Sometimes, the wrong choices bring us to the right understanding. That mantra can loosely be applied to many endeavors in my life. It fits well with my theories and logic when buying and selling Stock. Equities to be more specific. Reflecting on that, I've had my share of wrong choices through my Self-Directed Investing career. I've learned to assess where my choices might have been misguided and how I could avoid them in the future. Moreover, it shaped a simple and concise algorithm to apply when choosing a company.
But before explaining part of my current algorithm, a little dose of my logic. One of my favorite youth Sports was Baseball. My Coach once told me I was a rare catch for his team. Foremost, I was a decent Pitcher that could throw a moderate, "Sinker" and amazing, "Fast-Ball". I Pitched quite a few, "No hitters," and became a good friend with the one Catcher, "Pete," that seemed to know what I was throwing at him. I paid little attention to the Batter standing at the Plate. I was actually trying to NAIL Pete, or get one past his glove. He seemed to egg-me-on, as he always squatted, smacked his protector, sometimes pull down his mask, hit his Mitt then opened it up at me. He looked safe and ready to be blasted with a Hardball!
On the opposite side of the Plate, I was a vicious hitter. Maybe being a Pitcher helped me, but I think it was patience. I wasn't afraid to Strike-Out. I was a bit shorter than the average player and thicker, so my Strike-Zone was relatively small. Most importantly, I knew where I wanted the ball before taking a swing, and I wouldn't move unless I saw it flying to the far-side of the Plate and low. I don't like to sound like Al Bundy, but when I connected the thump and distance the ball soared surprised myself. I'm sure there were a few times, "Holy Cow," was heard as I started to jog the Bases. The majority of my hits were out of the park. But, I can recall the Coach being upset because I didn't swing at three, "Perfect," pitches.
So that leads me to think about the advantage of Stocks, or more specifically, Equities. But I wouldn't completely exclude Bonds, REIT's, or MLP's. Why try to beat 'em, when you can join 'em? The Stock Market, especially for Equities, offers significant advantages over starting your own Business. The Equities Market allows Investors to purchase a share of a operating company rather than becoming their competitor. Anyone can easily assess a company and the direction or momentum it's headed. It literally parallels being at Bat and looking for the one Pitch! One could Purchase a Tractor and Trailer and compete with, "Well Oiled Machines", like JB Hunt, Werner, or Schneider. Alternatively, they can assess which is best and buy-in!
But before explaining part of my current algorithm, a little dose of my logic. One of my favorite youth Sports was Baseball. My Coach once told me I was a rare catch for his team. Foremost, I was a decent Pitcher that could throw a moderate, "Sinker" and amazing, "Fast-Ball". I Pitched quite a few, "No hitters," and became a good friend with the one Catcher, "Pete," that seemed to know what I was throwing at him. I paid little attention to the Batter standing at the Plate. I was actually trying to NAIL Pete, or get one past his glove. He seemed to egg-me-on, as he always squatted, smacked his protector, sometimes pull down his mask, hit his Mitt then opened it up at me. He looked safe and ready to be blasted with a Hardball!
On the opposite side of the Plate, I was a vicious hitter. Maybe being a Pitcher helped me, but I think it was patience. I wasn't afraid to Strike-Out. I was a bit shorter than the average player and thicker, so my Strike-Zone was relatively small. Most importantly, I knew where I wanted the ball before taking a swing, and I wouldn't move unless I saw it flying to the far-side of the Plate and low. I don't like to sound like Al Bundy, but when I connected the thump and distance the ball soared surprised myself. I'm sure there were a few times, "Holy Cow," was heard as I started to jog the Bases. The majority of my hits were out of the park. But, I can recall the Coach being upset because I didn't swing at three, "Perfect," pitches.
So that leads me to think about the advantage of Stocks, or more specifically, Equities. But I wouldn't completely exclude Bonds, REIT's, or MLP's. Why try to beat 'em, when you can join 'em? The Stock Market, especially for Equities, offers significant advantages over starting your own Business. The Equities Market allows Investors to purchase a share of a operating company rather than becoming their competitor. Anyone can easily assess a company and the direction or momentum it's headed. It literally parallels being at Bat and looking for the one Pitch! One could Purchase a Tractor and Trailer and compete with, "Well Oiled Machines", like JB Hunt, Werner, or Schneider. Alternatively, they can assess which is best and buy-in!
How I Choose Stocks
I offer advice cautiously and seldomly share my methodology. I'm not going to, "Beat around the bush," successful Investing takes a lot of research and continuing research. It requires continuous assessment of what is seen in Public, People in your life (Their Purchases), and the Equity (Or Stock) Holdings owned. I think most are quite surprised at my overwhelming Emails, Market News Alerts, Reviewing Balance Sheets, Listening to Conference Calls, and surfing between Yahoo Finance and MSN Money. But I'm going to expand on my methodology and try to offer my views.
Stick to Stock of Large Cap Companies
I have a hunch what readers are thinking at this point. I get it, completely... Micro-Cap (Crap) Penny Stocks can make a lot of money. Clearly, IF one of those little companies gain, you'll be wealthy. You can also try to exploit the volatility, I know!!! Most of the people I speak with seem to sway the conversation to Penny Stocks. I usually step-back and yawn (literally to emphasize lacking interest). Penny Stocks are cool, maybe as a hedge. Investors are viewing Equity as a commodity, buy low sell high... Not me!
Brokers love the Penny Stock Day Trader, because they charge for each transaction! No Crystal Ball can predict Volatility or, when it comes to Penny Stocks, momentum. It's not there, there's no Holy Grail, I know a lot of people bought someone's, "Proven Penny Stock System," and is excited to share what that person did (Yawning). I've bought Penny Stocks in my twenties. Never was able to accurately assess growing momentum, by any measure. In my humble opinion, if a Penny Stock seems promising, use it as a hedge. Pick up a few shares anticipating a loss. I recently bought a Penny Stock, just a few hundred shares, and once again lost. But I'm still holding! Penny Stocks are like walking into a Casino. You're likely going to lose money.
Large Cap Companies are a commitment. I have absolutely NO intention of selling my shares. Don't get me wrong, if there is a significant increase in value, AND, I suspect it's from Emotion and might waver, I'll Sell then repurchase. I'd say those moves have been roughly 60% advantageous and vary rare. It leaves the option of Buying the same number of shares and keeping some cash or increasing the number of Shares by reinvesting the gains. My picks are carefully thought out and I wholeheartedly believe they will be operating well into my future. Possibly my retirement and hopefully left to future generations. I am LONG. Minimum Market Cap of $5 Billion (No Trump Wall Pun Intended).
A Dividend Payer
I love Dividend Paying Stocks. I love them so much, I made this a prominent aspect of choosing Equities. I like at least a 3% Dividend. How do I derive that return? I try to be above US Treasury Inflation Bonds. I-Bonds have a Guaranteed Interest Rate of Return plus the current Inflation Rate attached. Currently at 2.83%. A 3% Dividend Return is favorable. If you Google the Accounting Term, "Time Value," it will be clear why I try to stay above the I-Bond Benchmark. By the way, that changes every six months.
With that said, I view anything North of 4X the I-Bond Rate a High Risk. If I own a Stock that goes North of 4*(I-Bond Rate) I might even sell. I'll dig deep as to why the Yield escalated before making a choice. Often, I've found that Competitor has better momentum, less debt, or something that is giving them a competitive edge.
Debt Ratio
We grew up in a house where Debt was the ENEMY! We were constantly reminded to balance between, "Wants and Needs," to curve spending habits. We being my Siblings and myself! Now as an adult I get why Dad was so stern about Debt. It is the Damn Devil, it can ruin a person and it can RUIN a business, if out of control.
How much Debt is acceptable, is subjective. My Filter is no more than 1.0 D/E (Debt to Equity). Which in summary means the Company has an equal amount of Debt to Assets. But for comparison D/E is subjective to Industry.
For example, a Telecom is likely to have a High Debt to Asset Ratio. Two of my Favorite Stocks, American Telephone and Telegraph (You know them as AT&T) and Kraft Heinz both come into my filter. Whereas T has a D/E Ratio of 1.0 and Kraft Heinz 0.5. We can easily see that AT&T is not acquiring asset value respective to their debt, when compared to Kraft Heinz (What Kraft is buying for every dollar of debt has more value than AT&T). Before jumping, I'd further Compare AT&T to a rivals in the Telecom Sector, like notable Verizon. Whereas we see Verizon currently sports a D/E Ratio of 2.7. I interpret that as their debt outweighs their assets by $1.00 of value for every $2.70 of Debt (Assets could be Accounts Receivable too). So we see AT&T, in their Industry is running well balanced. Especially considering the recent acquisition of Time Warner.
Dividend History
I generally surf over to Dividend.com or Nasdaq.com and see how long a company has been paying a Dividend. I place a lot of emphasis on this, if choosing between two equities.
Dividend Growth
If there's one thing I love more than a Dividend, It's a long history of increasing Dividends! I like to see a Dividend Growth of 2% Annually. As aforementioned, I have zero interest in selling my shares, EVER. I want to generate Passive Income through Business Ventures and the Stock Market offers this to me, easily and decisively. If I can Buy a share of a Company for $30-$40, and it will pay me $2.00 Annually, per share, for the rest of my life and maybe future generations, with annual increases, "I'm in".
Further Stock Research
There you have my basic or first Level Screener. Simple and Concise, but eliminates a lot of the Stocks on the NYSE. After conducting that basic screening, I weight the companies against each other and their peers. Then I make a determination on which to invest, incrementally. I typically continually purchase the same stock for the duration of the year, but I do this screening roughly every three months. I keep a watchful eye on those that fit.
Full disclosure, I'm a shareholder of the Stock mentioned. Good luck in choosing. Hopefully this read offered some insights into forming an algorithm of your own!