not selling them. And the dividends are so sweet. You can get a 5% return without even trying, and that’s not including any capital appreciation (as long as dividends aren’t cut, a la BP).
August 3, 2010 at 12:22 pm
How do I get a personnel consultation face to face with Gail?
My husband and I need serious help. I have been looking for sound advice.
How can I arrange for a consultation.
Girl ready to jump!
August 3, 2010 at 12:52 pm
This is interesting information. I know myself, and I don’t have the personality to invest directly in stocks. I very much appreciate this information, however. It’s helpful to find investing information aimed at beginners. Thanks, Gail.
August 3, 2010 at 5:09 pm
now that i find myself over 50, i am no longer the high-risk investor i once was. 20 years ago i would split my investments about 80% high risk, 20% medium. 80% including foreign investments.
now, being 50 and hoping to retire some day (i really do like my work), i find myself much more middle-of-the-road, which suits my 50-year-old mentality & risk personality better. i, like jason above, do not have the time to really learn what i need to trade stocks myself online. since i am well aware of that i think it is a much better idea to let my financial advisor do that for me. it’s his expertise (and what he’s paid to do…).
thanks gail, for the information & the reminder to check in with mr financial advisor…it’s the 2nd half of the year and time to make a 6-month appointment to make sure my money & i are doing okay!
August 3, 2010 at 5:56 pm
Gina, Gail doesn’t do personal consultations, but everything you need to do the work yourself is available on this website.
You can check out questions here: http://gailvazoxlade.com/questions.html
You can check out blog archives and sort by tags to see which items best relate to your situation.
You can check out the most used information here (including both articles and worksheets): http://gailvazoxlade.com/resources.html
For more articles, check out this link: http://gailvazoxlade.com/articles.html
Good luck on your journey!
August 3, 2010 at 8:10 pm
Must have been the day for computer issues. My computer at work decided it wanted a divorce from it’s OS. Had to wait for IT to come and fix that. Glad the site is working for now. I too tried earlier and couldn’t get in, but patience pays off.