Earnings Trading Chase...... FAIL!!!!!

Don't chase your own tail!!!

This earnings season I made a big mistake.  I chased after stocks because of their scheduled earnings reports.  Regardless of the future position of the stock that I was in I was selling out of good positions so that I could be in position to trade a new stocks earnings report.  This ended up costing me profits and to a lesser extent trading fees, (aka slippage). 

I have learned my lesson.  Earnings are not to be traded, there are too many variables and too much biased opinion attached to them.  From now on if something is working I will stick with it until it is not working anymore.  This strategy was abhorrent and did not yield any profits for me.  I will NEVER chase after earnings trades during earnings season again!

Be patient, have conviction

Down 5, 6, 7, 8%?!?!?!!?!  Argghhh!!!

As you can see from the picture above I was not thrilled with the price drops of one of my stocks the day after it reported last week!  It went down 10% in one day!  That was a really scary ride! 

When that happens it is understandable to feel like panicking and then selling your stock as soon as possible.  Instead you should take a hard look at the numbers, and most importantly read the news associated with your stock and find the reason behind the dramatic price drop.  Most times the stock market over reacts to both good and bad news.  Usually stocks that get slaughtered one day will float back up to a higher price after they get sold off.  This is true for quality stocks especially and that is why I try my best to only trade quality stocks.

Because I do my homework, I trade quality stocks, and I didn't panic I was able to have enough conviction to stay in my stock after it went down.  I realized that it was an over reaction and now it has come back 6.38%.  I am hoping that because it is an over reaction that it will come all the way back and possibly even end up giving me a small gain by the end of next week.

Don't Trade Low Quality Stocks!

Trash goes in trash cans not in your portfolio.

I like to position trade.  In the future I may swing or day trade.  These types of market strategies are certainly more risky then value investing or income investing.  In order to limit my risk as much as possible I only work with the stock of good viable companies.  I will not trade a stock that has a garbage company behind it no matter how hot the stock is.

One of Jim Cramers rules for trading is, "Never let a bad trade turn into a bad investment".  This is a great rule.  If a trade goes against you then you need to sell out of it and maintain discipline.  What happens if you have a horrible trade that gaps down well past your trades exit point?  Well if it is a momentum stock with poor fundamentals and its multiple finally decides to start reflecting that fact then your in trouble.  At this point you will have to wait for the stock to float back up a bit so that you can sell it.  The price you get may be well below your exit point in some circumstances.  You will have no choice but to sell at this point, the stock had bad fundamentals and now the market has now turned against the stock and it will trend lower in the future.

If you only trade stocks that have good fundamentals and good a corresponding multiple, (PE ratio), if something catastrophic happens and the market crashes gaping down below where your exit price is you will have more options.  The price should recover much more then a stock with poor fundamentals.  You may also have the choice to just add the trade to your portfolio temporarily depending on what drove the price of the stock down dramatically. 

Trading the stocks of strong companies with great fundamentals is a great way to give yourself more options, trade from a position of strength, and most importantly sleep well at night.

Great Success!!!

Great Success!  Will now celebrate dancing!

The stock that I have for my current trade reported very good numbers after market close today!!!  That is exciting.  I can not wait to see how it does in the coming days and weeks.  Hopefully all of my hard work and research pays off!

Earnings Excitement!

MONEY!!!!

It is boring when the U.S. markets are closed.  I am really excited for them to open up tomorrow!  A stock that I own shares of is reporting after the U.S. markets close tomorrow.  I can't wait, days like tomorrow are what makes investing and trading so great.  Besides sports what else can be this exciting?


Hopefully I am still excited after the companies earnings report tomorrow evening! 

Remain Cautious!

The party can always end.... Suddenly!!!

The market has been doing very well for the past few months.  That is great and everyone should be making money.  Earnings season has been good, unemployment numbers have been good and there has been a reasonably good news from Greece and Europe.  P/Es are expanding and going higher and higher as the averages trade higher.

There are some storms on the horizon though.  Iran and high gasoline prices, the U.S. Presidential elections, and any number of as yet unknown factors can move the market down sharply at any time.  Make sure to remain disciplined in good times.  Take profits, protect your unrealized gains and above all else remain wary and keep doing your homework!!!

Return on Equity

Misreading ROE can lead to frustration

Return on Equity or "ROE" tells investors how much profit a company is generating from the money that is given to it by its investors.  You can find the ROE for a company by dividing the net income by the average shareholder's equity.

It is important to compare a companies Return on Equity to other companies in its industry.  A companies ROE may be lower if it has a large investment in assets.  This investment may give the company a competitive advantage that will help it out perform other companies and register large returns.  Take ROE into account but do not rely on it solely when analyzing a stock.

Stockcharts.com

Using Stockcharts.com is like legal stealing!

I am not an expert at technical analysis, but I plan to be one or at least increase my knowledge of technical analysis in the years to come.  While learning about technical analysis I have found that it is essential to have Stockcharts.com pulled up on the computer so that I can use at it as a reference and learning tool.  Stockcharts.com is free and has detailed customizations that you can use when learning about technical analysis.  EMA, SMA, MACD, OHLC bars, Candlesticks, it is all here for the most part.  Of course you change the duration of the time periods that you want to view on the chart.

Stockcharts.com also has great articles and information on technical and fundamental analysis.  If you click on the 'Chart School' tab you are taken to a portal that will give you a multitude of articles about technical analysis.  I looked through these articles quickly and found that they have great illustrations to go along with the written content.

I have read some of the blogs from the 'Blogs' tab on Stockcharts.com and found that they were informative and had great chart illustrations.  I have enjoyed the content that I found in the blogs section of the site.

There are sparse advertisements on Stockcharts.com, a huge plus.  Nothing pops up on me when I am viewing the content on this site.  Ad pop ups on websites make me want to slap kittens in the face.

There is also content available for paying members that includes more customization options and a membership to the site.  I do not need these extra customizations at this time, but if I ever do need them, Stockcharts.com will be the first place that I sign up for these services on.  I feel like I should already be paying them for the content they provide for free anyway;  no one tell them that though!

Overall I give Stockcharts.com an A.  I can't think of any draw backs to this site.  It has great charts, chart information and technical analysis education, mostly for free.  I highly recommend visiting the site.  You would think that I was on the Stockcharts.com payroll.  I'm not though, the site is just that great!  I have supplied the link below. VISIT IT NOW!  If you need to view some stock charts that is.

Link for article  http://stockcharts.com/

P/E Ratio

"THIS BUNNY KNOWS NOTHING ABOUT P/E Ratios!!!"

How much is a stock worth?  How much does it cost compared to its competitors?  People tell me things at work all the time like, "Hey Sprint stock is only $2 a share, it is so cheap I should buy that right?!?!"  The answer to that question is always an easy, "NO!".  Then they tell me that Sprint is so cheap, especially when compared to AT&T and Verizon.  They say, "AT&T's stock costs $29.73 and Verizon's stock costs $38.34 that is WAY MORE expensive then Sprint's $2.19 stock!!!"  They are being mislead though, the stocks quote price has little to do with the stocks value.

When you buy a stock you should not look at it like buying a piece of a company.  After all if you buy ten thousand dollars worth of Sprint stock what are you expecting to get from that purchase?  Hopefully you were not thinking that you can go to a Sprint store and just grab a cell phone and walk out or that you can stop paying your mobile service bill if Sprint is your carrier.  When you buy stock you are purchasing a chance to share in the profits that the company makes on a per stock share basis.  The profits that a company makes on a per share basis are referred to as the companies/stocks earnings per share or EPS.  Once we know the EPS we can find the P/E Ratio by taking the Price (P) of the stock and dividing it by the Earnings (E or EPS).  So the P/E ratio for AT&T is figure like this.  The P, price per share of stock $29.73, divided by E earnings per share EPS $1.97 equals the P/E ratio of about 15.  So the P/E ratio for AT&T is 15.  That means that investors are paying 15 times earnings per share to own the stock.  This is why the P/E ratio is also referred to as the "Multiple".

Now that we know how to find the P/E ratio we can compare companies that are competing against each other like Verizon, AT&T and Sprint.  AT&T has a P/E of 15, Verizon has a P/E of 15.39, and Sprint has a P/E of -2.61.  So a stock that people thought was cheap was is actually expensive because the company behind it is losing money!  I personally do not choose to invest in or trade the stocks of companies that are losing money.  You can also use the P/E ratio to compare a stocks value to the average value of all the stocks of the index it trades on.

When looking at stock prices in the future, please remember that the quote price does not tell you close to as much about a stock's value as the P/E ratio does.  The P/E ratio can tell you the a lot about the true value of the stock compared to the overall market, sector, and the competition.

Quick Ratio

"I'm going crazy about quick ratios!!  Whoa who are you?!?!"

Today I wanted to discuss the Quick Ratio.  The quick ratio is an indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets. The higher the quick ratio, the better the position of the company.

Quick ratio can also be referred to as the acid test or acid test ratio.  Quick ratio is found by dividing current assets minus inventories by current liabilities.  Quick ratio is considered a more conservative measure of liquidity then the current ratio.  

 

Remember the higher the current ratio, the better the companies finacial position!

PEG Ratio!!!

I'm this excited about PEG ratios!!!!

The Price to Earnings Growth ratio is a very widely used stock ratio.  PEG ratio is used by investors to determine a stock's value while taking into account earnings growth. Many people have the opinion that because PEG takes growth into account it is superior to the P/E ratio.  The calculation for PEG is as follows:  P/E ratio divided by Annual EPS Growth.  OH THAT'S CONFUSING CHRIS!!!!!!  I know that one is a bit confusing.  So I will give an example.  Lets take Apple.  Apple has a P/E ratio or 'Multiple' of, 14.3 and an annual EPS Growth of, 85%.  Therefore the PEG for Apple is a ridiculously low .16!   (If you don't remember what the P/E ratio or Multiple is you can look up the post I wrote about it a few weeks ago.) 

Stocks with PEG ratios of 2 or less are considered cheap.  Lower PEG ratios mean that the stock in undervalued.  Keep in mind that 5 year projected PEG ratios are using estimates instead of real numbers when you look them up.

When I looked for PEG ratio's on the internet I was only able to find the 5 year projected PEG for stocks.  Yahoo.com finance and thestreet.com where the only financial sites that I could find them on.  Although it takes a bit of work to find them, PEG ratios are a valuable tool when it comes to evaluationing stocks.

Finacial Ratios Week!

....Of Financial Ratios!!!

This week I will be describing some of the main financial ratios that are used when analyzing stocks.  These ratios can help you determine the value of stocks, check on a companies financial health, and show you if a company is in a position to out gain its competition.  Understanding these ratios is essential for any individual who wants to trade or invest in stocks.

Cramer's 10th Commandment of Trading: Don't Trade Flow.

Don't trade Flow!  Don't become a Loser!

 Cramer's tenth commandment of trading is, 'Don't trade flow'.  This simply means just because you see a stock going up a lot, it doesn't mean that you should trade the stock just based on seeing it move up.  What usually happens in this situation is that flow traders jump into a stock after a big run up and then the stock immediately turns against them and goes down.  This is a great way to lose money.

It is very important that you know the basic fundamentals of investing and the real reasons that you are buying a stock for a trade.  Trading flow is an ignorant and embarrassing way to lose money.  Loser's lose money this way.  Don't be a loser!

Cramer's 9th Commandment of Trading: Don't Trade Headlines.

Can't Trust It!

Cramer's 9th commandment of trading is, don't trade headlines.  The main stream press is usually wrong with its take on the market.  After all most journalists aren't traders or former stock brokers.  Usually by the time they report something it is already too late to profit from the information you see on the evening news. 

There are some good financial news outlets out there. It is good to watch business programming and look at what the business media has to say.  That being said it is very important to know the whole story behind a stock.  I have found that many times there is much more to a story then what is reported on CNBC or Fox Business.  Never rely completely on any news out let for your trading decisions, learn to do your own homework.  That is where true success lies.

Cramer's 8th Commandment of Trading: Don't Fear Missing Anything.

Being impatient can be Deadly!

Jim Cramer's 8th Commandment of Trading is:  Don't fear missing anything.  Sometimes it is okay to have all of your money on the sidelines.  Many investors feel pressure to have all of their money in the market at all times.  If you force yourself to make investments and trades because you fear missing profits you are making a mistake.  There will always be an opportunity to make gains in the markets.  If you force yourself to make a trade or investment you may very well be forcing yourself into making one that you don't fully understand or feel good about.  It is important to always have strong convictions when trading and investing.  You must also understand the premise or strategy behind your trade/investment.  Failure to do this can lead to losing money.

Look at this commandment like a waiting to catch a train at the train station.  If you miss your train you can definitely catch the next one, or even one after that.  If you try to jump onto the train when it is moving because your afraid of being left behind, even though you are already out of position, you could fall down and get crushed by the train.  It is definitely better to just be patient!

Cramer's Seventh Commandment of Trading: Control Losses; Winners Take Care of Themselves

This has nothing to do with this post but it is cool!

Controlling losses is a big part of trading.  Trading can be emotional and it can be hard to let go of a losing stock.  You may have worked really hard researching a stock that you trade and you may get attached to it and this can cloud your judgement when all the other traders are running for the exits.  You can't let this happen.  If a trade turns against you, get out quickly!  You can wait for the stock to come back up a little bit because inevitably it should.  But sell when you get that strength and don't look back!

By "Winners Take Care of Themselves", Cramer means that if you are winning trades you will be successful.  Winning stocks will make you money when you trade them.  Even if you punch out prematurely you should still be making money.  Any trade that makes you money is an above average trade.

Cramer's Sixth Commandment of Trading: You Don't Have a Profit Until You Sell

You can think of this commandment the same way you think of the old saying, "Never count your chickens before they hatch.".  Trading is the same as many things in life.  There are many variables and the landscape is constantly changing from minute to minute.  You may be involved in a trade where the stock is on fire.  You are looking at the stocks chart and adding up how much money you are going to have once it gets even higher.  After all you have already made 20% on this stock.  In reality unrealized gains don't count for anything.  The money you earn from a trade is only real when you have a realized gain.  A realized gain is money that has been put into your bank account.

I like this commandment because it helps me to think about trades pragmatically and prudently.  However, I would be lying if I said that I didn't get really excited about unrealized gains.  Anytime I have a stock that has gone up I am excited even before I sell it.  It is good to keep in mind that anything can happen to a stock and send it tumbling downward within minutes.  That being said if you trade high quality stocks the chances of that happening are pretty low.  I make it a rule to trade high quality stocks.

Cramer's Fifth Commandment of Trading: Tips are for Waiters

I really like Cramer's fifth commandment of trading.  It makes it very easy to remember that you should never make a trade based on a tip.  After all who would just buy a stock because someone they knew told them to buy without even looking at the fundamentals of the stock before purchasing it?!?!?  Apparently a lot of people would.  Simply put, DON'T DO THAT!!!!

On the other side of the coin, don't give tips either.  In the past I personally made a huge mistake once and accidentally did this.  Someone at work asked me about a stock and I offhandedly said something like, "Oh yeah I like that company they have a cool service.".  Little did I know that the person who was asking me was basing their decision to buy on what I said.  My little uninformed tip or answer contributed to them buying a stock that got crushed just a week or so later!  I thought that the company had a cool product but I didn't know anything at all about the fundamentals or news pertaining to the stock.  I definitely learned my lesson!  Now anytime that someone asks me for a tip about a stock if I don't know the stock I tell them that I don't know anything about the stock!  That makes sense now doesn't it!  So does the stock trading commandment, "Tips are for Waiters".

Iranian Opportunities?

Thankfully the situation in Europe seems to be gliding in for a much softer landing then many had anticipated.  The situation that the European Union has with some of its member nations debt levels and its banks have cleared up a bit in the last five weeks or so.  Things are starting to look a lot better in Europe now.  To their credit European leaders have taken the debt and solvency issues that some member countries have seriously and they have become proactive.  I can now see a spring where things go well with Greece, Italy, Spain, etc. and the European Union is able to successfully strengthen their economy and banking system.

With unemployment improving, China in for a soft landing, and the EU getting their act together the market is looking really good right now.  However, there is one major storm building on the horizon.  Iran and its nuclear program may very well cause a major international incident.  I have seen a ton of chatter in the news lately about Israel and/or the United States striking Iran to interrupt their nuclear ambitions.  Any air strikes or naval conflict in Iran or the Persian Gulf would cause a sizable market pull back.  I am going to cautiously await this pull back because I believe that this conflict has to happen this spring for a number of reasons.  Once the market pulls back I think that it will be a great buying opportunity.  This is also an opportunity to buy oil stocks like Exxon and Chevron before the strike because world oil production will be disrupted when this happens obviously sending oil prices much higher for the short term.

Still Sick

I'm still under the weather today.  I plan on being back tomorrow with a fresh post tomorrow.  Thanks for checking in!

Not feeling so well!

I'm under the weather today.  I plan on being back with a fresh post tomorrow.  Thanks for checking in!

Slippage

Slippage - Unfortunate, costly and even embarrassing!

Slippage is the cost of doing business for an investor or trader.  It is very important for traders to keep slippage costs under control because they can seriously eat into profits.  Taxes, opportunity cost, and trade fees are all examples of slippage costs.

Trade fees can eat into your profits if you make many trades per week.  If every single trade costs around $16 and you make ten trades in a month you have accrued $160 in slippage costs.  Opportunity costs refer to the money you have in a decent or bad investment that could be in a better investment.

Taxes are a very dangerous type of slippage cost.  When you buy a stock and then sell it before 365 days have past you have to pay short term capital gains on any profit you make.  Right now the short term capital gains tax rate runs from 10% to 35%, (I just threw up in my mouth a little!).  That is really gross, and the worst thing is that you also have to pay taxes on all of the income you make at the end of the year.  This gives the Federal government a chance to hit you twice tax wise on your hard earned trading income!

When you are making a plan to trade stocks or even invest, please do some homework and know how much it will cost you to make stock purchases and sales, and MORE importantly the effects that taxes will have on your investing and/or trading strategy.

FYI:  Obama has purposed increasing capital gains taxes.  He came up with the idea while pulling the wings off of butterflies when he was enjoying a warm glass of fresh kitten blood.  Make sure to stay up to date on changes to the taxes that effect you.

Compound Interest!

'Use your brain'

Sometimes when I get tired of reading quarterly reports, looking at balance sheets, studying accounting techniques that apply to stocks or have a bad day with a trade and feel like giving up I will pull up a compound interest calculator and plug in some numbers.  You can find a good calculator at the following link:  http://www.moneychimp.com/calculator/compound_interest_calculator.htm

Albert Einstein said, "The most powerful force in the universe is compound interest.".  He was pretty smart and if you check out the calculator you will see that if you put some money to work over time and allow the effects of compound interest to work you will see how powerful it can be.

For the last hundred years or so stocks have gone up 10% a year on average.  I know that I can make up a diversified stock account that has dividends alone that return 9%-11% a year.  Jim Cramer was able to make an average return of 24% for his clients for years and years at his hedge fund.  When Warren Buffett started investing he made 60% returns each year.

For fun try plugging so of these different interest rate returns into the calculator along with a dollar amount you can save up and then a dollar amount you can contribute each year.  You can vary the amount of years that you allow the investment to grow.  Every time I show this to people they are shocked by what compound interest can do.  I bet that you will be too!

Cramers's 4th Commandment of Trading.

Cigarettes have gotten expensive.  Don't burn your money with bad trades!

Jim Cramer's 4th commandment of trading is:  'Never turn a trading gain into an investment loss.'.  Don't over stay your welcome in a trade.  Remember trades are different from investments.  The whole point of a trade is that it has a catalyst.  Once the catalyst has taken place and the stock reacts to the upside or the down side it is time to take profits or minimize losses. 

Sitting in the stock because it has a great reaction to a catalyst can lead to over staying your welcome and eventually the stock can end up losing you money.  If you are trading stick to your plan, take profits or minimize loses.  Do not fall in love with the stock you trade and end up over staying your welcome by making a winning trade into a losing investment!

Cramer's 3rd Commandment of Trading

Jim Cramer's 3rd commandment of trading is:  'It is okay to take a loss when you already have one.'   Apparently some traders believe that when they take a loss it doesn't really count as a loss until they sell the stocks they traded into.  Although this seems like a simple problem to avoid, it does go back to the old rule of not falling in love with your trades/stocks/investments. 

If your taking a loss on a trade that you have made and you keep making excuses for why you need to stay in the stock it is definitely time to head for the exits!  If you feel like you have a strong reason to stay and truely believe the stock will turn around then you should explain the situation to another investor, or even just a friend.  If your explanation doesn't make sense to the third party GET OUT OF THE STOCK!  Staying in bad trades because you want to believe that you didn't make a mistake is a sure fire way to lose tons of money!

Read or listen to company conference calls

Hard at work

I have spent today reading conference calls for three of the stocks that I follow.  Although reading conference calls is not the most entertaining thing to do it is absolutely esseintial for stock traders and investors.  There is also an option to listen to company conference calls when they report their quarterly earnings but I like to read the transcripts.  You should read or listen to every quarterly conference call for every stock that you are currently holding or plan to trade.

The information in the conference call will include some general talk by the company officers followed by a question and answer session where analysts who follow the stock ask questions to the finacial officers. 

The conference calls are full of essential information about the companies well being, plans for the future and they can also provide valuable information about the specific sector a company is in and even the shape of the U.S. or global economy.  Some of the lingo and terms used in conference calls can be hard to understand.  Don't hesitate to look words and terms that you do not understand up so that you can gain a better understanding of what the company leadership and analysts are referring to.

The best place to find transcripts of conference calls on the internet in my opinion is, http://seekingalpha.com/.  Once on Seeking Alpha enter in a stock symbol and go to the quote page.  On the left hand side of the page you will see, 'Business Intelligence' and 'Transcripts' beneath that.  Click on transcripts for a transcript of the company conference call that you wish to read. 

Although reading conference calls is a bit daunting at first, it is essential for being a successful investor, will lead you to better returns, and you will find that you get better at analyzing the calls as you read more of them.

DRIP

DRIPS can make your $ overflow!

 
What the heck is a DRIP!?!  In investing a DRIP is not a problem like a leaky faucet it is.  A DRIP stands for 'dividend reinvestment plan', and is defined as:  A plan offered by a corporation that allows investors to reinvest their cash dividends by purchasing additional shares or fractional shares on the dividend payment date. 

This type of plan lets you take the money that you make from your dividend payments and reinvest it in to more stock.  Most good companies who offer dividends will offer a DRIP program and you should be able to sign up for a DRIP through your brokerage.  A DRIP will allow you to buy more stock automatically and build your position with your dividend payments automatically.  How maddening would it be, for example if you received a dividend payment for $11.22 for one quarter?  It is much better to use a DRIP and have the money automatically reinvested in the stock when you are trying to build a position. 

If you are an income investor who relies on your dividend payments to pay bills and you have a substantial position in a stock then obviously DRIPs aren't for you!  If you are a savvy investor who is trying to build a strong position in high quality dividend yielding stocks, make sure that you incorporate DRIP.

Dividends. A stocks, "Yield"

The definition of a dividend is:  A distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (dividends per share). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield. 

Dividends are very important for long term investors, income investors, and well.... smart investors.  You can think of a dividend and the yield it provides like you think of the annual yield that you can get from a bank savings account.  Stocks are more risky then savings accounts and they offer better yields to their investors due to this risk.  If you bought $1,000 dollars worth of shares of AT&T you would get around a 5% annual yield.  These payments are normally made four times a year on a quarterly basis.  So after owning AT&T for one year you would own the shares you bought and if the share price stayed relatively the same you would also get $50 or 5% of the $1,000 that you invested.  The price of the stock could certainly go up and if that was the case you would have a very good investment on your hands.  Although 5% may not seem like much when compared to a "high yield" savings account with a bank it is huge.  I looked up Wells Fargo's high yield savings account and found that it offers a .05% yield.  So you would get $5 back from that savings account if you deposited $1,000;  ten times less then if you invested it in AT&T and the share price stayed the same.  The difference in bank account yields and stock yields is due to extremely low interest rates at this point in time.  When the economy gets hot be on the look out for high yielding savings accounts offered by banks.

Of course there are more risks with stocks then bank savings accounts.  The price of AT&T could go down and then you would end up losing money.  Companies can also decided that they do not want to or can not pay their investors the yield that they promised.  Generally though stocks with dividends that offer a yield are safer then other stocks.  If you want to make sure that the dividend issuing stock you like is safe you can do some research and find out how consistently the company has paid the yield it promises.  Good companies will have been consistent for years and years.  Dividends can protect stocks from going lower when the market gets bad because normally the lower a dividend stock goes the higher its yield gets.  This attracts more demand to buy the stock when the value falls and the yield rises.  This can help to hit the brakes when the stock price starts sliding.

It is definitely worth your time to look into stocks that have a dividend.  Over the last decade dividend stocks have outperformed the major averages, (Dow Jones, S&P 500, etc.).  These types of stocks can be real money makers for long term and income investors.

Jim Cramer's Second Commandment of Trading

"I thought RIMM would come back eventually...."

I'm sure everyone who reads 17and17 knows the difference between a stock trade and a stock investment by now.  If you don't please go and read the post from a few days ago that describes the difference in detail!  The second commandment of trading is, 'Your first loss is your best loss'.  This means that when you lose on a trade because the catalyst doesn't make the stock react the way you planned you need to exit the trade buy selling your stock shares.

Missing on a trade or having your trading thesis proven wrong sucks!  Just look at the guy above, he is crying over it.  As hard as losing on a trade can be you have to steel yourself to the fact that everyone loses on trades and investments.  Winners cut their losses quickly and maintain discipline.  Losers make excuses and refuse to believe that a trade went against them.  A loser will then lose even more by hanging on to a trade that failed and making into a larger problem; a failed investment.  Make your first loss your best loss by staying disciplined and cutting your losses quickly.

Apple Earnings Explode

Apple Earnings

Today after the U.S. markets closed Apple reported a net profit of $13.06 billion, or $13.87 a share. Analysts had expected Apple to earn $10.16 per share.  Revenue jumped 73 percent to $46.33 billion, handily beating the average Wall Street analyst estimate of $38.91 billion, according to Thomson Reuters I/B/E/S.

I use Apple products everyday at work and if I wasn't so frugal I would certainly by the products myself.  That being said, the next phone I purchase will definitely be an iPhone.  The first tablet I buy will definately be an iPad.  Have you ever used an iPad?  They are amazing!  My buddy at work is nice enough to let me play around with his iPad a bunch and it is awesome!  If I was him I wouldn't let any one touch it!

Apple is also sitting on astronomical amounts of cash, they have not saturated the world markets with their great products, and their mobile devices are the best out there.  For the near future Apple is a sure thing as a company and a stock.

I do think that eventually Google with their army of droid phones could over take Apple in the mobile device arms race.  The whole mobile internet bull market will push stocks like Apple and Google higher and the competition between the two will lead to better mobile devices and earnings.  Not in 2012 though.  It looks like it is going to be Apple's year this year.

Jim Cramer's First Commandment of Trading

"Don't turn a trade into a bad investment... Or else!"

The first commandment of trading according to Jim Cramer is, "Never turn a trade into an investment.".  There is a difference between a stock trade and a stock investment.  A stock investment happens when you buy a stock for the long term because you believe that the companies fundamentals are solid and better then the other stocks that it competes with.  When you invest in a stock you should believe that your stocks value will rise over time.  On the other hand a trade is when you buy a stock because you believe that there will be a catalyst or event that effects the stocks price that is going to take place in the near future.  This catalyst will drive the stock's price higher allowing you to sell the stock for a trade profit.

It is very important to understand the catalyst for a trade.  The catalyst is the reason that you think the stock will go higher in the near term.  From yesterday's post:  Examples of catalysts are legal rulings, election results, quarterly earnings reports etc.  You may decide to trade Lowes stock because you have noticed a large increase in business at Lowes in your area.  You may ask some family that you have in a different area of the country if they have noticed a lot of people in their area frequenting Lowes also.  Plus you see a story on the news reporting that a lot of people are doing home repairs.  So you may feel that Lowes will have great quarterly earnings that beat Wall Street Analyst expectations.  In that case you could execute a trade by purchasing shares of Lowes stock before their next quarterly report with the expectation that when they beat their earnings estimate their stock price will rise dramatically.  In this case the catalyst for the trade is the release of the quarterly report.

Two possible outcomes for this trade include the following.  Lowes could report a terrific quarter sending the stock price significantly higher.  Then you would finish your trade by selling your shares and making a quick profit.  On the other hand Lowes could miss quarterly earnings estimates and the share price could tumble.  At that point you would need to exit the trade.  No matter what happens you must have an exit strategy for a trade.  If the stock goes up you take profits, if it goes down you minimize your losses and sell the stock.  (Don't sell into a panic or a free fall in the case a trade turns against you.  Wait for the stock to show a bit of strength before you sell it unless the losses are minimal.).  Either way you end up selling the stock when you execute a trade.  Do not let a bad trade turn into a worse investment!  That is a sure fire way to lose money.

What is the difference between a trade and an investment?

"There is a difference between a trade and an investment?!?!?  WOW!"

In the future I am going to post about the ten commandments of trading and rules for investing.  Before I get started describing those rules and strategies I figured that it would be a good idea to explain the difference between a trade and an investment.  There is a HUGE difference after all!

An investment is when you purchase something with the expectation that its value will increase in the future.  People invest in stocks all the time, but people also invest in their homes, collectables, bonds and a miriad of other investments.  An investment should grow in value over time as it matures.  If you are going to invest in a stock or multiple stocks please make sure that you feel it is the stock of a strong company that is profitable in the near term and long term future.

A stock trade is different than a stock investment.  A trade is when you buy a stock because you believe that there will be a catalyst or event that effects the stocks price that is going to take place in the near future.  This catalyst will drive the stock's price higher allowing you to sell the stock for a trade profit.  It is very important to understand the catalyst for a trade.  The catalyst is the reason that you think the stock will go higher in the near term.  Examples of catalysts are legal rulings, election results, quarterly earnings reports and any other event that will move a stock's price. 

Here is a basic example.  You may decide to trade Lowes stock because you have noticed a large increase in business at Lowes in your area.  You may ask some family that you have in a different area of the country if they have noticed a lot of people in their area frequenting Lowes also.  Plus you see a story on the news reporting that a lot of people are doing home repairs.  So you may feel that Lowes will have great quarterly earnings that beat Wall Street Analyst expectations.  In that case you could execute a trade by purchasing Lowes stock before their next quarterly report with the expectation that when they beat their earnings estimate their stock price will rise dramatically.  In this case the catalyst for the trade is the release of the quarterly report.

All trades need to have a catalyst.  Because trades have specific catalysts the stock involved does not necessarily have to have great fundamentals or long term future profitability like a stock you would invest in for the long term.  Because of this it is important to not let trades turn into investments.  Remember a trade and an investment are two very different things.

Real Money by Jim Cramer

The Greatest!

If you would like to be an active stock trader or an active stock investor you must read Real Money by Jim Cramer.  In Real Money Cramer brings his knowledge and experience and delivers it to his readers in a reader friendly style.  This book has invaluable information that is presented in a reader friendly style.  If you have never read a book about stock investing I don't suggest that Real Money be the first book you read.  You should have some basic grasp of the very basics of stock investing and the stock market before reading Real Money.  However, even if you are a beginner you will be able to take away a wealth of knowledge from this book.

"Make Money!"

I have read Real Money twice.  The second time I read the book I took notes and I still review the notes I took a few times a year.  Although the trading and investing style suggested by Cramer in the book is more aggressive then my own style, the lessons and information in the book are outstanding.  This book breaks down how to compare stocks to one another, how to do the research you need to do to own and trade stocks, how to speculate, how to anticipate moves in stocks, how to trade cyclical and secular stocks, how to spot tops and bottoms in the market and in specific stocks, and much more.

Jim Cramer also gives the Readers of Real Money ten commandments of trading and twenty five investment rules to live by.  These basic rules of trading and investing are full of wisdom and come from decades of market experience.  Learning these rules can give investors a major edge in investing and trading.  I can not over state how great these investing and trading rules are.

The latter chapters in Real Money deal with spotting tops and bottoms and advanced trading/investing strategies.  These chapters are more advanced and the last time I read the book about one year ago I really had to concentrate in order to absorb and understand the content.  Cramer's description of options is one of the best that I have read.  Options are financial derivatives that are hard to understand for novice investors.  I had to re-read the options description in the book a few times in order to grasp how option puts and calls work.  However, Cramer's excellent description makes it possible for readers who are not experienced to understand options investing.

Real Money definately gets an A+!  It is full of invaluable investment and trading information and I can not recommend it enough.  I know that I will read this book again multiple times in the future.  It is the best book about investing and trading I have ever come across.

The Keystone XL Pipeline

"I hate jobs!"

 On Wednesday President Obama personally canceled the Keystone XL pipeline.  The safety aspects of this pipeline have been studied for three years.  The pipeline would have been a boon for the U.S. economy, decreasing energy independence by reducing the need for foreign energy and therefore increasing national security. It would have lowered domestic energy costs, heating, gas prices, food costs would have all gone down.  It would have also created thousands of jobs for U.S. workers, up to 20,000 according to some estimates.

However, Obama hates both the environment and the United States.  On Wednesday he emerged from his liberal think tank meeting and said, "This announcement is not a judgment on the merits of the pipeline, but the arbitrary nature of a deadline that prevented the State Department from gathering the information necessary to approve the project and protect the American people. I'm disappointed that Republicans in Congress forced this decision, but it does not change my administration's commitment to American-made energy that creates jobs and reduces our dependence on oil."

As you can see, the Republicans in Congress "forced" their way into the White House in the middle of the night and forced Obama to cancel the Keystone XL pipeline.  I'm surprised the Republicans breaking into the White House and forcing the President to cancel a project that he says is good for American-made energy was not covered more thoroughly by the press.  The press was really asleep on that one!

Any Obama supporters that have made it this far into this post may be asking, "Yeah Obama hates America but you also said he hates the environment!  That part isn't true!".  Well of course Obama hates the environment.  He personally made sure that millions of barrels of oil get routed away from a safe pipeline that has been studied for 3 years knowing full well that now the oil will go to China.  Everyone knows the Chinese are not environmentally friendly, the don't have a government agency that protects the environment, they don't have good environmental standards, they mine for coal with nuclear weapons etc etc..  So now Obama has made sure that the oil produced in Canada will have a bigger environmental impact and will definitely not be used as efficiently as it could have been.  Who would use the oil produced in Canada more efficiently?  The U.S. or China;  the answer is clear.

Normal Eco wackos may not realize that the oil will now end up hurting the earth worse than it would of if the Keystone XL pipeline would have been built immediately.  It is hard for them to focus when they are smoking marijuana all day, and asking their parents for more rent money.  So I doubt they realize that as long as Obama keeps oil prices high he can use tax payer dollars to further line his friends pockets with tax payer dollars that they can use to make more solar panels at their failed solar panel factories.  Now maybe Obama can try to get another stimulus package so he can fund more companies that are doomed to fail like Solyndra!
 
If you own oil patch companies like Exxon, Chevron, Hess, BP, etc. then this is all good news for you.  Obama took a break from torturing kittens and kicking senior citizens down flights of stairs long enough to ensure that oil prices remain a bit higher in the near future.  This also good for my Russian readers, your leaders are wise enough to provide its citizens with domestic energy.  Plus higher oil prices are good for countries that produce large amounts of oil as well as the companies that produce and transport oil.  Obviously, I disagree with the decision to cancel construction of the pipeline.

P/E Ratio the "Multiple"

Understanding P/E ratios can lead to making money!

How much is a stock worth?  How much does it cost compared to its competitors?  People tell me things at work all the time like, "Hey Sprint stock is only $2 a share, it is so cheap I should buy that right?!?!"  The answer to that question is always an easy, "NO!".  Then they tell me that Sprint is so cheap, especially when compared to AT&T and Verizon.  They say, "AT&T's stock costs $29.73 and Verizon's stock costs $38.34 that is WAY MORE expensive then Sprint's $2.19 stock!!!"  They are being mislead though, the stocks quote price has little to do with the stocks value.

When you buy a stock you should not look at it like buying a piece of a company.  After all if you buy ten thousand dollars worth of Sprint stock what are you expecting to get from that purchase?  Hopefully you were not thinking that you can go to a Sprint store and just grab a cell phone and walk out or that you can stop paying your mobile service bill if Sprint is your carrier.  When you buy stock you are purchasing a chance to share in the profits that the company makes on a per stock share basis.  The profits that a company makes on a per share basis are referred to as the companies/stocks earnings per share or EPS.  Once we know the EPS we can find the P/E Ratio by taking the Price (P) of the stock and dividing it by the Earnings (E or EPS).  So the P/E ratio for AT&T is figure like this.  The P, price per share of stock $29.73, divided by E earnings per share EPS $1.97 equals the P/E ratio of about 15.  So the P/E ratio for AT&T is 15.  That means that investors are paying 15 times earnings per share to own the stock.  This is why the P/E ratio is also referred to as the "Multiple".

Now that we know how to find the P/E ratio we can compare companies that are competing against each other like Verizon, AT&T and Sprint.  AT&T has a P/E of 15, Verizon has a P/E of 15.39, and Sprint has a P/E of -2.61.  So a stock that people thought was cheap was is actually expensive because the company behind it is losing money!  I personally do not choose to invest in or trade the stocks of companies that are losing money.  You can also use the P/E ratio to compare a stocks value to the average value of all the stocks of the index it trades on.

When looking at stock prices in the future, please remember that the quote price does not tell you close to as much about a stock's value as the P/E ratio does.  The P/E ratio can tell you the a lot about the true value of the stock compared to the overall market, sector, and the competition.

Stanley Black and Decker vs. Snap On Inc.

 The battle of the tool company stocks!!!  I have used tools for work and home repair in the past.  When I was in the construction industry I used a set of Dewalt portable power tools, they were very reliable and they worked great.  Dewalt is a Stanley Black and Decker product, (symbol SWK).  I have also purchased Stanley hand tools, I own some pliers, philips head drivers, screw drivers etc. right now and they are great tools.

I also worked for a municipality doing landscape construction and street maintenance.  At that job I used huge sets of Snap On hand and power tools, (symbol SNA).  Snap On sells those great huge tool sets that come in red drawers.  The Snap On tools I used were great.

So I have actual hands on experience using the tools that both of these companies sell.  All in all I would say that they are similar in quality and I would not hesitate to buy either brand.  Both are made in the U.S., SWK in Indiana and SNA in Wisconsin.  I couldn't say which one made a higher quality tool, so I did a bit of research online and found that Snap On tools were a bit more highly recommended then Stanley/Black and Decker/Dewalt.  Both companies put out high quality products.

Jim Cramer had a segment on his show last Thursday, January 12th about SWK.  He really likes the stock and after looking into it myself I can't disagree with his outlook on the stock.  SWK has a ridiculously low PEG ratio of .76 a relatively low P/E ratio, and good growth.  SWK is also much larger than SNA which gives it more market share and weight in the tool industry.

After doing some quick research I found that I like SNA slightly better.  The tools are a bit better according to internet chatter, tool magazines etc.  The share price of SNA hasn't been artificially raised by being on Mad Money so it has some more room to run up in the immediate future.  SNA has a lower P/E ratio and higher net margins then SWK.  I'm a sucker for low P/E ratios and high margins.

Both SNA and SWK are well liked by Wall Street analysts.  Both have great yield protection, around 2.5% each.  Both have good P/E ratios, PEG ratios, good technical charts, management, and most importantly both make high quality products that are American made.  Both are tied to a U.S. housing sector that should be on the rebound.  These are good stocks.

In the end I like SNA slightly better then SWK because I think SNA has a bit more room to run higher in the immediate future. Plus Jim Cramer is my hero so every time I can pick against him it makes me feel like I'm a free thinker!  I did not do all the necessary research it takes to actually purchase shares of these stocks.  I did not read the 10-Qs, or the 10-k thoroughly and I did not listen to the conference calls.  So if you think you would like to purchase these stocks make sure you do your homework please!!!  If you don't know what 'homework' means give your money to a professional extra please!!!  All that being said looking at the charts I like SWK at around the $68 level and SNA at around the $52 level.

Yahoo Finance

I use yahoo.com mainly to track my stock watch lists with yahoo's portfolio tracker.  I have found that it is easy to use and importantly free.  I think that yahoo.com has better information displayed right when you type in a stock symbol and look at the quote.  Unlike MSN money, yahoo.com shows you the P/E ratio without the need to scroll down.  There are a ton of basic features I love on yahoo.com finance.  The best one in my opinion is the "Competitors" page that shows you the statistics and ratios for the competitors and overall industry for the stock you are investigating.  It is also easy to find major company events by clicking on the "Company Events" feature.  This will show you the recent filings, major press releases, and upcoming earnings report date for the stock you are researching.  Yahoo.com finance also has analyst reports that are available for sale if you feel the need to delve really deep into a stock your looking at.

Yahoo.com finance is one of my favorite sites for investing information.  I use it daily and I also like the way it visually looks as well as the features described above.  That being said there are a couple of draw backs to yahoo.com finance.  One thing I do not like is the market pulse page.  This page shows message board posts from average joes and any regular joe can put comments on the page.  People should be cautious when reading what anyone says about stocks!  This is especially true when a teenage kid can access the market pulse page and type out silly junk.  On the other hand carefully reading the market pulse page can help to gauge investor sentiment a bit I suppose. 

Apart from possibly letting morons and crazy people ramble on via the Market Pulse feature, I also find yahoo.com finance lacking when it comes to rating stocks.  There is plenty of analyst information but there is no yahoo.com rating system.  Other financial sites like MSN and thestreet.com have their own site specific ratings.  I wish yahoo finance had a rating system too.

Apart from those tiny issues I really like yahoo.com finance and I use it everyday.  Just their portfolio tracker alone makes them great.  I gave MSN money a B when I reviewed them.  To be fair I will give Yahoo Finance a B+, it is better overall then MSN.

The Investment Answer

False Advertising

"The Investment Answer" by Daniel C. Goldie, CFA, CFP & Gordon S Murray explains very basic investing to beginning investors.  This is a really short book and a very easy read.  If you are looking for a basic explanation of how to invest and some examples of how you can be successful as a passive investor I suggest reading this book.  If you are just a novice passive investor then the old faulty "Efficient Market Hypothesis" mumbo jumbo put forth by the authors of the book will not effect you and you will feel good when you get 7% average annual returns over the next decade or two of your life.  If you are just looking for a way to find someone to help you with your money you should read this hard bound pamphlet.  Do not buy it though, rent it from the library.  It takes a matter of hours to read and the advice given doesn't require that the reader commit to studying the content.

If you are an active investor and/or trader this book really has zero to offer.  It is good to quickly read it so you know the contents and you can tell people who want basic investment advice about the book.  Or you could just take my word for it instead of quickly reading it and just suggest it to passive investors when they ask for some advice about investing.  Actually I can't recommend that.  If you recommend this book you could seem like you don't care about the person asking for advice.  There are much better basic investment advice books out there. 

There is nothing in this book that is risky or controversial.  Just plain vanilla advice and a bit of help for passive investors who want to learn the absolute minimum about investing and therefore get the absolute minimum average returns on their investments.  Summed up this book says, "Here are some very basic investing facts, now go and give your money to these guys so that they can invest it for you....."

Overall I give "The Investment Answer" a C-.  It does not fail to provide some basic information in a very short read.  On the other hand it is definitely not the investment answer for passive or active investors.

Market Pull Back or Market Crash?

"We're gonna need a bailout..."

I received the following question in the comment section of my last post:

Can we have a post describing a "Pull Back"? How to spot the difference between a pull back and a significant crash. If I am eying a stock and waiting for a pull back, I want to be able to know when I can buy. But I don't want to buy during what I believe to be a pull back and have the stock continue to drop for a week while I lose money.

That is a good question.  The overall market has pull backs all the time.  Crashes happen more rarely.  Pull backs can happen due to a number of factors including bad financial news, a major global news event, profit taking and many more.  Recent pull backs have happened due to the revolutions in Libya and Egypt, the earthquake in Japan, Greek debt issues, poor European bond sales, etc..  Crashes happen when there is a major fundamental problem that comes into the light.  In 1929 the US stock market crashed due to a bubble created by security purchases made on margin, (credit).  Wild greedy buying lead to over priced stocks and then the bottom fell out and a panic ensued.  This happened again in 2000 when investors bid up the prices of the ".com" stocks to over valued levels;  selling to escape over valued situations and a realization that companies like Pets.com did not have any intrinsic value or real profit potential lead to another crash.  In 2008 risky mortgage derivatives fueled by ignorant home loan applicants, evil/greedy investment/retail bankers, and over optimistic and unrealistic U.S. government home ownership policies lead to another crash.

All that historical junk about crashes and pull backs is sort of interesting and can serve as examples of what a crash or a pull back has looked like in the past.  Judging just by the aforementioned examples we can see that crashes happen when there is something intrinsically wrong with the financial markets, pull backs happen more often then not when investors get nervous or the buying demand recedes temporarily and more sellers come into the market to take profits.  A decent analogy would be that your life is in a pull back if you get drunk and fall out of a strange bed when you see who you woke up next to the next morning.  That is a definite pull back and very unfortunate but it isn't a massive issue.  Your life is in crash mode if you get cancer, or get a divorce.  Those types of things are REALLY going to change the way that things are in your life forever and it will be a very long time until things normalize again.  So when your trying to decide if there is a pull back or a crash ask yourself if what is happening is going to change fiscal law and/or policy at some point, or if it is a more temporary global set back like an interruption to global oil supply, or bad national unemployment numbers.

Most importantly, how can we tell when a pull back or crash has petered out and it is time to buy.  Unfortunately, no one can call a bottom in the markets.  This gives us a couple of options.  We can find stocks we like, figure out what a good price is to buy them and then buy the stock in increments as it gets cheaper and cheaper.  If that seems risky we can wait until the market starts to recover significantly and then do our buying.  Although we can't perfectly call bottoms in stocks or the markets there are some strong signs that appear when the markets are done pulling back or crashing.  When there is bad financial news related to the crash or pullback and the market doesn't react by going down anymore it can be a sign that the pullback or crash is over.  There are also technical and fundamental resistance levels that can act as a  price floor for a pullback or crash.  Watch a financial cable channel during a down turn in the market and you will definitely see analysts talk about these levels.  They will be on CNBC or Bloomberg talking about the specific resistance levels for the major indexes.  If you take note of a couple resistance levels and the market does not break down through them for a week or two it may be a sign that it is time to buy, (there are resistance levels for the different financial averages;  Dow Jones, NASDAQ, etc.).

The best advice I can give is to find quality stocks you like, know the price and valuation that you like them at then be patient and wait for an oppurtunity to buy.  Example:  Someone may have bought Ford in March 2008 at around $5 a share because Ford had restructured and the logic at the time was to buy Ford because its tangible assets alone where worth $5 a share.  The market had run down very far at that point in time.  However, in November 2008 Ford's shares plummeted to $1.43.  Missing that bottom in Ford's stock price was certainly unfortunate, but it was not a massive mistake because Ford's stock was undervalued at $5.  By November 2009 Ford's stock price was $9 an 80% gain, and by November 2010 Ford was at around $16 a share a 220% gain in just two years.  The moral of the story is that it is more important to know the value of a stock then call the bottom of a pull back or market crash.