Stock-Picking Strategies: Fundamental Analysis

Ever hear someone say that a company has "strong fundamentals"? The phrase is so overused that it's become somewhat of a cliché. Any analyst can refer to a company's fundamentals without actually saying anything meaningful. So here we define exactly what fundamentals are, how and why they are analyzed, and why fundamental analysis is often a great starting point to picking good companies.

The Theory
Doing basic fundamental valuation is quite straightforward; all it takes is a little time and energy. The goal of analyzing a company's fundamentals is to find a stock's intrinsic value, a fancy term for what you believe a stock is really worth - as opposed to the value at which it is being traded in the marketplace. If the intrinsic value is more than the current share price, your analysis is showing that the stock is worth more than its price and that it makes sense to buy the stock.

Although there are many different methods of finding the intrinsic value, the premise behind all the strategies is the same: a company is worth the sum of its discounted cash flows. In plain English, this means that a company is worth all of its future profits added together. And these future profits must be discounted to account for the time value of money, that is, the force by which the $1 you receive in a year's time is worth less than $1 you receive today. (For further reading, see Understanding the Time Value of Money).

The idea behind intrinsic value equaling future profits makes sense if you think about how a business provides value for its owner(s). If you have a small business, its worth is the money you can take from the company year after year (not the growth of the stock). And you can take something out of the company only if you have something left over after you pay for supplies and salaries, reinvest in new equipment, and so on. A business is all about profits, plain old revenue minus expenses - the basis of intrinsic value.

Greater Fool Theory
One of the assumptions of the discounted cash flow theory is that people are rational, that nobody would buy a business for more than its future discounted cash flows. Since a stock represents ownership in a company, this assumption applies to the stock market. But why, then, do stocks exhibit such volatile movements? It doesn't make sense for a stock's price to fluctuate so much when the intrinsic value isn't changing by the minute.

The fact is that many people do not view stocks as a representation of discounted cash flows, but as trading vehicles. Who cares what the cash flows are if you can sell the stock to somebody else for more than what you paid for it? Cynics of this approach have labeled it the greater fool theory, since the profit on a trade is not determined by a company's value, but about speculating whether you can sell to some other investor (the fool). On the other hand, a trader would say that investors relying solely on fundamentals are leaving themselves at the mercy of the market instead of observing its trends and tendencies.

This debate demonstrates the general difference between a technical and fundamental investor. A follower of technical analysis is guided not by value, but by the trends in the market often represented in charts. So, which is better: fundamental or technical? The answer is neither. As we mentioned in the introduction, every strategy has its own merits. In general, fundamental is thought of as a long-term strategy, while technical is used more for short-term strategies. (We'll talk more about technical analysis and how it works in a later section.)

Putting Theory into Practice
The idea of discounting cash flows seems okay in theory, but implementing it in real life is difficult. One of the most obvious challenges is determining how far into the future we should forecast cash flows. It's hard enough to predict next year's profits, so how can we predict the course of the next 10 years? What if a company goes out of business? What if a company survives for hundreds of years? All of these uncertainties and possibilities explain why there are many different models devised for discounting cash flows, but none completely escapes the complications posed by the uncertainty of the future.

Let's look at a sample of a model used to value a company. Because this is a generalized example, don't worry if some details aren't clear. The purpose is to demonstrate the bridging between theory and application. Take a look at how valuation based on fundamentals would look:



The problem with projecting far into the future is that we have to account for the different rates at which a company will grow as it enters different phases. To get around this problem, this model has two parts: (1) determining the sum of the discounted future cash flows from each of the next five years (years one to five), and (2) determining 'residual value', which is the sum of the future cash flows from the years starting six years from now.

In this particular example, the company is assumed to grow at 15% a year for the first five years and then 5% every year after that (year six and beyond). First, we add together all the first five yearly cash flows - each of which are discounted to year zero, the present - in order to determine the present value (PV). So once the present value of the company for the first five years is calculated, we must, in the second stage of the model, determine the value of the cash flows coming from the sixth year and all the following years, when the company's growth rate is assumed to be 5%. The cash flows from all these years are discounted back to year five and added together, then discounted to year zero, and finally combined with the PV of the cash flows from years one to five (which we calculated in the first part of the model). And voilà! We have an estimate (given our assumptions) of the intrinsic value of the company. An estimate that is higher than the current market capitalization indicates that it may be a good buy. Below, we have gone through each component of the model with specific notes:

Prior-year cash flow - The theoretical amount, or total profits, that the shareholders could take from the company the previous year.
Growth rate - The rate at which owner's earnings are expected to grow for the next five years.
Cash flow - The theoretical amount that shareholders would get if all the company's earnings, or profits, were distributed to them.
Discount factor - The number that brings the future cash flows back to year zero. In other words, the factor used to determine the cash flows' present value (PV).
Discount per year - The cash flow multiplied by the discount factor.
Cash flow in year five - The amount the company could distribute to shareholders in year five.
Growth rate - The growth rate from year six into perpetuity.
Cash flow in year six - The amount available in year six to distribute to shareholders.
Capitalization Rate - The discount rate (the denominator) in the formula for a constantly growing perpetuity.
Value at the end of year five - The value of the company in five years.
Discount factor at the end of year five - The discount factor that converts the value of the firm in year five into the present value.
PV of residual value - The present value of the firm in year five.
So far, we've been very general on what a cash flow comprises, and unfortunately, there is no easy way to measure it. The only natural cash flow from a public company to its shareholders is a dividend, and the dividend discount model (DDM) values a company based on its future dividends (see Digging Into The DDM.). However, a company doesn't pay out all of its profits in dividends, and many profitable companies don't pay dividends at all.

What happens in these situations? Other valuation options include analyzing net income, free cash flow, EBITDA and a series of other financial measures. There are advantages and disadvantages to using any of these metrics to get a glimpse into a company's intrinsic value. The point is that what represents cash flow depends on the situation. Regardless of what model is used, the theory behind all of them is the same.

Stock-Picking Strategies: Introduction

When it comes to personal finance and the accumulation of wealth, few subjects are more talked about than stocks. It's easy to understand why: playing the stock market is thrilling. But on this financial roller-coaster ride, we all want to experience the ups without the downs.

In this tutorial, we examine some of the most popular strategies for finding good stocks (or at least avoiding bad ones). In other words, we'll explore the art of stock-picking - selecting stocks based on a certain set of criteria, with the aim of achieving a rate of return that is greater than the market's overall average.

Before exploring the vast world of stock-picking methodologies, we should address a few misconceptions. Many investors new to the stock-picking scene believe that there is some infallible strategy that, once followed, will guarantee success. There is no foolproof system for picking stocks! If you are reading this tutorial in search of a magic key to unlock instant wealth, we're sorry, but we know of no such key.

This doesn't mean you can't expand your wealth through the stock market. It's just better to think of stock-picking as an art rather than a science. There are a few reasons for this:

So many factors affect a company's health that it is nearly impossible to construct a formula that will predict success. It is one thing to assemble data that you can work with, but quite another to determine which numbers are relevant.

A lot of information is intangible and cannot be measured. The quantifiable aspects of a company, such as profits, are easy enough to find. But how do you measure the qualitative factors, such as the company's staff, its competitive advantages, its reputation and so on? This combination of tangible and intangible aspects makes picking stocks a highly subjective, even intuitive process.

Because of the human (often irrational) element inherent in the forces that move the stock market, stocks do not always do what you anticipate they'll do. Emotions can change quickly and unpredictably. And unfortunately, when confidence turns into fear, the stock market can be a dangerous place.

The bottom line is that there is no one way to pick stocks. Better to think of every stock strategy as nothing more than an application of a theory - a "best guess" of how to invest. And sometimes two seemingly opposed theories can be successful at the same time. Perhaps just as important as considering theory, is determining how well an investment strategy fits your personal outlook, time frame, risk tolerance and the amount of time you want to devote to investing and picking stocks.

At this point, you may be asking yourself why stock-picking is so important. Why worry so much about it? Why spend hours doing it? The answer is simple: wealth. If you become a good stock-picker, you can increase your personal wealth exponentially. Take Microsoft, for example. Had you invested in Bill Gates' brainchild at its IPO back in 1986 and simply held that investment, your return would have been somewhere in the neighborhood of 35,000% by spring of 2004. In other words, over an 18-year period, a $10,000 investment would have turned itself into a cool $3.5 million! (In fact, had you had this foresight in the bull market of the late '90s, your return could have been even greater.) With returns like this, it's no wonder that investors continue to hunt for "the next Microsoft".

Without further ado, let's start by delving into one of the most basic and crucial aspects of stock-picking: fundamental analysis, whose theory underlies all of the strategies we explore in this tutorial (with the exception of the last section on technical analysis). Although there are many differences between each strategy, they all come down to finding the worth of a company. Keep this in mind as we move forward.

What's the difference between "top-down" and "bottom-up" investing?

Before we look at the differences between top-down and bottom-up investing, we should make it clear that both of these approaches have the same goal - to ferret out great stocks. Now, let's look at the different strategies used by top-down vs. bottom-up investors to select companies in which to invest.

Top-down investing involves analyzing the "big picture". Investors using this approach look at the economy and try to forecast which industry will generate the best returns. These investors then look for individual companies within the chosen industry and add the stock to their portfolios. For example, suppose you believe there will be a drop in interest rates. Using the top-down approach, you might determine that the home-building industry would benefit the most from the macroeconomic changes and then limit your search to the top companies in that industry.

Conversely, a bottom-up investor overlooks broad sector and economic conditions and instead focuses on selecting a stock based on the individual attributes of a company. Advocates of the bottom-up approach simply seek strong companies with good prospects, regardless of industry or macroeconomic factors. What constitutes "good prospects", however, is a matter of opinion. Some investors look for earnings growth while others find companies with low P/E ratios attractive. A bottom-up investor will compare companies based on these fundamentals; as long as the companies are strong, the business cycle or broader industry conditions are of no concern.

P/E ratios explained

What Does Price-Earnings Ratio - P/E Ratio Mean?

A valuation ratio of a company's current share price compared to its per-share earnings.

Calculated as:

For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).

EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters.

Also sometimes known as "price multiple" or "earnings multiple".

Price-Earnings Ratio - P/E Ratio

In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. However, the P/E ratio doesn't tell us the whole story by itself. It's usually more useful to compare the P/E ratios of one company to other companies in the same industry, to the market in general or against the company's own historical P/E. It would not be useful for investors using the P/E ratio as a basis for their investment to compare the P/E of a technology company (high P/E) to a utility company (low P/E) as each industry has much different growth prospects.

The P/E is sometimes referred to as the "multiple", because it shows how much investors are willing to pay per dollar of earnings. If a company were currently trading at a multiple (P/E) of 20, the interpretation is that an investor is willing to pay $20 for $1 of current earnings.

It is important that investors note an important problem that arises with the P/E measure, and to avoid basing a decision on this measure alone. The denominator (earnings) is based on an accounting measure of earnings that is susceptible to forms of manipulation, making the quality of the P/E only as good as the quality of the underlying earnings number.

The Ins And Outs Of Selling Options

I wanted to learn more about options and I figure you might too, so I did a search and came up with this really good article from Investopedia.

In the world of buying and selling stock options, choices are made in regards to which strategy is best when considering a trade. If an investor is bullish, she can buy a call or sell a put, whereas if she is bearish, she can buy a put or sell a call. There are many reasons to choose each of the various strategies, but it is often said that "options are made to be sold." This article will explain why options tend to favor the options seller, how to get a sense of the probability of success in selling an option and what risks accompany selling options.

Time Is on My Side

The phrase "time is on my side" is not just popular because of The Rolling Stones, but also because selling options is a positive theta trade. Positive theta means that the time value in stocks will actually melt in your favor. You may know that an option is made up of intrinsic and extrinsic value. The intrinsic value relies on the stock's movement and acts almost like home equity. If the option is deeper in the money (ITM), then it has more intrinsic value. If the stock moves out of the money (OTM), then the extrinsic value will grow. Extrinsic value is also commonly known as time value.

During an option transaction, the buyer expects the stock to move in one direction and hopes to profit from it. However, this person pays both intrinsic and extrinsic value and must make up the extrinsic value to profit. Because theta is negative, the option buyer can lose money if the stock stays still or, perhaps even more frustratingly, if the stock moves slowly in the correct direction but the move is offset by time decay. Time decay works so well in the favor of the option seller because not only will it decay a little each day but it also works weekends and holidays. It's a slow-moving money maker for patient investors.

Volatility Risks and Rewards

Obviously having the stock price stay in the same area or having it move in your favor will be an important part of your success as an option seller, but paying attention to implied volatility changes is also vital to your success. Implied volatility, also known as vega, moves up and down depending on the supply and demand for option contracts. An influx of option buying will inflate the contract premium to entice option sellers to take the opposite side of each trade. Vega is part of the extrinsic value and can inflate or deflate the premium quickly.

An option seller may be short on a contract and then experience a rise in demand for contracts, which, in turn, inflates the price of the premium and may cause a loss, even if the stock hasn't moved. In most cases, on a single stock, the inflation will occur in anticipation of an earnings announcement. Monitoring implied volatility provides an option seller with an edge by selling when it's high because it will likely revert to the mean.

At the same time, time decay will work in favor of the seller too. It's important to remember that the closer the strike price is to the stock price, the more sensitive the option will be to changes in implied volatility. Therefore, the further out of the money a contract is or the deeper in the money, the less sensitive it will be to implied volatility changes.

Probability of Success

Option buyers use a contract's delta to determine how much the option contract will increase in value if the underlying stock moves in favor of the contract. However, option sellers use delta to determine the probability of success. You may remember that a delta of 1.0 means that an option will likely move dollar-per-dollar with the underlying stock, whereas a delta of .50 means the option will move 50 cents on the dollar with the underlying stock. An option seller would say that a delta of 1.0 means you have a 100% probability of success that the option will be at least 1 cent in the money by expiration and a .50 delta has a 50% chance that the option will be 1 cent in the money by expiration. The further out of the money an option is, the higher the probability of success is when selling the option without the threat of being assigned if the contract is exercised.

At some point, option sellers have to determine how important a probability of success is compared to how much premium they are going to get from selling the option. Figure 2 shows the bid and ask prices for some option contracts. Notice the lower the delta that accompanies the strike prices, the lower the premium payouts. This means that an edge of some kind needs to be determined. Various calculators are used other than delta, but this particular calculator is based on implied volatility and may give investors a much-needed edge. However, using fundamental evaluation or technical analysis can also help option sellers.

Worst-Case Scenarios

Many investors refuse to sell options because they fear worst-case scenarios. The likelihood of these types of events taking place may be very small, but it is still important to know they exist. First off, selling a call option has the theoretical risk of the stock climbing to the moon. While this may be unlikely, there isn't an upside protection to stop the loss if the stock rallies higher. Therefore, call sellers need to determine a point at which they will choose to buy back an option contract if the stock rallies, or they may implement any number of multi-leg option spread strategies designed to hedge against loss.

Selling puts, however, is basically the equivalent of a covered call. When selling a put, remember the risk comes with the stock falling, but a stock can only hit zero and you get to keep the premium as a consolation prize. It is the same in owning a covered call - the stock could drop to zero and you lose all the money in the stock with only the call premium remaining. Similar to the selling of calls, selling puts can be protected by determining a price in which you may choose to buy back the put if the stock falls or hedge the position with a multi-leg option spread.

Selling options may not have the kind of excitement as buying options, nor will it likely be a "home run" strategy. In fact, it's more akin to hitting single after single. Just remember that enough singles will still get you around the bases and the score counts the same.

by Ryan Campbell,

Ryan Campbell, CMT has worked in the financial industry for approximately a decade. He has worked as a full-service broker, a banker and is currently a content producer for Investools.com. He writes a daily market commentary and develops courses on trading equities, options, futures and currencies. He has contributed as a columnist to other financial publications. Ryan is also an active member of the Market Technicians Association and was the recipient of its prestigious Chartered Market Technician designation.

What's the difference between a stop and a limit order?

Different types of orders allow you to be more specific about how you'd like your broker to fulfill your trades. When you place a stop or limit order, you are telling your broker that you don't want the market price (the current price at which a stock is trading), but that you want the stock price to move in a certain direction before your order is executed.

With a stop order, your trade will be executed only when the security you want to buy or sell reaches a particular price (the stop price). Once the stock has reached this price, a stop order essentially becomes a market order and is filled.

For instance, if you own stock ABC, which currently trades at $20, and you place a stop order to sell it at $15, your order will only be filled once stock ABC drops below $15. Also known as a "stop-loss order", this allows you to limit your losses. However, this type of order can also be used to guarantee profits.

For example, assume that you bought stock XYZ at $10 per share and now the stock is trading at $20 per share. Placing a stop order at $15 will guarantee profits of approximately $5 per share, depending on how quickly the market order can be filled.

Stop orders are particularly advantageous to investors who are unable to monitor their stocks for a period of time, and brokerages may even set these stop orders for no charge.

One disadvantage of the stop order is that the order is not guaranteed to be filled at the preferred price the investor states. Once the stop order has been triggered, it turns into a market order, which is filled at the best possible price. This price may be lower than the price specified by the stop order.

Moreover, investors must be conscientious about where they set a stop order. It may be unfavorable if it is activated by a short-term fluctuation in the stock's price. For example, if stock ABC is relatively volatile and fluctuates by 15% on a weekly basis, a stop loss set at 10% below the current price may result in the order being triggered at an inopportune or premature time.

A limit order is an order that sets the maximum or minimum at which you are willing to buy or sell a particular stock. For instance, if you want to buy stock ABC, which is trading at $12, you can set a limit order for $10. This guarantees that you will pay no more than $10 to buy this stock. Once the stock reaches $10 or less, you will automatically buy a predetermined amount of shares.

On the other hand, if you own stock ABC and it is trading at $12, you could place a limit order to sell it at $15. This guarantees that the stock will be sold at $15 or more.

The primary advantage of a limit order is that it guarantees that the trade will be made at a particular price; however, your brokerage will probably charge a higher a commission for the limit order, and it's possible that your order will not be executed at all if the limit price is not reached.

How to avoid taxes with an IRA

I just learned something AWESOME, maybe you already know this, but I had a question about taxes and trading profits in a Roth IRA.

My question was if you trade stocks in a Roth IRA and do not withdraw the profits but re-invest them are they taxed? Well here is the answer:


One of the most common and 100% IRS-approved ways for the active trader to avoid taxes is to trade within an IRA. Please note, I am not a CPA or Tax Advisor. These are simply a few observations from one trader to another (or would-be trader). Consult directly with your tax advisor prior to taking any action in regards to the following. All the same, this should serve as an introduction into how traders can trade tax free within an IRA structure.

Short term gains which are what are produced by active trading are taxed at your regular tax rate. Long term gains on investments held for one year or more are taxed at 20%. However, if you actively trade within your IRA, not only are ALL taxes deferred, you don't have to report any gains or losses. The reason being there is no tax effect on the gains/losses so the IRS doesn't care what happens.

A Roth IRA is an even better vehicle for active traders to trade within. Profits made within the Roth IRA structure are never required by the IRS to be reported. Besides, gains are never taxed if the rules are followed. Basically, you need to hold the Roth for a minimum of 5 years and be over 59 1/2 to withdrawal 100% tax free.

Many traders believe that one can only trade on the long side within an IRA. This isn't true. Short selling is permitted under certain guidelines. In addition your IRA can be traded on margin to magnify the gains.

The IRS may be the trader's nemesis, but knowledge of the beast will mitigate the harm in a completely legal and ethical manner.

Dave Goodboy is Vice President of Marketing for a New York City based multi-strategy fund.
That is great news, now I know that I can trade in my Roth IRA and not worry about taxes WOOHOO!

Technorati needs to verify that I am an author of this blog by looking for a unique code. So I am posting this so the following code 7VY9837RE53X can be checked by them and the blog can be added to their system. I will remove this post as soon as the verify it.

More about Growth Investing

Here is some more information about Growth Companies:

What Does Growth Company Mean?

Any firm whose business generates significant positive cash flows or earnings, which increase at significantly faster rates than the overall economy. A growth company tends to have very profitable reinvestment opportunities for its own retained earnings. Thus, it typically pays little to no dividends to stockholders, opting instead to plow most or all of its profits back into its expanding business.

Growth Company

Growth companies are most often seen in the technology industries. The quintessential example of a growth company is Google, which has grown revenues, cash flows and earnings by leaps and bounds since its initial public offering. Growth companies such as Google are expected to increase profits markedly in the future, and thus the market bids up their share prices to high valuations. This contrasts with mature companies, such as diversified utility companies, which see very stable earnings with little to no growth.

Growth Investing

I thought some of my readers might also like to know a little more about Growth Investing, so here it is:

What Does Growth Investing Mean?

A strategy whereby an investor seeks out stocks with what they deem good growth potential. In most cases a growth stock is defined as a company whose earnings are expected to grow at an above-average rate compared to its industry or the overall market.

Growth Investing

Growth investors often call growth investing a capital growth strategy, since investors seek to maximize their capital gains.Although it is often said that growth investing and value investing are diametrically opposed, a better way to view these two strategies is to consider a quote by Warren Buffett: "growth and value investing are joined at the hip". Another very famous investor, Peter Lynch, pioneered a hybrid of growth and value investing with what is now commonly referred to as a "growth at a reasonable price (GARP)" strategy.

What Does Growth At A Reasonable Price - GARP Mean?

An equity investment strategy that seeks to combine tenets of both growth investing and value investing to find individual stocks. GARP investors look for companies that are showing consistent earnings growth above broad market levels (a tenet of growth investing ) while excluding companies that have very high valuations (value investing). The overarching goal is to avoid the extremes of either growth or value investing; this typically leads GARP investors to growth-oriented stocks with relatively low price/earnings (P/E) multiples in normal market conditions.

Growth At A Reasonable Price - GARP

GARP investing was popularized by legendary Fidelity manager Peter Lynch. While the style may not have rigid boundaries for including or excluding stocks, a fundamental metric that serves as a solid benchmark is the price/earnings growth (PEG) ratio. The PEG shows the ratio between a company's P/E ratio (valuation) and its expected earnings growth rate over the next several years. A GARP investor would seek out stocks that have a PEG of 1 or less, which shows that P/E ratios are in line with expected earnings growth. This helps to uncover stocks that are trading at reasonable prices.

In a bear market or other downturn in stocks, one could expect the returns of GARP investors to be higher than those of pure growth investors, but subpar to strict value investors who generally purchase shares at P/Es under broad market multiples.

Value investing

I definitely fall under the category of value investor. I like the idea of buying stocks for less than they are worth. Who wants to pay full price, don't we all like a sale?
Well here is some information on what value investing is.

Value investing is an investment that derives from the ideas on investment and that Ben Graham began teaching at Columbia Business School in 1928 and subsequently developed in their 1934 text Security Analysis. Although value investing has taken many forms since its inception, it generally involves buying a stock whose shares appear under priced by some form(s) of fundamental analysis. As examples, such securities may be stock in public companies that trade at discounts to book value or tangible book value, have high dividend yields, have low price-to-earning multiples or have low price-to-book ratios.

High-profile proponents of value investing, including Berkshire Hathaway chairman Warren Buffett, have argued that the essence of value investing is buying stocks at less than their intrinsic value. The discount of the market price to the intrinsic value is what Benjamin Graham called the "margin of safety". The intrinsic value is the discounted value of all future distributions.

However, the future distributions and the appropriate discount rate can only be assumptions. Warren Buffett has taken the value investing concept even further as his thinking has evolved to where for the last 25 years or so his focus has been on "finding an outstanding company at a sensible price" rather than generic companies at a bargain price.

Benjamin Graham

Benjamin Graham Value investing was established by Benjamin Graham and David Dodd, both professors at Columbia Business School and teachers of many famous investors. In Graham's book The Intelligent Investor, he advocated the important concept of margin of safety — first introduced in Security Analysis, a 1934 book he coauthored with David Dodd — which calls for a cautious approach to investing. In terms of picking stocks, he recommended defensive investment in stocks trading below their tangible book value as a safeguard to adverse future developments often encountered in the stock market.

Further evolution

However, the concept of value (as well as "book value") has evolved significantly since the 1970s. Book value is most useful in industries where most assets are tangible. Intangible assets such as patents, software, brands, or goodwill are difficult to quantify, and may not survive the break-up of a company. When an industry is going through fast technological advancements, the value of its assets is not easily estimated. Sometimes, the production power of an asset can be significantly reduced due to competitive disruptive innovation and therefore its value can suffer permanent impairment. One good example of decreasing asset value is a personal computer. An example of where book value does not mean much is the service and retail sectors. One modern model of calculating value is the discounted cash flow model (DCF). The value of an asset is the sum of its future cash flows, discounted back to the present.

Performance, value strategies

Value investing has proven to be a successful investment strategy. There are several ways to evaluate its success. One way is to examine the performance of simple value strategies, such as buying low PE ratio stocks, low price-to-cash-flow ratio stocks, or low price-to-book ratio stocks. Numerous academics have published studies investigating the effects of buying value stocks. These studies have consistently found that value stocks outperform growth stocks and the market as a whole.

Performance, value investors

Another way to examine the performance of value investing strategies is to examine the investing performance of well-known value investors. Simply examining the performance of the best known value investors would not be instructive, because investors do not become well known unless they are successful. This introduces a selection bias. A better way to investigate the performance of a group of value investors was suggested by Warren Buffett, in his May 17, 1984 speech that was published as The Superinvestors of Graham-and-Doddsville. In this speech, Buffett examined the performance of those investors who worked at Graham-Newman Corporation and were thus most influenced by Benjamin Graham. Buffett's conclusion is identical to that of the academic research on simple value investing strategies--value investing is, on average, successful in the long run.

During about a 25-year period (1965-90), published research and articles in leading journals of the value ilk were few. Warren Buffett once commented, "You couldn't advance in a finance department in this country unless you taught that the world was flat."

Fannie Mae

So this stock has dropped again...
I am still good overall since I bought most of my shares under $0.70 per share. I like the fact that it has dropped again. Now I can buy more shares for cheaper. Our fearful, I mean fearless, I mean, famous, I mean infamous.... Whatever our Leader Mr. President has now promised unlimited funds for Fannie Mae and Freddy Mac.
This is BAD for us tax payers, but good for me as an investor since I know the US government will not let them fail.
Now that is the kind of stock I want... One that the US Government says will not fail.

Rule # 1 Investing

I am reading a new book called "Rule #1" by: Phil Town.

The Rule is to Not loose money!

I love this book so far. It has helped teach me how to break down a companies financials to make a better informed decision when it comes to a stock purchase. I recommend this book to anyone that wants to make over 15% returns from the stock market. It follows the Value Investing principals.

I have researched many companies recently and have come up with a top 10 stocks to invest in. I am not going to share that information until I make the purchase which I will post on here, because I only invest in companies I can understand and that fit in my moral values, which may or may not be yours.

The system teaches you to figure out 6 main numbers for a company.

They are:

Return on Investment Capital (ROIC)
Sales Growth Rate
Earnings per share growth rate
Equity growth rate
Cash flow growth rate
Value per share (actual value per share based on what the company is worth)

When you figure them you figure the 10 year, 5 year and 1 year numbers. They all need to be over 10% with an increasing value over time.

Also the Value per share needs to be 50% of the actual share price to have a built in margin of safety.

Once you have narrowed down the list of stocks by doing this you can then look at P/E ratios, Dividends, Insider Trading, Earnings per share, Book price, etc.... To figure out if the company is one you want to own.

One thing I have learned is to look at myself as owning the company, not just a shareholder. Only by companies that you would own for 100 years and that you agree with their work ethic, their morals, etc... Also only buy businesses that you have some knowledge of, or feel close to.

Here is a quick and easy link to the book at Amazon. I have found that it is very hard to find a place that can beat their prices. So here it is, hope this helps and gets you into this form of investing, I think you will enjoy it, especially when the money starts rolling in from your investments.

Web Hosting

I will be starting up some new websites soon and have decided on my hosting service. They have so many options and things included and great prices. I am sure I will love their services. The service is Lunarpages, check them out by following this link.

Link to the 1st post in this series that has links to all the other posts:

My quest for financial freedom: Back ground for this quest

Main link to this blog:

http://quest-for-financial-freedom.blogspot.com/

Scottrade

Sorry I have not been here in a while. I will not let it happen again.

I have been busy getting some stuff done. I have recently set up a Scottrade account due to the lower trading fees than the company I was with prior.

I also have been doing a bunch of research on different stocks. More to come...



Link to the 1st post in this series that has links to all the other posts:

My quest for financial freedom: Back ground for this quest

Main link to this blog:

http://quest-for-financial-freedom.blogspot.com/

Investing clubs

I have been researching recently about investment clubs, what they are and how they operate. I have come to realize that they are a really good idea for novice investors. I am currently locating a club to join in my area.

One thing nice about them is that you can get started investing for a very low monthly investment of between $25-$100 per month depending on the club.

They offer you a chance to learn about investing from other club members and to own a nice portfolio of stocks that you could not afford to own on your own.

The NAIC (National Association of Investors Corporation) is the governing body for investing clubs in the US. They are a non-profit organization dedicated to increasing investors knowledge and to help people become better investors. Their system of picking stocks has beat the market over the 55 years of their existence.

Their website is http://www.betterinvesting.org/ They have so much stuff on the site it is unreal. It is really worth the $6.95 per month to become a member. I joined today and have started to look through all they offer on the site.

Here are some of the top companies that investment clubs across the country invest in:

General Electric
Stryker
Walgreens
Cisco
Johnson and Johnson
Microsoft
Aflac
Lowes
Pepsi
Starbucks

Those are the top 10 stocks held by investment clubs in the US.

Please check out my Internet Income Streams blog here:

http://internet-incomestreams.blogspot.com/

Looking for someone?

Then follow this link and find them!

I have used this service for a while now and have found many of my old friends that I have lost contact with over the years. Click on the link type in the name and reconnect!

http://Acme-People-Search.com/1243108874LCOL

Link to the 1st post in this series that has links to all the other posts:

My quest for financial freedom: Back ground for this quest

Main link to this blog:

http://quest-for-financial-freedom.blogspot.com/

My Stocks

My stocks

So far I have purchased shares of Zions Bank (ZION), shares of Fannie Mae (FNM) and shares of Pfizer (PFE).

The Pfizer shares I just purchased this morning at $13.80 per share.
The Zions Bank shares I purchased at $6.91 per share.
The Fannie Mae shares I purchased at $0.81 per share.

So far the Pfizer and the Zions Bank are up. The Zions Bank shares are doing pretty good, almost 100% growth.

Zions Bank and Pfizer are also dividend stocks, so they earn me money even if the share price does not go up. Actually if the share price does not go up I get a higher percentage dividend.

Zions Bank pays a $0.16 dividend.
Pfizer pays a $0.64 dividend.

Fannie Mae has a P/E ratio of: -.03 and a Forward P/E of: -0.24
Pfizer has a P/E ratio of: 12.43 and a Forward P/E of: 6.21
Zions Bank has a P/E ratio of: -2.95 and a Forward P/E of 13.80! How is that for potential!

Also in other news Pfizer (NYSE:PFE) just acquired Wyeth (NYSE:WYE).
With Pfizer posting annual earnings of $43 Billion last year and Wyeth posting earnings of $22 Billion I think Pfizer just grabbed a company that they may have underestimated the size of. Could this be a good or bad thing? I do not know, I think it will end up being a good thing, I just think that it will take a quarter or two before it really takes effect on the stock prices and earnings.

Pfizer (NYSE: PFE) opened at $13.36. So far today, the stock has hit a low of $13.21 and a high of $13.56. PFE is now trading at $13.52, up $0.35 (2.66%). Over the last 52 weeks the stock has ranged from a low of $11.62 to a high of $20.65. PFE shares are rising today after a Standpoint Research analyst initiated the stock at Buy with a $20 price target.

Fannie Mae and Freddy Mac have been in the news a lot recently of course and here is one of the reasons why:
Freddie and Fannie play a more vital role than ever in the U.S. housing market. The Federal Housing Administration now guarantees about a third of new U.S. loans, up from 3% at the height of the housing bubble. Most of the remaining new mortgages are still backed by one of these two. Furthermore, GSE bonds are held in huge numbers by large companies and formidable countries. In other words, allowing Fannie and Freddie to fail on their obligations could cause more losses at major institutions and possibly a foreign relations nightmare. So I do not think that the Government will let them fail, there is too much at stake here.

Please check out my Internet Income Streams blog here:

http://internet-incomestreams.blogspot.com/

Link to the 1st post in this series that has links to all the other posts:

My quest for financial freedom: Back ground for this quest

Main link to this blog:

http://quest-for-financial-freedom.blogspot.com/

Thrill of CD Auctions Lures Investors

Thrill of CD Auctions Lures Investors

(I did not write nor claim any of this article as my own. It was written by the below mentioned person)

By DONNA KARDOS

(The Wall Street Journal)

As the stock market continues to be roiled by volatility, investors are turning to a surefire way to make their money grow, but with a modern twist: certificates of deposit that are auctioned off online.

The yield rates from the auctions aren't always better than the average retail CD rates. Still, investors have been turning to CD auctions for the thrill of the game, the comfort of a fixed rate and the chance that the rate they get might be above average.

MoneyAisle.com and Zions Direct offer two of the most well-known CD auction services. Both only offer CDs from banks insured by the Federal Deposit Insurance Corp., and have seen monthly hits to their sites and auction activity accelerate as the recession continues to affect consumers' investment decisions.

The FDIC currently insures deposits up to $250,000 per depositor per bank, but that coverage is scheduled to drop back to $100,000 in most cases at year's end.

Zions Direct, run by Utah-based regional bank Zions Bancorp, puts the bidding in customers' hands, giving them the chance to bid on CDs offered by multiple banks for terms such as one month, two months, three months, six months and one year. There are no sign-up charges and no broker fees, but investors need to deposit at least $1,000.

MoneyAisle.com asks investors what they want to deposit and for how long, prompting 112 banks to vie for the deposit. The site—which charges banks a fee to participate—chooses the bank that offers the best rate for the investor. It then presents the offer to the investor, who can back out if unsatisfied with the rate.

MoneyAisle Chief Executive Mukesh Chatter says he developed MoneyAisle to counter the idea that consumers have to find the best deals for things they want to buy on their own. "We're removing that burden," he says. Monthly hits to the site have jumped fivefold to more than 75,000 visitors in February from 14,586 visitors in July, its first full month in operation.

David Hemingway, executive vice president of Zions Direct, touts the fact that the Zions auction process—a modified Dutch auction similar to the way the Treasury Department auctions off its Treasury bills— gives investors the chance to control the auction. He says investors can secure CDs at yields higher than those they bid for because the auction gives all winning bidders in each auction the same yield.

In March, the auctions site on Zions Direct received 18,500 visits, more than triple the 5,600 hits it got in March 2008. Auction accounts soared 71% to just under 8,000 bidders in February from a year earlier.

Most banks auctioning CDs via Zions Direct are Zions affiliates, but those that aren't are charged a flat fee to participate. "What we are really interested in is the deposits that come with the new bidders' brokerage accounts," Mr. Hemingway says, though he noted the auctions currently contribute just a small fraction of the parent company's deposit base.

The Zions and MoneyAisle sites also are attracting users seeking entertainment value, says Motley Fool senior analyst Dan Caplinger. "Auctions are kind of fun," he says. "You feel like you're participating in things and getting a bargain you wouldn't otherwise get."

That's not necessarily always the case for CD auctions, though. While some result in better-than-average CD yields, others don't. Still, Zions' Mr. Hemingway points out, "they may not be excited about the yield, but people are happy just not to lose their money."

© 2009 Dow Jones & Company. All Rights Reserved.

Looking for someone?
Then follow this link and find them!
I have used this service for a while now and have found many of my old friends that I have lost contact with over the years. Click on the link type in the name and reconnect!
http://Acme-People-Search.com/1243108874LCOL

Please check out my Internet Income Streams blog here:

http://internet-incomestreams.blogspot.com/

Link to the 1st post in this series that has links to all the other posts:

My quest for financial freedom: Back ground for this quest

Main link to this blog:

http://quest-for-financial-freedom.blogspot.com/

Pfizer information

I have been thinking about and researching Pfizer for a while now. I really like this stock and want to purchase some shares. I wanted to post up some information about the company that I have come across that leads me to really like this stock.

First off they are paying a 9.64% dividend! That is like a 9.64% savings account! Here is some information about the stock.

Beta -- 0.66
Dividend & Yield -- 1.28 (9.64%)
Earnings/Share -- 1.20
Forward P/E -- 5.98
Market Cap. -- 91.12 Bil
P/E -- 11.35
Return on Equity -- 13.11
Total Shares Out. -- 6.74 Bil

Here is some information about the company that I found on MSN Money:

Pfizer Inc. (Pfizer) is a research-based, global pharmaceutical company. The Company discovers, develops, manufactures and markets prescription medicines for humans and animals. It operates in two business segments: Pharmaceutical and Animal Health. Pfizer also operates several other businesses, including the manufacture of gelatin capsules, contract manufacturing and bulk pharmaceutical chemicals. In June 2008, Pfizer completed the acquisition of all remaining outstanding shares of common stock of Encysive Pharmaceuticals, Inc. through a merger of Pfizer's wholly owned subsidiary, Explorer Acquisition Corp., with and into Encysive. In June 2008, it also completed the acquisition of Serenex, Inc., a biotechnology company with a Heat Shock Protein 90 development portfolio. In January 2008, the Company completed the acquisition of Coley Pharmaceutical Group, Inc., a company whose area of capability is immunotherapy with emphasis on Toll-like receptor research and development.

Here is their contact information:

235 East 42nd StreetNew York NY 10017
http://www.pfizer.com/
Phone: 212-5732323
Fax: 212-5737851
Industry : Drug Manufacturers - Major
Employees : 81,800
Exchange : NYSE


Pfizer Declares Q2 2009 Dividend
April 23, 2009
The Board of Directors of Pfizer declared $0.16 second-quarter 2009 dividend on the Company's common stock, payable June 2, 2009, to shareholders of record at the close of business on May 8, 2009.
So if you buy before May 8th 2009 you will receive $0.16 per share on June 2nd 2009.

Please check out my Internet Income Streams blog here:

http://internet-incomestreams.blogspot.com/

Link to the 1st post in this series that has links to all the other posts:

My quest for financial freedom: Back ground for this quest

Main link to this blog:

http://quest-for-financial-freedom.blogspot.com/

Real investing and finance information

I apologize to the readers of this blog that came here for investment information. I have been side tracked by these Pay Per Click, Pay to Post, and paid survey sites. I am going to get this blog back to talking about real investing, finance, and money making.

I have been talking to a person I met recently at work and his ideas for some stock purchases are Marvel and Hasbro due to the upcoming motion pictures that will hit theaters soon. I have done some checking and they might be a good option to invest in.

He also mentioned that Fannie Mae may not be that good. One thing he told me that I did not know was that the Government mandated them to come up with 5 Million in liquid assets. They did not know why because they are doing fine as a company. They only have a 2% default rate on their loans, and they own 70% of the home mortgages in the US. So the other 38% of defaulted loans come from the other 30% of all companies that loan money. That means that those companies are in big trouble.

The Government also issued themselves 10,000 shares of Preferred stock in Fannie Mae when they had come up with the 5 million in liquid assets. So what that says is that when and if anyone makes money from Fannie Mae the Government will get paid first due to the preferred shares vs the common shares that most of us own.

I still think that Fannie Mae is a viable option for investors. I am confident that they will recover and bring in nice profits to common and preferred share holders.

Link to the 1st post in this series that has links to all the other posts:

My quest for financial freedom: Back ground for this quest

Main link to this blog:

http://quest-for-financial-freedom.blogspot.com/