Extinct Companies: Some die young, some in middle age. Bankruptcies and Takeovers

Companies die every year. 

Some die young.  They try to go too far too fast on borrowed money they can't pay back, and they crash. 

Some die in middle age because their products turn out to be defective, or too old-fashioned, and people stop buying.  Maybe they're in:

• the wrong business, or
• the right business at the wrong time, or
• worst of all, the wrong business at the wrong time.

Big companies can die right along with smaller and younger companies.

American Cotton, Laclede Gas, American Spirits, Baldwin Locomotive, Victor Talking Machine, and WRight Aeronautical were once big enough and important enough to be included in the Dow Jones Industrial Average, but they're gone now, and who remembers them?  The same goes for Studebaker, Nash, and Hudson Motors, Remington Typewriter, and Central Leather.

Takeover

There's one way a company can cease to exist without actually dying.  It can be swallowed up by some other company in a takeover. 


Bankruptcy:  Chapter 11 protection and Chapter 7

Chapter 11:  And often, a company can avoid dying a quick death by seeking protection in a bankruptcy court. Bankruptcy court is the place where companies go when they can't pay their bills, and they need time to work things out.  So they file for Chapter 11, a form of bankruptcy that allows them to stay in business and gradually pay off their debts.  The court appoints a trustee to oversee this effort and make sure everyone involved is treated fairly.

Chapter 7:  If it's a terminal case and the company has no hope of restoring itself to profitability, it may file for Chapter 7.  That's when the doors are closed, the employees sent home, and the desks, lamps and word processors are carted off to be sold.

Often in these bankruptcies, the various groups that have a stake in the company (workers, vendors, suppliers, investors) fight each other over who gets what. 

• These warring factions hire expensive lawyers to argue their cases. 
• The lawyers are well-paid, but rarely do the creditors get back everything they're owed. 

There are no funerals for bankrupt companies, but there can be a lot of sorrow and grief, especially among workers, who lose their jobs and bondholders and stockholders, who lose money on their investments.

Companies are so important to the health and prosperity of the country that it is too bad there isn't a memorial someplace to the ones that have passed away.  Or perhaps the state historic preservation deparments should put up plaques on the sites where these extinct companies once did business.  There ought to be a book that tells the story of interesting companies that have disappeared from the economic landscape, and describes how they lived, how they died, and how they fit into the evolution of capitalism.

The Bulls and the Bears

In a normal day of trading, many stocks will go up in price, while otheres will go down.

But occasionally, there's a stampede when the prices of thousands of stocks are running in the same direction, like bulls at Pamplona.  If the stampede is uphill, we call it a "bull market."

When the bulls are having their run, sometimes 9 out of 10 stocks are hitting new highs every week.  People are rushing around buying as many shares as they can afford.  They talk to their brokers more often than they talk to their best friends.  Nobody wants to miss out on the good thing.

As long as the good thing lasts, millions of shareholders go to bed happy, and wake up happy.  They sing in the shower, whistle while they work, help old ladies across the street, and count their blessings every night as they put themselves to sleep reviewing the gains in their portfolios.

But a bull market doesn't last forever.  Sooner or later, the stampede will turn downhill.  Stock prices will drop, with 9 out of 10 stocks hitting new lows every week. People who were anxious to buy on the way up will become more anxious to sell on the way down, on the theory that any stock sold today will fetch a better price than it would fetch tomorrow.

Are you strategized to gain from a correction or a bear market?

Correction:  When stock prices fall 10% from their most RECENT peak.
Bear market:  When stock prices fall 25% or more from their most RECENT peak.

Statistics:

• There were 53 corrections during the last century.
•  That is, 1 correction occurred every 2 years. (1:2)
• 1 in 3 corrections have turned into bear markets.(1:3)
• That is, 1 bear market appeared every 6 years.(1:6)

Nobody knows who coined the term "bear market."

You can make a better case for calling a bear market a lemming market, in honour of the investors who sell their stocks because everybody else is selling.

Though financial losses are linked with the appearance of the bear market, there are also those who gained from the bear market.  Are you strategized to gain from a correction or a bear market?

1929:  Papa Bear market
1973-74:  Momma Bear market, average stock was down 50%.
1982: Bear market
1987:  Crash of 1987, Dow dropped over 1000 points in 4 months; 508 of those points in 1 day.
1990:  Saddam Hussen bear market when investors worried about the Gulf War,
1997:  Asian Financial Crisis Bear market
2001:  Technology Bust Bear market
2008:  Credit crunch Bear market

Anxious to buy and anxious to sell

A bull market doesn't last forever.  Sooner or later, the stampede will turn downhill.

Are you one who is anxious to buy on the way up?
Are you one who is anxious to sell on the way down?

People who were anxious to buy on the way up will become more anxious to sell on the way down, on the theory that any stock today will fetch a better price than it would fetch tomorrow.

An EXTENDED bear market can test everybody's patience and unsettle the most experienced investors.

An extended bear market can test everybody's patience and unsettle the most experienced investors.
Small bears were easier to handle than the big (extended) bears of 1929 and 1973 - 74.

No matter how good you are at picking stocks, your stocks will go down, and just when you think the bottom has been reached, they will go down some more.  If you own stock mutual funds, you won't do much better, because the mutual funds will go down as well.  Their fate is tied to the fate of the stocks they own.

1929:  People who bought stocks at the high point in 1929 (this was a small group, fortunately) had to wait 25 years to break even on the prices.  Imagine your stocks being in the red for a quarter-century! 

1973-74:  From the high point in 1969 before the crash of 1973-74, it took 12 years to break even. 

Perhaps we'll never see another bear market as severe as the one in 1929 - that one was prolonged by the Depression.  But we cannot ignore the possibility of another bear of the 1973-74 variety, when stock prices are down long enough for a generation of children to get through elementary, junior high and high school.

Investors can't avoid corrections and bear markets any more than northerners can avoid snowstorms.

Predicting the market is difficult: Chorus of "experts" claiming to see bears that never show up.

It would be nice to be able to get a warning signal, so you could sell your stocks and your mutual funds just before a bear marekt and then scoop them up later on the cheap.  The trouble is nobody has figured out a way to predict bear markets.  The record on that is no better than the record on predicting recessions.

Once in a while, somebody calls a bear and becomes a celebrity overnight - a stock analyst named Elaine Garzarelli was celebrated for predicting the Crash fo 1987. (Roubini for the recent bear market of 2008).  But you never hear of somebody prediting two bear markets in a row. 

What you do hear is a chorus of "experts" claiming to see bears that never show up.

Since we are all accustomed to taking action to protect ourselves from snowstorms and hurricanes, it's natural that we would try to take action to protect ourselves from bear markets, even though this is one case in which being prepared like a Boy Scout does more harm than good.  Far more money has been lost by investors trying to anticipate corrections than has been lost in all the corrections combined.

http://myinvestingnotes.blogspot.com/2010/01/another-telling-statistics.html
Another telling statistics on Market Timing:  Missing the chance to run with the bulls
Great Timing versus Lousy Timing

Investors can't avoid corrections and bear markets

Investors can't avoid corrections and bear markets any more than northerners can avoid snowstorms. 
In 50 years of owning stocks, you can expect

• 25 corrections, of which
• 8 or 9 will turn into bears.

You can expect 1 correction every 2 years, on average.

You can expect 1 bear every 6 years, on average, that is, every 3 corrections turned into bear markets.

Another telling statistics on Market Timing: Missing the chance to run with the bulls

Great Timing versus Lousy Timing
(Performance difference = 1.6% difference)

Investment returns from 1970 to 1995

Starting in 1970, if you were unlucky and invested $2,000 at the peak day of the market in each successive year, your annual return was 8.5%.

If you timed the market perfectly and invested your $2,000 at the low point in the market in each successive year, your annual return was 10.1%. 

So the difference between great timing and lousy timing is 1.6%.

Of course, you'd like to be lucky and make that extra 1.1%, but you'll do just fine with lousy timing, as long as you stay invested in stocks.  Buy shaes in good companies and hold on to them through thick and thin. 

There's an easy solution to the problem of bear markets.  Set up a schedule of buying stocks or stock mutual funds so you're putting in a small amount of money every month, or four months, or six months.  This will remove you from the drama of the bulls and bears.


Missing the chance to run with the bulls

One of the worst mistakes you can make is to switch into and out of stocks or stock mutual funds, hoping to avoid the upcoming correction.  It's also a mistake to sit on your cash and wait for the upcoming correction before you invest in stocks.  In trying to time the market to sidestep the bears, people often miss out on the chance to run with the bulls.

A review of the S&P 500 going back to 1954 shows how expensive it is to be out of stocks during the short stretches when they make their biggest jumps. 

• If you kept all your money in stocks throughout these four decades, your annual return on investment was 11.5%. 
• Yet if you were out of stocks for the fourty most profitable months during these fourty years, your return on investment dropped to 2.7%..

The real story is in the numbers - get the necessary training to read them

Four times a year, you'll get the report card that tells you

• how the company is doing,
• how its sales are going, and
• how much money it has made or lost in the lastest period. 

Once a year, the company sends out the annual report that sums up the year in great detail.  Most of these annual reports are printed on fancy paper with several pages of photographs.  It's easy to mistake them for an upscale magazine.

In the front, there's a personal message from the head of the company, recounting the year's events, but the real story is in the numbers. 

• These run for several pages, and unless you are trained to read them, they will surely strike you as both confusing and dull. 
• You can get the necessary training from a good accounting course. 
• Once you do, these dull numbers can become very exciting, indeed. 
• What could be more exciting than learning to decipher a code that could make you a prosperous investor for life?

Companies that intentionally mislead their shareholders (this rarely happens) face severe penalties, and the perpetrators can be fined or sent to jail.  Even if it is unintentional (a more common occurrence), a company that misleads shareholders is punished in the stock market. 

• As soon as they realize it hasn't told them the whole truth, many big-time investors will sell their shares at once. 
• This mass selling causes the stock price to drop. 
• It's not unusual for share prices to fall by half (50%) in a single day after the news of the scandal gets out.

When a stock loses half its value overnight, that disturbs all the investors, including the corporate insiders, from the chief executive on down, who are likely to own large numbers of shares.  That's why it is in their best interest to make sure the company sticks to the facts and doesn't exaggerate. 

• They know the truth will come out sooner or doesn't exaggerate. 
• They know the truth will come out sooner or later, because companies are watched by hundred, if not thousands of shareholders. 
• A company can't brag about its record-breaking earnings if the earnings aren't there - too many investors are paying close attention.

The ultimate "NO" vote

Ultimately, the company exists for the shareholders.  The directors are there to represent the shareholders' interests.  These directors are not employees of the company.  They make strategic decisions, and they keep tabs on what the managements are doing.

Any time you decide you don't like the management, its policies, or the direction the company is headed, you are always free to exercise the ultimate "no" vote and sell your shares.

You have to Know the Story: Confusing the price with the story is the biggest mistake an investor can make.

If you're going to invest in a stock, you have to know the story.  This is where investors get themselves in trouble.  They buy a stock without knowing the story, and they track the stock price, because that's the only detail they understand.  When the price goes up, they think the company is in great shape, but when the price stalls or goes down they get bored or they lose faith, so they sell their shares.

Confusing the price with the story is the biggest mistake an investor can make. 

• It causes people to bail out of stocks during crashes and corrections, when the prices are at their lowest, which they think means that the companies they own must be in lousy shape. 
• It causes them to miss the chance to buy more shares when the price is low, but the company is still in terrific shape.

The story tells you what's happening inside the company to produce profits in the future - or losses, if it's a tale of woe. 

• It's not always easy to figure this out. 
• Some stories are more complicated than others. 
• Companies that have many different divisions are harder to follow than companies that make a single product. 
• And even when the story is simple, it may not be conclusive.

But there are occasions when the picture is clear and the average investor is in a perfect position to see how exciting it is.  These are the times when understanding a company can really pay off.

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

Three Faces of Market Danger

Three Faces of Market Danger

By PAUL J. LIM
Published: January 23, 2010

AFTER one of the most volatile periods for stocks in decades, it’s only natural for investors to wonder how risky the markets will be in 2010.


Weekend Business: Paul Lim on stock market risks.Unfortunately, that is impossible to predict with any certainty. But investors can at least look for the types of risks the market seems most likely to face. Those perceived dangers have shifted in recent years. In 2008, for example, there was the all-too-real risk of losing big money in the global credit crisis. Last year, after the crisis seemed to subside, investors who stayed on the sidelines risked missing out on the market’s huge rebound.

Today, strategists say, investors face risks in three major categories:

EARNINGS RISK As the economy started to heal last year, investor expectations for corporate profits started to grow. That helped to drive up equity prices by 65 percent from March 9 to Dec. 31.

But after a rally of that magnitude, “people will start to get nervous about the ability of companies to actually meet those expectations,” said Ben Inker, director of asset allocation at GMO, an asset management firm in Boston. That is partly because corporate profit forecasts have grown so lofty.

Wall Street analysts estimate that earnings for companies in the Standard & Poor’s 500-stock index were up 193 percent in the fourth quarter of 2009, versus the period a year earlier, according to a survey by Thomson Financial. Moreover, they expect earnings for all of 2010 to be up more than 28 percent from 2009.

“While we are seeing profit improvement, we think the numbers that are getting baked in are excessive,” Mr. Inker said.

Michele Gambera, chief economist at Ibbotson Associates, an investment consulting firm in Chicago, points out that “it’s hard to have a stable improvement of corporate profits in an environment where companies are deleveraging.”

It’s also difficult to see profits soaring, he said, while the employment outlook is so weak. Not only does a struggling job market threaten consumer spending, it also exacerbates continuing problems in the financial system. “If people don’t have jobs, they cannot pay off their debts,” Mr. Gambera said.

VALUATION RISK When the market began to rally in March, stocks were roundly considered cheap. Back then, the price-to-earnings ratio for equities was a mere 13.3, based on 10-year averaged earnings, as calculated by Robert J. Shiller, the Yale economist.

But thanks to the recent surge in stock prices, the market P/E has jumped to a much frothier 20.8, versus the historical average of around 16.

“Current market valuations are high enough that they’re more or less suggesting everything is going to be fine this year,” said Robert D. Arnott, chairman of Research Affiliates, an investment management firm in Newport Beach, Calif. But if everything isn’t — if the economy hits a speed bump, for instance, or if corporate profits come in lower than expected — investors may start to question the prices they are paying for risky assets, he said.

This is why James W. Paulsen, who works in Minneapolis as chief investment strategist for Wells Capital Management, says that this year, unlike 2008 and 2009, “it will be important for people to go back to assessing valuations again.”

POLICY RISK Government economic policies are having a huge impact, but they can be tricky to predict. For instance, investors who were banking on imminent health care reform may need to rethink their strategy after the special Senate election last week in Massachusetts.

Health care is only one area that is up for grabs. This year, for example, the government and the Federal Reserve Board will face a big decision on whether to curtail the huge stimulus that has helped prop up the economy.

Mr. Arnott says he believes the Fed will be forced to raise short-term interest rates this year, possibly even before the recovery gains full traction.

The danger is that the markets may react badly to the end of the Fed’s unusually loose monetary policy.

“It’s not like the economy is out of the woods,” said Duncan W. Richardson, chief equity investment officer at Eaton Vance, an asset manager in Boston. “The patient is still in the hospital.”

INVESTORS must also keep in mind that the tax cuts enacted under President George W. Bush — which lowered the maximum rate on long-term capital gains taxes to 15 percent from 20 percent and the top dividend tax rate to 15 percent from 39.6 percent — are due to expire at year-end.

While it is unclear whether the Obama administration will extend those cuts, or at least extend them for the middle class, the uncertainty is bound to raise concerns on Wall Street.

Because of the “potentially big risks that may come out of Washington,” Mr. Richardson said, “investors need to be more diversified than ever.”

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

http://www.nytimes.com/2010/01/24/business/24fund.html

Every person who owns shares in a company wants it to grow

Every person who owns shares in a company wants it to grow

When investors talk about "growth", they're not talking about size.  They're talking about profitability, that is, earnings.

It means the profits are growing.  The company will earn more money this year than last year, just as it earned more money last year than the year before that.

• A company doubling its earnings in 12 months can cause a wild celebration on Wall Street, because it's very rare for a business to grow that fast.
• Big, established companies are happy to see their earnings increase by 10 to 15% a year, and
• younger, more energetic companies may be able to increase theirs by 25 to 30%. 

One way or the other, the name of the game is earnings.  That's what the shareholders are looking for, and that's what makes the stocks go up.

People who buy shares are counting on the companies to increase their earnings, and they expect that a portion of these earnings will get back to them in the form of higher stock prices.

This simple point - that the price of s stock is directly related to a company's earning power - is often overlooked, even by sophisticated investors. 

The earnings continue to rise, the stock price is destined to go up.  Maybe it won't go up right away, but eventually it will rise.

And if the earnings go down, it's pretty safe bet the price of the stock will go down.  Lower earnings make a company less valuable.

This is the starting point for the successful stockpicker.  Find companies that can grow their earnings over many years to come. 

It is not an accident that stocks in general rise in price on average of about 8% a year over the long term.  That occurs because companies in general increase their earnings at 8% a year, on average, plus they pay 3% as a dividend.

Based on these assumptions, the odds are in your favour when you invest in a representative sample of companies.  Some will do better than others, but in general, they'll increase earnings by 8% and pay you a dividend of 3%, and you'll arrive at your 11% annual gain.


Stock Price Watchers

The ticker-tape watchers begin to think stock prices have a life of their own.

• They track the ups and downs, the way a bird watcher might track a fluttering duck.
• They study the trading patterns, making charts of every zig and zag.
• They try to fathom what the "market" is doing, when they ought to be following the earnings of the companies whose stocks they own.

"Expensive Shares"

By itself, the price of a stock doesn't tell you a thing about whether you're getting a good deal.


You'll hear people say: "I am avoiding IBM, because at $100 a share it's too expensive." 

• It maybe that they don't have $100 to spend on a share of IBM, but the fact, that a share costs $100 has nothing to do with whether IBM is expensive. 
• A $150,000 Lamborghini is out of most people's price range, but for a Lamborghini, it still might not be expensive. 

Likewise, a $100 share of IBM may be a bargain, or it may not be.  It depends on IBM earnings.

• If IBM is earning $10 a share this year, then you're paying 10 times earnings when you buy a share for $100.  That's a P/E ratio of 10, which in today's market is cheap. 
• On the other hand, if IBM only earns $1 a share, then you're paying 100 times earnings when you buy that $100 share.  That's a P/E ratio of 100, which is way too much to pay for IBM.

Capitalism is not a zero-sum game

Except for a few crooks, the rich do not get that way by making other people poor.

When the rich get richer, the poor get richer as well. 

If it were really true that the rich get richer at the expense of the poor, then since the US is the richest country in the world, by now, they would have created the most desperate class of poor people on earth.  Instead, they have done jsut the opposite.

There is substantial poverty in America, but it doesn't come close to matching the poverty seen in parts of India, Latin America, Afria, Asia, or Eastern Europe where capitalism is just beginning to take hold. 

When companies succeed and become more profitable, it means more jobs and less poverty.

Companies are in business for one basic reason. They want to make a profit.

Profitable companies with good management are rewarded in the stock market, because when a company does well, the stock price goes up.  This makes investors happy, including the managers and employees who own shares.

In a poorly managed company, the results are mediocre, and the stock price goes down, so bad management is punished.  A decline in the stock price makes investors angry, and if they get angry enough, they can pressure the company to get rid of the bad managers and take other actions to restore the company's profitability.

A highly profitable company can attract more investment capital than a less profitable company.  With the extra money it gets, the highly profitable company is nourished and made stronger, and it has the resources to expand and grow.

The less profitable company has trouble attracting capital, and it may wither and die for lack of financial nourishment.

The fittest survive and the weakest go out of business, so no more money is wasted on them.  With the weakest out of the way, the money flows to those who can make better use of it.

All employees everywhere ought to be rooting for profit, because if the company they work for doesn't make one, they'll soon be out of a job.  Profit is a sign of achievement.  It means somebody has produced something of value that other people are willing to buy.  The people who make the profit are motivated to repeat their success on a grander scale, which means more jobs and more profits for others.

That a company earns a lot of money doesn't necessarily mean the stockholders will benefit.

That a company earns a lot of money doesn't necessarily mean the stockholders will benefit.  The next big question is:

• What does the company plan to do with this money? 

Basically, it has 4 choices.

1.  It can plow the money back into the business, in effect investing in itself.

• It uses this money to open more stores or build new factories and grow its earnings even faster than before. 
• In the long run, this is highly beneficial to the stockholders. 
• A fast growing company can take every dollar and make a 20% return on it. 
• That's far more than you and I could get by putting that dollar in the bank.

2.  Or it can waste the money.

• It can waste on corporate jets, teak-paneled offices, marble in the executive bathrooms, executive salaries that are double the going rate, or buying other companies and paying too much for them. 
• Such unnecessary purchases are bad for stockholders and can ruin what otherwise would be a very good investment.

3.  Or a company can buy back its own shares and take them off the market. 

• Why would any company want to do such a thing? 
• Because with fewer shares on the market, the remaining shares become more valuable. 
• Share buybacks can be very good for the stockholders, especially if the company is buying its own shares at a cheap price.

4.  Finally, the company can pay dividend. 

• A majority of companies do this. 
• Dividends are not entirely a positive thing - a company that pays one is giving up the chance to invest that money in itself. 
• Nevertheless, dividends are very beneficial to shareholders.

A dividend is a company's way of paying you to own the stock.  The money gets sent to you directly on a regular basis - it's the only one of the above 4 options in which the company's profits go directly into your pocket. 

• If you need income while you're holding on to the stock, the dividend does the trick. 
• Or you can use the dividend to buy more shares.

Dividend also have a psychological benefit. 

• In a bear market or a correction, no matter what happens to the price of the stock, you're still collecting the dividend. 
• This gives you an extra reason not to sell in a panic.

Millions of investors buy dividend-paying stocks and nothing else. 

• Compile a list of companies that have raised their dividends for many years in a row. 
• In Wall Stree, one company has been doing it for 50 years, and more than 300 have been doing it for 10. 

Market Multiple or "What the market is selling for".

The P/E ratio is a complicated subject that merits further study, if you are serious about picking your own stocks. 

Here are some pointers about P/Es.

If you take a large group of companies, add their stock prices together, and divide by their earnings, you get an average P/E ratio. 

On Wall Street, they do this with the Dow Jones Industrials, S&P 500 stocks and other such indexes.  The result is known as the "market multiple" or "what the market is selling for."

• The market multiple is a useful thing to be aware of, because it tells you how much investors are willing to pay for earnings at any given time. 
• The market multiple goes up and down, but it tends to stay within the boundaries of 10 and 20. 
• The stock market in mid-1995 had an average P.E ratio of about 16, which meant that stocks in general weren't cheap, but they weren't outrageously expensive, either.

In general, the faster a company can grow its earnings, the more investors will pay for those earnings. 

• That's why aggressive young companies have P/.E ratios of 20 or higher.  People are expecting great things from these companies and are willing to pay a higher price to own the shares. 
• Older, established companies have P/E ratios in the mid to low teens.  Their stocks are cheaper relative to earnings, because established companies are expected to plod along and not do anything spectacular.

Some companies steadily increase their earnigns - they are the growth companies. 

Others are erratic earners, the rags-to-riches types.  They are the cyclicals -

• the autos, the steels, the heavy industries that do well only in certain economic climates. 
• Their P/E ratios are lower than the P/.Es of steady growers, because their perfomance is erratic. 
• What they will earn from one year to the next depends on the condition of the economy, which is a hard thing to predict.

Reading the Stock Pages

One way to tell who the investors are is by watching them read the paper.  Investors don't start with the comics, or sports, the way other readers do.  They head straight for the business section, and run their finger down the columns of stocks searching for yesterday's closing prices on the companies they own.

The price of the last trade, called the closing price, gets quoted in the papers the next morning.

A lot of information is packed into a single line. 

365-Day High-Low 
62 - 37

Stock
Disney

Div
0.36

Yld %
0.625

P/E
23

Sales
11090

High
57

Low
56

Last
57

Chg
+1

So, in the last 12 months, there's a wide range of prices that people will pay for the same stock

• In fact, the average stock on the NYSE moves up and down approximately 57 % from its base price in any given year. 
• More incredibe than that, one in every three stocks traded on the NYSE moves up and down 50 to 100 % from the base each year, and about 8% of the stocks rise and fall 100% or more.

A stock might start out the year selling for $12, rise to $16 during an optimistic stretch, and fall to $8 during a pessimistic stretch. 

• That's a 100% move:  from $16 to $8. 
• Clearly , some investors pay a lot less than others for the same company in the same year.

In the 4 columns:"High," "Low," "Last," and "Chg"(Change), you get a recap of what happened in yesterday's trading. 

• In this case, nothing much. 
• The highest price anybody paid for Disney during this particular session was $57, and the lowest was $56, and the last sale of the day was made at $57. 
• That was the closing price that everybody was looking for in the newspaper. 
• It was up $1 from the closing price of the day before, which is why +$1 appears in the "Chg" column.

"Div" stands for dividend.  Dividends are a company's way of rewarding the people who buy their stock.  Some companies

• pay big dividends,
• some pay small dividends, and
• some pay no dividend at all. 

The number shown 0.36 means "thirty-six cents."  That's Disney's current annual dividend - you get 36 cents for each share you own.

"Yld% (Yield), gives you more information about the diividend, so you can compare it, say to the yield from a savings account or bond.  Yield = curren dividend divided by the closing stock price. 

• The result is 0.625 % - the return you're getting on your money if you invest in Disney at the current price.
• This 0.625% is a very low return, as compared to the 3% that savings accounts are paying these days. 
• Disney is not a stock you'd buy just for the dividend.

P/E is the abbreviation for "price-earnings ratio."  You get the P/E ratio by dividing the price of a stock by the company's annual earnings.  The P/E can be found in the paper every day.

• When people are considering whether to buy a particular company, the P/E helps them figure out if the stock is cheap or expensive. 
• P/E ratios vary from industry to industry, and to some extent from company to company, so the simplest way to use this tool is to compare a company's current P/E ratio to the historical norm.

In today's market, the P/E of the average stock is about 16, and Disney's P/E of 23 makes it a bit expensive relative to the average stock. 

• But since Disney's P/E ratio has moved from 12 to 40 over the past 15 years, a P/E of 23 for Disney is not out of line, historically. 
• It is more expensive than the average stock because the company as been a terrific performer.

Finally,l there's "Sales":  (Volume) the number of shares that were bought and sold in yesterday's session at the stock exchange. 

• You always multiply this number by 100, so the 11,000 tells us that 1.1 million shares of Disney changed hands. 
• It's not crucial to know this, but it makes you realize that the stock market is a very busy place.

Thanks to home computers, electronic tickertape and other technologies, people no longer have to wait for tomorrow's newspaper to check their stocks.  All this technology has a drawback:  It can get you too worked up about the daily gyrations.

• Letting your emotions go up and down in sympathy with stocks can be very exhausting form of exercise, and it doesn't do you any good. 
• Whether Disney rises, falls, or goes sideways today, tomorrow, or next month isn't worth worrying about if you are a long-term investor.

Stock-picking: There are hundred of different ways to skin a cat.

No investor can possibly hope to keep up with the more than 13,000 companies whose stocks are traded on the major exchanges in the US markets today.  That's why amateurs and pros alike are forced to cut down on their options by specializing in one kind of company or another. 

• For instance, some investors buy stocks only in companies that have a habit of raising their dividends. 
• Others look for companies whose earnings are growing by at least 20% a year.
• You can specialise in a certain industry, such as electric utilities, or restaurants or banks. 
• You can specialize in small companies or large companies, new companies or old ones. 
• You can specialise in companies that have fallen on hard times and are trying to make a comeback.  (These are called "turnarounds.")