Picking Stocks
Posted by Gail | Filed under Investing
New Sticky Situation at the end. Also, Question 5 in our new feature on the Success Post called Thinking Things Through. Head on over and add your 2 bits. And remember to vote on this week’s poll.
Trying to decide between the thousands of publicly traded companies in just North America? First you have to narrow the field to the 10 or 15 (or 20 or 25) stocks that capture your interest. The easiest way to do that is to “screen” for those companies.
Screening can be as simple as thinking about the products and services you use, and finding out more about those companies, to as complex as determining specific criteria for your investment prospects. On my desk I’ve got my telephone (Bell) and computer (Apple), a Pier One ginger peach candle (Pier 1 Imports), and a package to go to my publishers (Federal Express). Alex’s bank statement (CIBC) is sitting on top of my software manual (Microsoft) and Malcolm’s new chessboard (Mattel) is perched precariously and perilously close to my chair. There, that looks like a nice investment portfolio.
You can also pay close attention to the news. When you hear that Apple is launching a new toy that’s twice as fast as anything currently available, or that your local supermarket has just be bought by a bigger-and-better competitor who has plans to create a new shopping experience, your antennae may quiver. Or if a company makes an announcement that sends it’s stock plummeting, and you believe it is a case of investor over-reaction, which may present a neat opportunity to take advantage of the rebound that typically follows a sell-off.
Of course, screens can also be far more complex and happily there are a ton of tools available on the web, which allow you to quickly see who meets your criteria. Having determined the two or three vectors along which you’ll measure potential picks, you then run the entire world of stocks through those criteria. Magically, your computer spits out the name of the companies that match. You could, for example, screen all stocks for those with a dividend above 4%. Or you could look for companies with revenues of $3 billion or more, or with a price per share of $12, or with earnings growth of 20% or with $1billion or more in sales or a P/E ratio of 20 or… well, you get the idea.
Screens are a great way to narrow your prospects so you can focus in tightly on the ten or twelve that seem to meet most of your criteria.
The first thing you’ll want to do when considering a particular stock for your portfolio is find out the answers to some very important questions relating to the company’s purpose, position, prospects and price.
Let’s start with Purpose. Before you invest you must invest-igate. Read as much as you can about the companies you’re interested in. Call the company, ask for investor relations and request an investor information packet. You’ll get everything from the annual report, to securities filings, to press releases to analysts’ reports.
The idea is to build a feel for the company, to develop at least a general understanding of what the company does for a living. You don’t have to be an expert — there’s an analyst out there who can provide expert opinion for you — but you’ve at least got to get the gist of what the company is all about. What is the primary business of the company? Is the company selling tried-and-true products for which there will always be a demand (think toilet paper and shampoo) or is it offering new products that are expected to capture the imagination of consumers (RIM and Apple)? Does management have a vision for the future or is the firm beset with fleeing employees? Are sales rising or falling? Is management moving forward or too busy cleaning up the mistakes of the past?
Getting to know a company is an art. There are no hard and fast questions to ask or answers that are right or wrong. It’s a little bit intuition and a lot of investigation. And the more you know about a company, the more likely you are to see the potential for the future.
Most companies offer more than one product; a conglomerate might offer hundreds of different products in a range of industries. You want to develop a sense of the forces that will drive the company’s financial results. What percentage of profits does a particular product or division account for? How much of a company’s earnings are tied to a particular product? The annual report is a good source for this kind of information.
If you’re in the position of being a specialist in a particularly industry, use your expertise within that industry to your advantage. Knowing the major players, trends in the industry and a little history will help you bring a deeper level of understanding to the analysis of stocks in your industry.
If you can find someone who is in the industry, offer him or her a burger in exchange for a brain-dump. Then ask one billion questions about what’s happening in the industry, where they see change coming from, who the major players are, what’s new, and what the rumors are in the trenches.
Full service brokerage houses can be a good source of additional research, which is why it’s always a good idea to have a least part of your money there. But weigh what you read carefully if the brokerage house also does business with the company. Houses that underwrite companies are not unbiased in their analysis of those companies’ potential. That being said, analysts know how to evaluate a particular company’s prospects for growth — that’s their job. But not every assertion deserves to be taken to heart. The idea is to read as many takes on the situation as you can find and then form an opinion.
As an aside, don’t pay much attention to the analyst’s ratings on securities. Their judgements have been known to be flawed — sometimes terribly flawed — and I’ve met many a broker who’s given up on buy or sell recommendations provided by their own analysts. Because the language you see doesn’t translate directly. While “Hold” may sound like “hang on to the stock”, it’s really code for “dump this caca.”
Next week: Position, Prospects and Price
Last week: Types of Stocks
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Sticky Situation: A friend of ours left her partner and moved in with us. When she first got here we told her not to worry about paying rent or helping out with the chores. It’s 5 months later and we wish we’d started off by putting some expectations on her. What do we do now to get out of this mess? How much should she be contributing anyway?
Hey, do you have a sticky situation you need help with? Send it to me at getgvo@gmail.com with SS in the subject line and we’ll see what everyone has to say about the best way to handle it.
August 31, 2010 at 6:14 am
RE: house guest.
It’s time to sit down and discuss the situation. Was there a time line for the friend to stay? “Suze, you have been with us for 5 months now. What are your plans? We have been happy to be able to help you get back on your feet. If you’d like to stay longer, we can talk about that, but we will need you to contribute to the household as well.”
As to how much she should pay, that depends on your household. Is she going to be a roommate or a boarder? Think about how much it costs to have her there (extra power, water, heat) and figure out a fair amount that is a benefit to both of you. Does she buy her own food?
There is a lot to ask to be able to offer sound advice.
August 31, 2010 at 6:45 am
I’ve found stock screening software to always be lacking. I try to filter for one thing and then another and I often find that the screen might screen for one thing but not another thing. I’ve yet to find something that will screen for multiple criteria that I want to look for.
As for the Sticky situation. I’d clearly start to ask about rent. I’d sit the person down and state clearly that the freeloading offer was temporary and now that the person is here longer it is time to pitch in. After stating that I’d come to some sort of a reasonable agreement with them.
regards,
Jason
August 31, 2010 at 7:36 am
I couldn’t imagine letting it go for 5 months!…one month no problem…but then we’d have to come to a financial agreement…just have an honest conversation and come to an agreement…if she still needs “help” in the finance dept I would be willing to have the rent amount fairly low but she has to pay something and of course help out with the day day chores in the house…
August 31, 2010 at 9:12 am
I agree with previous writers, it’s time for a sit down chat. Explain that that she has one month left to decide if she’s staying or going. Have a breakdown ready on paper to show what her share of the rent, utilities, and food will be if she stays. Have a chores chart prepared so together you can plan who is doing what jobs. The amount she pays would depend on the number of people in the household. If there’s three adults she would pay a third of all expenses. The amount would be less if you have children but she should still pay a substantial amount as she would be using an adult share of food, utilities, etc.
August 31, 2010 at 9:42 am
I agree with the above posters that it’s time to have a chat. How much depends a lot on you. Others suggest 1/3 the expenses, and that may be appropriate, but if, as someone pointed out, she’s in financial dire straits, it may be too much for her. If you’re doing this out of the kindness of your heart, and you can afford it, I would propose asking her to pay the “extra” that she adds to the expenses. For example, I had a good friend stay with us while she completed her education. She was away from her husband, so money was tight. I offered her our spare room at a rate that just covered our extra water, hydro, food, etc. She chipped in with chores, of course, but happily, that wasn’t something I had to discuss with her, she just did it, as a good housemate, thank goodness! I didn’t think it made sense to charge her more, because I was doing it as a favour, not to make money off of a friend. We were paying our mortgage, taxes, cable, etc. anyway, whether she came or not, so I just saw those as our responsibility. I guess I’m just a bit of a softie, but so much depends on the people and the particulars of the situation.
August 31, 2010 at 9:54 am
Well, there’s a lot of missing information that might affect this, I think it’s all in how you start the conversation. If you sit her down and say, “way to be taking advantage of us all this time, you mooch”, she may justifiably wonder why you haven’t brought this up before if it bothered you so much. And you obviously care about her, if you let her live with you for 5 months rent free. Maybe she was under the impression that you didn’t want her money?
The situation also doesn’t say what you want to have happen. Do you want her to move out, or do you want her to start contributing? Make sure you have that clear in your mind first, not a ’she better do one or the other’ situation, because then you’ll end up where you are now.
i’d sit her down over tea or dessert, ideally with whichever one of you is her better friend so she doesn’t feel like you’ve been resenting her this whole time (unless she’s a mutual friend, in which case it makes sense for both of you to be there). Ask her about her plans moving forward in general (dating again, work if applicable) and then specifically ask about how she’s planning to live. It’s fair to tell her that you and your partner have plans of your own ragarding travel, renovations, taking in a (paying) renter, etc, and you’d like to know what she’s thinking so you can know what to do.
If you want her out, you’ll need to say that – tell her you’re wanting to make some changes/plans by X month, and she would need to be gone by then. You wanted to give her notice, hope that’s not a problem, and are more than willing to help her look for a place if she needs it. I’d give her 1.5-2 months warning if you go this route. If you are happy for her to stay, tell her you’d be happy to make it official by drawing up a ‘lease’ agreement, where she can rent her room from you – maybe that would be beneficial for one or both of you, deductions-wise?
Finally, I suggest going in to this conversation knowing exactly what you think a fair rent amount is, and as others have said, it depends on the size of the room, whether or not it includes expenses, etc. I suggest giving your friend a lump sum to pay, which includes a fixed share in your bills rather than a chunk of each bill each month – she may not be reliable enough to give you the money.
I also suggest asking for money rather than having her do chores for you… i can see that becoming an express ticket to failed-expectations-lead-to-big-resentment town.
August 31, 2010 at 11:48 am
I agree that there is a lot of missing info.
Is this a person with no recognized work skills and is having problems finding a job that would pay the bills? Is this person spending so much on lawyer fees to get a reasonable settlement that a few more months are needed to get rent money? Is the person actively trying to get through this or is it pure mooching?
The biggest thing needed is a talk about the path to get this person back on their feet. You said that $ and chores were not expected so there is not break in agreement.
August 31, 2010 at 11:50 am
I forgot to add:
What is the credit history of the person? None, negative, good? This can keep people out of finding an appartment.
August 31, 2010 at 12:18 pm
Re: Sticky Situation
Everyone has given very good advice on what to say to the friend. After the conversation with the friend is done, these people should sit down with themselves and talk about what they’ve learned from this situation. They sound like people who have a hard time saying no or at least “yes, but here’s what we need to make this situation work”. You can get into a lot of financial trouble not being able to say no, never mind the personal woes. They should probably look at all the areas of their lives where they need to be more assertive.
August 31, 2010 at 1:16 pm
I agree with the others – and especially with Jessie’s post.
It sounds like the person has trouble with conflict, which I can relate to. I would try to remember that, like Jessie said, you can approach it in a fair way.
Start by asking to have a meeting with her and then asking her about how she’s doing with her goals and where she’d like to see herself or what her longer term plans are. You could start by saying, “it’s been 5 months since your partner left, and we wondered how you are feeling about where you are at” and then lead into, “well, we’d like to make a plan here. If you’d like to stay, we will need to come to a fair agreement so we can make this work financially for everyone” and then lay out some specific numbers in mind and how/why you came to these numbers. You don’t even need to explain that you have your own financial goals that you are working towards, though. Personally I see this as self-evident. Everyone wants to do something important with their money.
The other question is whether she’s been working to get back on her feet. Obviously there are a lot of costs involved in a break-up, especially if there are legal issues. But is she working or looking for a job, or a better job, or doing everything she can to make more money? If so, this is a good sign, that she’s building up enough of an income to manage of her own. If this is the case the transition will be easier. If she’s not doing any of this, it’s a warning sign that she’s found a cushy situation and isn’t planning on heading out anytime soon. If this is the case, I would probably look for a way to wind down her stay altogether because chances are she won’t be a fair contributor. If it’s the former, however, maybe you’ll be able to come to some agreement.
Ultimately I think that just about anything can be achieved through diplomatic conversation, when people are fair, honest, and calm. If she sees that you genuinely care about her, are happy to help her, and just want to come to a fair financial agreement, chances are she’ll respond positively. If you do all of this and she still responds negatively, I’d say the warning bells are going off that this is not going to end well, and I’d start moving towards terminating the offer.
Remember that you are in the right here – you have been generous and deserve to have a contribution from her. Anyone else would expect this. So rest assured that you’re not being mean, you are just being fair.
Good luck!
August 31, 2010 at 6:24 pm
I have six rules I follow when choosing dividend stocks . My strategy is featured in this weeks Me and My Money article in the globe and mail. Check it out.
http://www.theglobeandmail.com/globe-investor/investment-ideas/features/me-and-my-money/investor-sticks-to-tried-and-true-dividends/article1688180/
August 31, 2010 at 6:52 pm
Off topic: Just got back from a couple of days in downtown Toronto (money saved – all paid for). Because of a previous blog on tipping that garnered a lot of messages….I left a toonie on my pillow each a.m. The maid left me a lovely note in thanks. So thank you to whoever it was here that clued me in about this…..I’ve always been a conscientious tipper everywhere else.
Re: Sticky Situation – Because my friend would be so upset on arrival I probably wouldn’t say anything for a few days. She obviously would be a very close friend if she is requesting sanctuary with me, so hopefully we could discuss her situation and come to an agreement about her contributions and length of stay at that time.
As I couldn’t see yesterday’s blog until today I missed the cat picture. I’m a cat lover (have two furbabies here) – is there a way to see previous pictures?
Re: voting – I haven’t had any trouble recently….
I think I’m all caught up on my Re: messages….
August 31, 2010 at 11:33 pm
i think jessie approached this in a very humane and sensitive manner. when discussing money, which is difficult even under the best circumstances, it pays to be kind! i certainly agree, there just isn’t enough information presented to make a well-thought-out suggestion as to how to resolve. so jessie and others did it for me, before i could get to the post today.
i agree with jason on the screens; perhaps i don’t have the patience but i end up so darn frustrated when i try them…so again, my financial advisor earns his money helping me to understand such things.
here’s where i’m a bit ignorant and asking your forgiveness: what’s a “toonie”? thanks. i’ve always been one of those if-i-don’t-know-i-ask people.
August 31, 2010 at 11:57 pm
ste:
http://en.wikipedia.org/wiki/Canadian_2_dollar_coin
A $2 coin from Canada ($1: loonie – there is a loon on it – so for $2, it became a toonie).
Two-dollar bills were not phoney in Canada.
September 7, 2010 at 7:16 am
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