How to Pick Fundamentally Strong Stocks

Buffett on How to Allocate Captital

Buffett on How to Allocate Captital
Written by Greg Speicher on November 20, 2009 - 0 Comments

At the recent CNBC Town Hall Event at Columbia Warren Buffett and Bill Gates: Keeping America Great, Buffett was asked how an individual investor should allocate capital.

QUESTION: Hi, I’m Brian Seedabalker. I’m a second-year student. Mr. Buffett, it’s great to see you again. I was on the trip to Omaha last month. Thank you for hosting us. My question is, how would you recommend an individual investor who follows the Graham and Dodd philosophy to allocate their capital today?

BUFFETT: Well, it depends whether they are going to be an active investor. Graham distinguished between the defensive and the enterprising and that. So if you are going to spend a lot of time on investment, you know I just advise looking at as many things as possible and you will find some bargains. And when you find them, you have to act. It doesn’t — it hasn’t changed at all since I was here in 1950, 1951. And it won’t change the rest of my life. You start turning pages. When I got out of school, I turned every page in Moody’s 10,000-some pages twice, looking for companies. And you have to find them yourself. The world isn’t going to tell you about great deals. You have to find them yourself. And that takes a fair amount of time. So if you are not going to do that, if you are just going to be a passive investor, then I just advise an index fund more consistently over a long period of time. The one thing I will tell you is the worst investment you can have is cash. Everybody is talking about cash being king and all that sort of thing. Most of you don’t look like you are overburdened with cash anyway. [LAUGHTER] Cash is going to become worth less over time. But good businesses are going to become worth more over time. And you don’t want to pay too much for them so you have to have some discipline about what you pay. But the thing to do is find a good business and stick with it.


BECKY: Does that mean you think we are through the roughest times? You had always kept the cash word around, too.

BUFFETT: We always keep enough cash around so I feel very comfortable and don’t worry about sleeping at night. But it’s not because I like cash as an investment. Cash is a bad investment over time. But you always want to have enough so that nobody else can determine your future essentially. The worst — the financial panic is behind us. The economic spillout which came to some extent from that financial panic is still with us. It will end. I don’t know if it will end tomorrow or next week or next month. Or maybe a year. But it won’t go on forever. And to sit around and try and pick the bottom, people were trying to do that last March and the bottom hadn’t come in unemployment and the bottom hadn’t come in business but the bottom had come in stocks. Don’t pass up something that’s attractive today because you think you will find something way more attractive tomorrow.


Key takeaways:
1. To allocate capital, you need a good search strategy. This requires a lot of hard work, “turning pages” as Buffett calls it. See earlier postings on “Search Strategy” for ideas on how to put together an effective search strategy.

2. It is not possible to pick the bottom. Learn how to value companies, practice until you get good, and buy when you find a good business that you understand, with good management, available at a price that has a mathematical expectancy to meet your minimum hurdle rate, for example 20%.


http://gregspeicher.com/?p=106

Stock Picking Strategies

Playing the Stock Market is thrilling. This is why when it comes to personal finance and the accumulation of wealth, investing in stocks is perhaps one of the most talked about topics regarding these subjects. However, we all know that the Stock Market has its ups and downs which is why investors want more of the ups and less of the downs.

Let’s explore the world of stock-pricing by learning some of the most sure fire ways of finding good stocks. An investor’s aim to achieve a rate of return that is greater than that of the market’s. In order to reach this aim, an investor has to find stocks with specific criteria.

Before going further, let is be stated that there is no method or strategy that is 100% guaranteed to yield profit. Simply put, there is no sure fire way of picking stocks. It’s a common misconception especially to newbie traders that once a system works, it will always work. Remember that no system is infallible and there is no magic formula when it comes to the Stock Market.

But, this does not mean that you cannot profit from picking stocks. A lot of people have done so and continue to make a living out of investing in stocks. Stock picking is an art rather than a science and the reason for this are as follows:

• A company’s over all financial health is not measured by profits alone. There are other factors that contribute to a company’s financial standing. Profit can be easily measured but how do you put monetary value on a company’s reputation? There are quantitative values that you can work with, but what about qualitative factors such as staff, competitive advantage and even environment? Building a system to measure all of this is simply impossible.
• The Stock Market is not only driven by companies, they are also run by people. Humans are the basic force that powers the volatile world of the Stock Market. And because of the human factor, stocks do not always do what you intend for them to do. People are driven by a wide array of emotions like confidence and fear which need to be factored into the whole formula.
• The tangible and intangible forces that are put to play in the world of stocks are simply too unpredictable to rely on a single fool proof system. There are too many factors that affect and interact with each other which make the Stock Market an exciting and dangerous world to be in.

At the end of the day, there is no scientific way of picking the right stock. Most people pick stocks by “gut feeling” or as a “best guess”. There are a lot of theories that abound, and sometimes two opposing theories will work at a certain time. If you want to pick stocks consider some personal preferences like time frame, risk tolerance and how much you are willing to risk (money wise) and devote (time wise) to picking and investing in stocks.

With everything said you might be asking why would invest in stock anyway? Think of it this way: Microsoft had its IPO in 1986. If you invested and had simply held on to that investment, your return would have been 35000% by 2004. In other words, your $15,000 investment would have become $5.25 million in 18 years later! It’s phenomena like that which has had investors always searching for the “next Microsoft.”

Read more: http://thestockmarketwatch.com/learn-stock-market/stock-picking-strategies-introduction/#ixzz12cjn5iuR

Criteria for Good Stock Picks

The foundation of long-term investing is the notion that the company's earnings drives the price of a share of its stock.

The foundation of long-term investing is the notion that the company's earnings drives the price of a share of its stock. The higher the earnings, the higher the price.





Comparing the above 2 charts, I will be excited with the bottom one.  The pattern here is that of 3 lines going up "almost parallel" to each other (monotonous "tramlines").  This company's earnings have been growing consistently over many years.  It was therefore not surprising that its share price has risen in tandem.   In addition, it has given dividends consistently over the years.  This dividend too has grown in tandem with the earnings.  However, since the share price has also risen, the DY over the years hovered probably around the same range.

Click here to see more companies with "monotonous tramlines" charts.

For long term investors, the total shareholder returns are from dividend and capital appreciation.  Look at this post here:

Selected Stock Performance Review
http://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdGZuWktpR2dvQUhhSmpkNElXY0NvWmc&output=html

Most of the total shareholder returns will be from capital appreciation of the stock prices.  I will concentrate on ensuring that I invest in a company's earnings.  The dividend is at best a "surrogate" indicator of this company's good earnings.

Related readings:

The story of Ellis Traub:  Investing for Beginners

Do you want to take your knowledge of investing to the next level?

Learning to invest can be an enjoyable pastime for those inclined toward it.  It is not a mystery that has to be left to the professionals.  Do you want to take your knowledge of investing to the next level?

You can do it as successful investing relies primarily on the proper understanding of basic mathematics and basic principles of business.

You want to learn about business.  

You want to learn how to value individual stocks.

You want to determine whether or not to buy more of the stock of your employer.

You want to own the greatest companies on the planet, hold them for decades, and turn a couple of thousand dollars into a couple of million dollars by the time you retire, or your kids retire, or their kids.

To get there, you need only add 6 + 17 successfully (23).  You need only multiply 12 X 2.6 (31.2).  You need only divide 178 by 14 (12.7).

Mostly, you'll just need to keep your eyes and mind open.  

The future of your financial situation rests more on these abilities than on working triple overtime next month or inheriting a whole mess of money from your great-uncle.


So, let's ask again:  is it time for you to step beyond the index fund and start investing in individual stocks?

Why invest in individual stocks?  

Because if you're methodical, you may beat the index funds that beat the majority of managed funds.  

Chances are you won't make much money at all in your first year of investing.

You'll still be learning and you'll probably make plenty of mistakes.

And there certainly are other alternatives to common stock.  Index funds are a great way to begin investing.

With method and resolve, private investors can manage to outperform the market over the long term.

Be a stock picker: Buy GREAT companies and hold for the long term until their fundamentals change

All the above are GREAT companies.

NEVER buy these GREAT companies at HIGH prices.

You can often buy them at FAIR prices.

On certain occasions, you have the chance to buy them at slightly BARGAIN prices.

Rarely, for example during the recent 2008 Crash, you had the chance to buy them at GREAT prices.

It is better to buy a GREAT company at a FAIR price than to buy a FAIR company at a GREAT price.

It is safe to hold these stocks for the long term since these companies have competitive advantages, selling only when their fundamentals change.

The present prices of these stocks are near or above their previous high prices.

Those who bought regularly into these stocks would have capital gains, through dollar-cost averaging.

Further comments:

1. Warren, on the other hand, after starting his career with Graham, discovered the tremendous wealth-creating economics of a company that possessed a long-term competitive advantage over its competitors.  
2. Warren realized that the longer you held one of these fantastic businesses, the richer it made you.  
3. While Graham would have argued that these super businesses  were all overpriced, Warren realized that he didn't have to wait for the stock market to serve up a bargain price, that even if he paid a fair price, he could still get superrich off of those businesses.  
4. In the process of discovering the advantages of owning a business with a long-term competitive advantage, Warren developed a unique set of analytical tools to help identify these special kinds of businesses.  
5. Though rooted in the old school Grahamian language, his new way of looking at things enabled him to determine whether the company could survive its current problems.  
6. Warren's way also told him whether or not the company in question possessed a long-term competitive advantage that would make him superrich over the long run.  
7. By learning or copying Warren, you can make the quantum leap that Warren made by enabling you to go beyond the old school Grahamian valuation models and discover, as Warren did, the phenomenal long-term wealth-creating power of a company that possesses a durable competitive advantage over its competitors.
8. In the process you'll free yourself from the costly manipulations of Wall Street and gain the opportunity to join the growing ranks of intelligent investors the world over who are becoming tremendously wealthy following in the footsteps of this legendary and masterful investor.

Related:

The Evolution of Warren Buffett

Learning and Understanding the Evolution of Warren Buffett
Li Lu sharing his Value Investing Strategies (Video)
The Three Gs of Buffett: Great, Good and Gruesome

The GREAT company has long-term competitive advantage in a stable industry.  This company:

• takes a one time investment capital and 
• pays you a very attractive return (dividend + capital appreciation), 
• which will continue to increase as years pass by;

Here are the golden words of Buffett on the GREAT businesses to own:

1.  On 'Great' businesses, Buffett says, "Long-term competitive advantage in a stable industry is what we seek in a business.

• If that comes with rapid organic growth, great. 
• But even without organic growth, such a business is rewarding. 
• We will simply take the lush earnings of the business and use them to buy similar businesses elsewhere. 
• There's no rule that you have to invest money where you've earned it. 
• Indeed, it's often a mistake to do so: Truly great businesses, earning huge returns on tangible assets, can't for any extended period reinvest a large portion of their earnings internally at high rates of return."

Should these 'not knowable in advance' factors influence your investing?

The economy, interest rates, fuel prices, commodity prices, foreign exchange, price of gold and geopolitical situations; should not these influence your investing?


Yes, these are hugely important factors. However, they are not predictable and largely out of our control. They are not knowable in advance. It is better to distance oneself from thinking about them when assessing the business to invest in.


Therefore, the approach adopted should generally not be a top-down macroeconomic one, but a bottom-up microeconomic one.


“The implication is with the passage of time, a good business over a long period of time produce results to the investor over time.”


Also read:
The Ultimate Signal to Load Up on Stocks?

Legendary fund manager Peter Lynch famously said that if investors spend 13 minutes thinking about the economy, they've wasted 10 minutes. Granted, Lynch wasn't managing money during a mega-macroeconomic crisis of the sort we're facing ...

How To Identify A Good Stock?

Taking Stock Episode 3 - How To Identify A Good Stock
Channel News Asia TV
http://wealth-mentors.com/wm/Int_TV_CNA_Stock7O3.aspx


Here is your Part 3 of 7 series. In this episode, Mirriam talks about "How to identify a good stock?".

There are over 10,000 stocks listed on the US stock exchanges and how do one go about picking the right stocks?

Do you know that:

-- Mirriam has her personal basket of stocks, just 20 of them?

-- When Mirriam trades, she uses fewer than 5 strategies?

It's indeed a surprise to many people that her trading style is so simple and that would be sufficient to bring her millions!

Yes, things don't have to be so complicated :)

And that's good news for newbies who want to take up trading.

Many of our members lack the financial background and yet they do very well!

Here are some of their success stories:

* * * * * * * * * * * * * * * * * * * * * * *
Joanne Yeo, Florist:
* * * * * * * * * * * * * * * * * * * * * * *
 "For the month of May, I made about US$4,200 profit from 11 trades. I attended the seminar in Jan and went live end of April and within a month of live trading, I've  paid off my tuition fee and still have some profits left. I am very thankful and glad to have done the course with Smart Traders. The methods taught by Mirriam are conservative but they can give you success 70% of the time. Options trading has really given me new opportunities to creating wealth for my future as I've seen it happen before my eyes."

* * * * * * * * * * * * * * * * * * * * * * *
Liew Mei Lan, ex-air stewardess and homemaker:
* * * * * * * * * * * * * * * * * * * * * * *
"Would like to share my 2 winning trades with the OEX. 22 Feb from $2.80 to $4.30 or 54% profit in 1 hour! Then , 23 Feb from $1.00 to $1.80 or 80% profit in 45min! Nice profit & very happy about it :)"


Back to the TV interview, questions Mirriam answers include -

1) How do you identify a good stock or share?

2) Would you recommend a beginner to go into stock markets? Would it be riskier to go into stock markets, considering other instruments?

3) What are growth stocks and dividend-yield stock and what are their differences?

4) Is it possible to find a stock that has both qualities?

5) Would you advise a beginner to invest in a company that has already established its name in the market? Perhaps a Multi-national company?

6) What about Information Technology and Tech stocks?

QUOTABLE QUOTES:

"The way to begin really is to understand the numbers behind the company."

Here's your episode 3 of 7, click here....

http://wealth-mentors.com/wm/Int_TV_CNA_Stock7O3.aspx

We trust that you enjoy watching this set of programs.

We look forward to mentoring you on your journey to successful Options Trading and Financial & Time Freedom.

If you've not yet enrolled in our Smart Traders Mentoring Program and would like to do so, call us today to reserve your priority seat!


To Your Trading Success,


Aaron Sim
CEO, Wealth Mentors
http://www.wealth-mentors.com

This combination of tangible and intangible aspects makes picking stocks a highly subjective, even intuitive process.

Workshop Basics Of Stock Picking-

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 proposing to attend this workshop 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. 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.

Prof Rakesh Sud ACA, Grad CWA Director- ACMC (AIMS Center for Management Consultancy) Acharya Institute of Management & Sciences (AIMS) 1st Stage, 1st Phase, Peenya, Bangalore 560058 Karnataka, India www.acharyaims.ac.in Mobile 91 9535159757 Tel : +91 80 2837 6430 / 2839 0433 / 4117 9588 / 4125 3496 sud.rakesh@gmail.com dir.acmc@acharyaims.ac.in

http://events.linkedin.com/Workshop-Basics-Stock-Picking-AIMS/pub/266382

Our Stock-Picking Track Record by Pat Dorsey, Morningstar

By Pat Dorsey, CFA| 1-26-2010 12:20 PM

Our Stock-Picking Track Record
Pat Dorsey takes a look back at the performance of our calls through the downturn and recovery, plus how our star ratings on wide-, narrow-, and no-moat stocks have played out.

Related Links
How Our Stock Calls Have Performed

Pat Dorsey: Hi, I'm Pat Dorsey, director of equity research at Morningstar. At Morningstar's Equity Research Department, we're sometimes accused of taking a bit of an academic focus towards equity research. We spend a lot of time on competitive analysis and cash flow projections, but at the end of the day, the purpose is to pick stocks that go up.

So, the question is, did we do this? How has our performance been in 2009 and over the past few years? We recently published an article looking at our performance in '09 and in the past several years. I wanted to recap some of the highlights for you.

One of the first ways we can look at our performance in general is basically comparing how cheap we thought stocks were in aggregate to how the market has done. On that score, we've done OK.

In '07 and '08, we thought stocks were mildly overvalued. In hindsight, they were more overvalued then we had projected them to be, but at least we weren't pounding the table and saying, "Go out and put all your money into the equity markets."

What we did get right was calling the market as significantly undervalued in late '08 and early '09 when the median price-to-fair value of all the stocks that we cover reached as low as about 0.6, meaning that we thought the median stock in our coverage universe was about 40% undervalued in late '08 and early '09. Of course, that turned out to be a pretty good call.

Close Full Transcript

We can also look at our valuation of popular indexes like the S&P 500 because, since we cover every stock in the S&P 500, we can basically take all of our fair values and roll them up into an aggregate value for the index. Well, before things really rolled over, we had a fair value of the S&P of about 1,500-1,600. That was certainly, in hindsight, too high. (Food for thought:  even the expert got it wrong!)

We quickly adjusted that downward in late '08 to a level of about 1,200-1,250, and I'm very proud of the fact that we actually held our ground. Throughout most of '09, we held our fair value for the S&P at about 1, 200 even as the market was cratering down towards 800, 700 and down to the intra-day number of the beast low on March nine of 666.

We held our ground that whole time that the fair value for the S&P of 1,200. I'm fairly glad that we didn't succumb to the temptation to hide under the covers and not call anything a buy. In fact, we called quite a few things buys at that point in time.

Those are two big ways to look at the overall performance of our stock calls. Another way is basically have our 5-stars, our buy-rated stocks, outperformed our 1-stars, sell-rated stocks? One way we do this is sort of look at it by moat. Look at it by

• wide-moat, 
• narrow-moat and 
• no-moat stocks.

And here again, the story is pretty good. If you look at our wide-moat stocks over pretty much all time periods--trailing three years, five years and last year--our 5-star, buy-rated, wide-moat stocks have beaten our entire coverage universe of wide-moat stocks and, of course have done much better than our 1-star, sell-rated, wide-moat stocks.

Same story on the narrow-moat side. Of course, narrow-moat companies are the kinds of companies that don't have quite as strong an advantage as wide-moat businesses, and they are still good businesses. And those are businesses where, again, our 5-stars have out-performed narrow moats in general, as well as our sell-rated, 1-star, narrow-moat stocks.

Now, on the no-moat side of things, the story's a little bit more mixed, frankly. We cover about 900 no-moat stocks. These are typically sometimes smaller, less well competitively advantaged businesses. Businesses that we think are very prone to the vicissitudes of the economy and don't really have strong economic moats. And our performance here has been a bit more skewed, basically. We have not really done a very good job of sorting out the buy-rated ones from the 1-star, no-moat stocks. I think there's a couple reasons for this.

One is, well, frankly these are harder companies to value at the end of the day. They tend to be more volatile. They tend to be less predictable. They tend to be more easily buffeted by macroeconomic events, so they're just harder to value. They've also more volatile. They tend to be a little bit more levered and smaller, on average. They're just tougher companies to get you arms around. And our 1-star, no-moat stocks actually did incredibly well in 2009.

So, if you had owned this portfolio of beaten-down retailers, auto parts companies and media firms, you would have made a ton of money in 2009. You would have also needed a titanium-lined stomach to have held them from the beginning of the year through the March lows, and I'm not quite sure how many people would have had the fortitude to do this. If you did, more power to you. But I think the perhaps better risk-adjusted way is to think about the 5-star, narrow-moat and wide-moat stocks.

Finally, our strategies have done fairly well over time. These are kind of real money portfolios. Again, you're seeing more conservative strategies, like our Morningstar StockInvestor Tortoise Portfolio, didn't do quite as well in 2009, but it also didn't lose nearly as much money as the market in 2008, where as our more aggressive portfolios, like the Morningstar StockInvestor Hare, did quite well in 2009, as taking risk was rewarded by the market .

And our Wide Moat Focus Index, which basically takes the 20 cheapest of our wide-moat stocks, basically has been knocking the cover off the ball. It was up about 46% in 2009 and is beating the market by about 500 basis points annualized over the past five years. Again, it's a very simple, mechanical strategy. It's simply looking at our wide-moat universe of about 160 companies and looking for the 20 cheapest and then rebalancing quarterly.

I think what that really shows is the value of a disciplined approach and having a watch-list sorting out a group of companies you think that have the economic sticking power to be around for the long haul and waiting and buying them when they're cheap. That's essentially all this strategy does.

So, that's a pretty comprehensive look at our performance in 2009 and over the past several years. Overall, pretty good. We could have done a better job with the no-moat stocks but again, these are just frankly harder companies to get your arms around. They tend to be a little bit riskier and those were some missed opportunities, but overall, I'm pretty pleased with the performance.

I'm Pat Dorsey and thanks for watching.
Video:
http://www.morningstar.com/cover/videocenter.aspx?id=323559

Graham's time-tested strategy for defensive investors beat the market again this year.

8 Graham Stocks for 2010

Graham's time-tested strategy for defensive investors beat the market again this year. But that shouldn't come as a big surprise because it's bested the market, often by a wide margin, in eight of the last nine years.

You can check out the yearly performance of the Graham stocks, the S&P500 (as tracked by the SPY exchange-traded fund), and the percentage point difference between the two in Table 1. If you had bought equal dollar amounts of each year's Graham stocks in your RRSP and then replaced them with the new crop of stocks in each subsequent year, you would have gained 480% (or 22% annually) over the full period. On the other hand, the unfortunate index investor who bought and held the S&P500 ETF (NYSE:SPY) would have lost 11% over the same time. That even includes quarterly dividends reinvested annually. As you might imagine, I've been very pleased with the performance of my take on Graham's defensive strategy.

TABLE 1: PERFORMANCE OF PAST GRAHAM STOCKS
Year	Graham	S&P500	+/-
2000 - 2001	20.4%	-22.2%	42.6
2001 - 2002	28.2%	-15.1%	43.3
2002 - 2003	56.8%	16.5%	40.3
2003 - 2004	32.2%	9.4%	22.8
2004 - 2005	46.6%	12.8%	33.8
2005 - 2006	-3.8%	10.7%	-14.5
2006 - 2007	34.4%	16.1%	18.3
2007 - 2008	-6.5%	-22.1%	15.6
2008 - 2009	2.2%	-6.2%	8.4
Total Gain	479.5%	-10.8%	490.3
Annualized	22.0%	-1.3%	23.3

Graham first described his method for defensive investors in The Intelligent Investor. Graham, the dean of value investing, passed away in 1976 but an updated edition of The Intelligent Investor (ISBN 0060555661), with new commentary from veteran columnist Jason Zweig, was published in 2003. The original text is presented in its entirety and Zweig's commentary is thoughtfully separated into copious footnotes at the end of each chapter. If you don't already have a copy of The Intelligent Investor then this is the version to get. Serious Graham buffs will also want to check out the sixth edition of Securities Analysis (ISBN 0071592539) which includes commentary from some of today's famous value investors. But, clocking in at 700 pages, it's not for dilettantes.

Because Graham's rules for defensive investors are extraordinarily strict, I use a more moderate version. My Graham-inspired rules are shown in Table 2. For example, I require some dividend growth over the last five years whereas Graham demanded a twenty-year record of uninterrupted dividend payments. Similarly, I focus on five years worth of earnings growth instead of ten years largely because the five-year figures are provided by many free internet stock screeners.

TABLE 2: GRAHAM-INSPIRED RULES

1. P/E Ratio less than 15 2. P/Book Ratio less than 1.5 3. Book Value more than 0.01 4. Current Ratio more than 2 5. Annual EPS Growth (5-Yr Avg) more than 3% 6. 5-Year Dividend Growth more than 0% 7. 5-Year P/E Low more than 0.01 8. 1-Year Revenue more than $400 Million

Even with my less-stringent version of Graham's rules, very few U.S. stocks usually pass the test. Indeed, the list peaked at 10 stocks in 2002, bottomed out at 2 stocks in 2003, and contained only 4 candidates last year. This year, the list is back up near its highs and contains 8 stocks. While that's a relatively high number of stocks, the list is tiny compared to the thousands of stocks which trade each day. As a result, even my version of Graham's approach remains quite strict.

The current crop of Graham stocks is shown in Table 3. Before diving in, you should always examine any stock in great detail and remember that ten stocks can not be said to form a well-diversified portfolio. Do your own due diligence and be on the look out for problems that might not be reflected in a company's latest numbers. Study news stories, press releases, and regulatory filings.

If you'd like more information on Graham stocks, I publish the Graham Value Stocks letter which covers several Graham-inspired strategies and highlights value stocks in both the U.S. and Canada. Just send me an email, and I'll be happy to provide an online sample.

Remember that value stocks can be psychologically difficult to hold and some stocks will disappoint. While Graham's Defensive method has avoided running into any serious trouble so far, it can't be expected to outperform all of the time. Indeed, significant periods of underperformance are likely. I'm particularly concerned that you might dive right in based on past performance alone. Don't. Be sure to focus at least as much on what can go wrong as on what might go right.

Table 3: U.S. stocks that pass Graham-inspired rules
Company	Price	P/E	P/B	EPS Growth	Current Ratio	D/E	Revenue ($M)	Dividend Growth
A.D.M. (ADM)	$29.72	11.2	1.41	28.1%	2.2	0.61	69,207	14.9%
Baldor (BEZ)	$28.55	14.9	1.47	32.0%	2.7	1.36	1,767	5.1%
Cash America (CSH)	$31.83	12.7	1.49	29.8%	5.1	0.69	1,052	16.6%
Overseas Shipholding (OSG)	$41.33	5.9	0.59	21.2%	4.1	0.72	1,473	18.2%
Reliance Steel (RS)	$41.97	13.4	1.26	70.0%	3.5	0.52	7,517	27.2%
Skywest (SKYW)	$17.16	11.7	0.73	11.1%	3.0	1.39	3,049	10.2%
Spartan Motors (SPAR)	$5.47	6.1	0.99	57.3%	2.8	0.15	624	2.4%
Tidewater (TDW)	$46.11	6.5	1.05	57.7%	3.1	0.13	1,377	10.8%
Source: msn.com, October 8, 2009

http://www.ndir.com/SI/articles/1109.shtml

Mastering Your Craft at Stock Picking

The pattern of learning anything begins with theoretical understandings initially and practical understanding later. That is, general principles first, and then particular instances of those principles.

The 10,000-hour rule (i.e. one cannot master a subject or skill until he’s practiced it for at least 10,000 hours) is true.

To be good at picking stocks, a further 40,000 hours of studying it will certainly (all else equal) yield a better stock picker!

However, it would be better to attain 10,000 to 20,000 hours of study or practice in several, related fields.

http://prisonproxy.blogspot.com/2010/02/mastering-your-craft.html

Relative quality often a matter of time

Luukko: Relative quality often a matter of time

Published On Sat Jan 30 2010

By Rudy Luukko
Mutual Funds Columnist

As any investing textbook will tell you, good stocks with superior fundamentals will eventually outperform bad stocks. What you also need to realize – as a direct holder of stocks or as a fund investor – is that stock markets don't always reward good stocks.

Paradoxically, stocks whose characteristics are exactly the opposite of what the textbooks advise you to look for are sometimes the biggest winners. At least over shorter periods.

This is what happened after the 2008-09 bear market, says fund manager James O'Shaughnessy, who is based in Stamford, Conn., and manages about $3.4 billion for RBC Asset Management Inc.

A practitioner of enhanced indexing (he calls his methodology strategy indexing), O'Shaughnessy employs quantitative screening techniques to try to beat market benchmarks. The criteria vary for the various mandates, but among his key factors are stock-price momentum, stock price to book value and dividend yield.

During the past two years of mostly bearish markets, O'Shaughnessy's screening methods flopped. All six of his RBC fund mandates with at least two years of history lagged in their peer groups. Five performed in the dreaded fourth quartile, meaning the bottom 25 per cent of fund rankings.

As O'Shaughnessy explains, no stock characteristics will consistently protect portfolios in down markets. His funds also suffered because the types of stocks he held weren't the ones that rebounded most strongly after the bear-market low of March 2009.

Instead, the market recovery was led by stocks that had been "priced for extinction," meaning they had fallen the most on fears that the issuing companies' very survival was threatened.

Historically, the shorter the holding period, the less likely it is O'Shaughnessy's funds will have outperformed their market benchmarks.

For example, RBC O'Shaughnessy Canadian Equity outperformed the S&P/TSX over all rolling 10-year periods dating back to its inception in late 1997. But it did so in just over half of all the three-year periods. And over all the one-year periods, the fund beat the index only 37 per cent of the time.

Of the three oldest funds, RBC O'Shaughnessy Canadian Equity and RBC O'Shaughnessy U.S. Value both rank in the top quartile of their peer groups over 10 years, and RBC O'Shaughnessy U.S. Growth performed in the second quartile. "We take solace from the fact that, over long periods of time, we can have the odds on our side," O'Shaughnessy told me.

More evidence that the ugliest-looking stocks will sometimes be market darlings comes from the so-called "Dangerous Portfolio," a demonstration model created by the CPMS division of Morningstar Canada. It's designed to illustrate the perils of choosing overpriced, debt-laden stocks with deteriorating earnings.

Yet in 2009, this portfolio returned 85.3 per cent, more than double the 35.1 per cent of the S&P/TSX Composite Total Return Index. Over 10 years, however, the Dangerous Portfolio has been the hypothetical wealth destroyer it was designed to be, losing an annualized 16.8 per cent, while the index gained an average 5.7 per cent.

Since you can do so badly over time with a portfolio of lousy stocks, it follows that there are merits in screening techniques that seek to identify the good ones. But as we've seen both with hypothetical portfolios and with real-life funds such as those managed by O'Shaughnessy, this is a game of probabilities. The only certainty is that no stock-picking system will work all the time.

rudy.luukko@morningstar.com
http://www.thestar.com/business/article/757949--luukko-relative-quality-often-a-matter-of-time

Why I usually avoid IPOs

I browsed the local paper for those stocks priced closest to the year low. There were 35 stocks listed: 29 derivatives (warrant) and 6 non-derivatives (mother share). Stemlife was in this list.

This company was listed with much hype in 2006.  Its revenue grew quickly in this virgin medical sector.  Those uninformed customers and investors saw "unlimited" potentials from this new medical technology.  The business model was not one with durable competitiveness.  With new competitors in the market, I can foresee this company's business will be challenging.

Listing in 2006 was the right timing as the stock was chased up to a high level during the bull market then.  At the peak market price of more than MR 6 in 2007,  its market cap was almost MR 900 million.   It was not surprising that a significant large investor (insider) sold when the price was close to its peak; making a huge profit from the shares, locking in many years of future profits that the company can hope to generate through its business.  

At 45 sen per share, its present market cap is MR 74.3 million. What is its intrinsic value?  Interestingly, more major investors sold and exited the company recently.

This is a good company to study as it provides a lot of education on how to select the stocks you wish to invest into.  In general, it is better to avoid IPOs.  IPOs are never priced cheap.  You can always let them build their business for a few years.  Given the track record you can then assess the business fundamentals with more certainties, before you invest.

Some simple rules I follow:

A good company can be a good investment at fair price or bargain price.

A good company may be a bad investment if you overpay.

Avoid a  lousy company at any price.

http://www.klse.com.my/website/bm/listed_companies/company_announcements/changes_in_s_holding/index.jsp

Insiders selling in huge volumes this January, desperate to unload

.

STEMLIFE BERHAD (ACE Market)

====19/01/2010 Notice of Person Ceasing (29C) - The Goldman Sachs International
====19/01/2010 Notice of Person Ceasing (29C) - The Goldman Sachs Group, Inc.
====19/01/2010 Changes in Sub. S-hldr's Int. (29B) - The Goldman Sachs International
Disposed 12/01/2010 5,706,000
====19/01/2010 Changes in Sub. S-hldr's Int. (29B) - The Goldman Sachs Group, Inc.
====18/01/2010 Changes in Sub. S-hldr's Int. (29B) - BERJAYA GROUP BERHAD
Disposed 14/01/2010 4,050,000
====18/01/2010 Changes in Sub. S-hldr's Int. (29B) - BERJAYA CORPORATION BERHAD
====18/01/2010 Changes in Sub. S-hldr's Int. (29B) - JUARA SEJATI SDN BHD
====18/01/2010 Changes in Sub. S-hldr's Int. (29B) - TAN SRI DATO' SERI VINCENT TAN CHEE YIOUN
====18/01/2010 Changes in Sub. S-hldr's Int. (29B) - HOTEL RESORT ENTERPRISE SDN BHD
====13/01/2010 Notice of Person Ceasing (29C) - HSC HEALTHCARE SDN BHD
====13/01/2010 Changes in Sub. S-hldr's Int. (29B) - HSC HEALTHCARE SDN BHD
Disposed 11/01/2010 10,000,000


Fundamentals

INCOME STATEMENT                           12/31/2006    2/31/2007  12/31/2008
Net Turnover/Net Sales	14,578	20,456	18,509
EBITDA	4,634	6,021	195
EBIT	3,719	5,112	327
Net Profit	3,772	5,515	1,317
Ordinary Dividend	-1,650	-1,650	-1,650

Recent Financial Results

Announcement Date		Financial Yr. End		Qtr	Period End		Revenue RM '000		Profit/Lost RM'000		EPS		Amended
04-Mar-10		31-Dec-09		4	31-Dec-09		4,971		-2,610		-1.55		-
24-Feb-10		31-Dec-09		4	31-Dec-09		4,971		-2,241		-1.33		-
26-Nov-09		31-Dec-09		3	30-Sep-09		4,331		410		0.27		-
20-Aug-09		31-Dec-09		2	30-Jun-09		3,691		65		0.09		-

****3 Steps To Profitable Stock Picking

3 Steps To Profitable Stock Picking

Stock picking is a very complicated process and investors have different approaches. However, it is wise to follow general steps to minimize the risk of the investments. This article will outline these basic steps for picking high performance stocks.

Step 1. Decide on the time frame and the general strategy of the investment. This step is very important because it will dictate the type of stocks you buy.

Suppose you decide to be a long term investor, you would want to find stocks that have sustainable competitive advantages along with stable growth. The key for finding these stocks is by looking at the historical performance of each stock over the past decades and do a simple business S.W.O.T. (Strength-weakness-opportunity-threat) analysis on the company.

If you decide to be a short term investor, you would like to adhere to one of the following strategies:

a. Momentum Trading. This strategy is to look for stocks that increase in both price and volume over the recent past. Most technical analyses support this trading strategy. My advice on this strategy is to look for stocks that have demonstrated stable and smooth rises in their prices. The idea is that when the stocks are not volatile, you can simply ride the up-trend until the trend breaks.

b. Contrarian Strategy. This strategy is to look for over-reactions in the stock market. Researches show that stock market is not always efficient, which means prices do not always accurately represent the values of the stocks. When a company announces a bad news, people panic and price often drops below the stock's fair value. To decide whether a stock over-reacted to a news, you should look at the possibility of recovery from the impact of the bad news. For example, if the stock drops 20% after the company loses a legal case that has no permanent damage to the business's brand and product, you can be confident that the market over-reacted. My advice on this strategy is to find a list of stocks that have recent drops in prices, analyze the potential for a reversal (through candlestick analysis). If the stocks demonstrate candlestick reversal patterns, I will go through the recent news to analyze the causes of the recent price drops to determine the existence of over-sold opportunities.

Step 2. Conduct researches that give you a selection of stocks that is consistent to your investment time frame and strategy. There are numerous stock screeners on the web that can help you find stocks according to your needs.

Step 3. Once you have a list of stocks to buy, you would need to diversify them in a way that gives the greatest reward/risk ratio. One way to do this is conduct a Markowitz analysis for your portfolio. The analysis will give you the proportions of money you should allocate to each stock. This step is crucial because diversification is one of the free-lunches in the investment world.

These three steps should get you started in your quest to consistently make money in the stock market. They will deepen your knowledge about the financial markets, and would provide a of confidence that helps you to make better trading decisions.

http://tradingindicator.blogspot.com/2010/01/3-steps-to-profitable-stock-picking.html

Comment:  There are many ways to make money.  Investing for the long term is profitable for many investors.  Some of those who employ other strategies can also be profitable too.

Sometimes stock picking can really work out great.

Stock Picking 101

posted in Bricks and Mortar Business |

It’s time for fund managers to “return to their natural stock-picking tendencies,” said Citigroup chief global equity strategist Robert Buckland. “Just when the bear market (and subsequent rebound) has bullied us all into being very macro is the time when a good contrarian should be moving micro.” Over the last few years, the financial advisory business has been playing it close to the vest to protect as much of their clients’ investments as possible. They’re hesitant to move away from safe options because everyone is fearful of market fluctuations these days. However, some analysts say it’s precisely this strategy that’s holding us back. Stock picking is slowly but surely coming back into favor again, offering higher yields and better deals for people who know when to get in and when to get out.

Sometimes stock picking can really work out great. For instance, financial advisory professionals who advised their clients to put money into MacDonald’s fast food chain in 1992 are now enjoying 25% returns each year. Similarly, insightful investors who sunk $10,000 into Microsoft’s stocks back in 1986 would have earned 35,000% back on their investment over an 18-year period! So by 2004, that initial investment would have become a nice $3.5 million, which would be an ideal retirement cushion!

There are many different types of stock picking strategies. Some of the most common include

• Fundamental Analysis,
• Qualitative Analysis,
• Value Investing,
• Growth Investing,
• GARP Investing,
• Income Investing,
• CAN SLIM,
• Dogs of the Dow and
• Technical Analysis.

While there is limited space to delve deeply into these complex strategies here, more information can be found at Investopedia (www.investopedia.com/university/stockpicking/stockpicking1.asp). Even when consumers learn financial investment techniques, there is no guarantee, however. According to Investopedia: “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.”

Stock picking can be done by individuals or by professionals. Top financial advisors work to assist clients in selecting a winning stock portfolio. While these individuals are undoubtedly more experienced in watching economic market fluctuations, they are still human and ultimately fallible. One should not simply entrust an enormous sum of money with a financial advisor, without looking over the periodic statements and watching the DOW/NASDAQ activity. All investing is a gamble, so expectations should be clear when getting started. Perhaps the best advice is still “don’t put all of your eggs in one basket!”

As a leading expert in the field of anxiety disorders and panic attacks, Beth Kaminski is always on the lookout for how to end panic attacks. Visit her site for more information on her treating panic disorder and much more.

http://growthbyaction.com/bricks-and-mortar-business/2145-stock-picking-101

Stock Picking Strategies - Value Investor

Stock Picking Strategies | Value Investor

As long as the stock market exists, there must always be the bullish and the bearish trends in the market place. These are the two components that make up the stock market. What this implies is that for every single day that the stock market opens, there are people making money, and there are people who are equally loosing money at the same time depending on the direction of the market. As a discerning investor, you need to arm yourself with the strategies that are geared towards securing your investments and also ensuring that you profit from the market daily, regardless of the period on the floor, whether bull or bear. So in order to achieve this, your stock picking strategies and principles has an important role to play here.

The first principle a wise investor should adopt for success, is to go for value investing. This is one of the best known stock picking strategies.

How do you go about this? Simply look for the stocks that are selling at a bargain price, but have strong fundamentals, which include the company's earnings, dividends, cash flow, and book value. These are companies that are undervalued by the market, but are sure to soar immediately the market corrects itself, which is certain that it will do. It is important to note here that not all prices that are down that are cheap.

So a value investor will know how to do his due diligence before arriving at the conclusion that a particular stock is cheap or not. Price does not always determine whether a stock is cheap or not, the determinant factor is the fundamentals. E.g., if a company's share price suddenly drops from $20 to $5, it does not mean that the price is cheap at that $5, rather, a value investor will first of all find out why the price nose-dived.

• Is it as a result of over-pricing which the market is now correcting?
• Or is it as a result of some fundamental problems?
• Or just because of profit taking and other market forces which does not affect the company's fundamentals?

These are the questions that a value investor must find answers to before investing his cash. The value investor knows that profits are made not just by trading of shares; rather, profits are made in stocks by investing in quality companies with strong fundamentals.

If you really want to make money in stocks, you have to sit down first, and ask yourself the type of investor you want to be. Ask yourself whether you are just trading in shares or whether you are investing for value. Don't follow the herd. Do your due diligence before investing. The internet has made things so easy today that you will get any information you need at your finger-tips. When you do this and remove greed, you will definitely make it big investing in stocks. Know when to exit and do so immediately, as waiting a minute or a day longer can wipe out a big fraction from your investment profits which are not a good idea at all.

by jsieiw
http://www.linkroll.com/Day-Trading-Finance--311038-Stock-Picking-Strategies-Value-Investor.html