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.

Euro Time.

Friday before going into work I watched CNBC for a few hours.  It seems like the European debt trouble is starting to come to the forefront of the markets.  It even drove the market down when we got good consumer confidence numbers.  The Euro got CRUSHED today against the dollar.  Some of the analysts I heard on CNBC were saying that Italy, France, Spain, Portugal, and even Germany should be down graded even more then they were on Friday.  Once again Greece is playing chicken with the world financial markets in hopes of getting as much of their sovereign debt forgiven as possible.  The European Union will really have to get along to come up with a solution to these problems.  Historically Europe has not been the greatest at solving their common problems. 

I feel like these downgrades and the situation in Greece should cause a significant market pull back and then a buying opportunity once the worst of it is priced into the market.  I still feel that the markets will end higher in 2012 then they did in 2011.  I will be watching closely and waiting for the next opportunity to buy later in 2012.

Limit, Market and GTC orders

Common knowledge when placing an order to buy stock.  Always use a limit order.  A limit order instructs your online brokerage or broker to buy a certain number of shares at a specific price.  This gives the buyer the power to decide what price they are willing to pay for the stock that they are trying to purchase.

If you place a market order with your broker bad things can happen.  You could end up paying much more for a stock then you planned to because during the time of placing the market order and the time that the order is filled there is a possibility that the stock could get much more expensive.  Your broker will take a market order and just fill it at the most convenient price available there is no reason for your broker to hunt for a better price if you place a market order.  They will get their commission for the transaction no matter what price it gets filled at.

You can also place GTC orders with your broker, (Good Til Canceled).  These orders will remain open until they are filled at least for a long predetermined amount of time, sometimes for 30 days etc.  Be careful when using these types of orders because market circumstances can change on a day to day basis and you want to make sure you don't forget about at GTC limit order you placed 20 days ago that fills once you find out the whole market has crashed.

When you open an online brokerage account or open an account with a broker make sure that they do not charge fees for any of these types of orders.  There are plenty of online brokers who don't charge their clients to make limit or GTC orders.

Bucket

On November 28, 2011 I read an article entitled, "Micro Cap Stocks with High Institutional Buying".  (The article is old and has been taken down now so the link is dead.)  The article mentioned eight micro cap stocks that hedge funds were buying up and adding to their portfolios.  Micro cap stocks are stocks of small companies that have market capitalization under $250 million.  In Jim Cramer's book, "Real Money:  Sane Investing in an Insane World", Cramer describes speculating by investing in "Buckets" of stocks.  A bucket of stocks is just a bunch of stocks that may be weak and chancy but when bunched together in a bucket they become less risky and the total bucket can become very profitable.  Cramer includes an example of a different bucket he actually traded in this book.  I took the micro cap stocks from the article I read and placed them into a bucket on November 28th 2011.  Since then I have been tracking their performance in a yahoo portfolio simulator, I did not buy any shares of any of the stocks.  Here are the results.

Symbol     11/28/11 Price     1/6/12 Price    =/- %
MNI               1.17                   2.41         +105.98%
ACW             5.90                   7.42          +25.76%
CIS                2.16                   2.80          +29.63%
DEPO            4.42                   5.48          +23.98%
GNOM          3.88                   3.71           -4.38%
MIPS             4.73                   4.92           +4.02%
SIFY              4.23                   4.23             0.00
ZIXI               2.50                   2.96          +18.40%

Overall Performance:  +25.42% 

So far this bucket is looking great.  You would need a literal bucket to catch all of the money made from this trade!  If you invested an even amount of capital into each of these stocks you would be up 25.42% in less than a month and a half.  It looks like the big money guys knew what they were doing with these stocks;  so far at least.  I looked at each of these stocks individually on November 28th and did not find much that I liked about most of them overall individually.  However, the next time I see that the institutional buyers are snapping up a large group of micro cap stocks and the overall market is in an uptrend I will keep this exercise and example in mind.

This kind of speculative stock investment bucket can be profitable.  It is better to form this type of bucket when the stock market is really hot and everything is rising.  ***PLEASE KEEP IN MIND***  This is an example of a SPECULATIVE investment.  I do not own any of the stocks that are listed in this example.  Please do research and understand the risks of investing if you are going to buy stocks.

Cramers early 2012 stock pick: ALXN

The Mad Money Stock Super Bowl 2012 Winner

Jim Cramer broke down four stocks that he likes for 2012 on his Mad Money show this week.  The winner of the four stocks according to Cramer was ALXN.  Alexion Pharmaceuticals Inc. (ALXN), is a biopharmaceutical company that makes drugs for people with very serious conditions.  I did a bit of checking into this stock after hearing about it on Mad Money.


I did not have time to read the companies SEC filings or look at their quarterly conference calls so my opinion is derived from looking at the basic financial information.  I have certain criteria that I go by that determines whether I will invest in a stock or even pay close attention to it.  ALXN fails to grab my attention right off the bat because it has a P/E ratio of 93 and a forward P/E ratio of about 51.  I'm not paying 51 times earnings for anything ever much less 93 times earnings.  The industry average P/E is 20 and the S&P 500 average is about 24.  That kind of valuation is too risky in my opinion, no matter how good the company is.


The second stat that disqualifies ALXN from me after digging into it further is it had negative income growth.  There are too many companies with positive income growth for me to consider ones that have negative income.  The company gets a 7 out of 10 from MSN stock scouter and a B+ from thestreet.com's stock picker.  These numbers are mediocre, but when paired with the HUGE P/E and the negative income growth I'm going to spend my stock research time else where.


Cramer is obviously no dummy and certainly knows more then me about investing and has his own style.  There are a bunch of positives for ALXN.  These include its massive +34.83% growth estimate for 2012.  That alone makes ALXN attractive.  Analysts also love the stock and most analysts rate it a strong buy or buy.  The company also enjoys a huge profit margin of 88% compared to the industry average of 68%, and the S&P average of 39.5%.


ALXN also shows a strong technical trend on its chart.  The technicals look like ALXN is at the peak of its run right now and just going by the charts traders would have to wait until the stock pulls back to the $66 level or so before entering the trade.

ALXN's Chart from stockcharts.com

I'm sure that Cramer sees more then I can see about ALXN but going off of my own criteria it is not a stock that interests me.  All investors should develop their own trading style and criteria that they feel comfortable with.  Do not make the mistake of investing in a stock just because a television pundit or analyst recommends it, even if they are the greatest of all time i.e. Jim Cramer!!!

Watch Mad Money this week.

"BUY BUY BUY!!!"

I have been watching Mad Money on CNBC for years.  It is on CNBC at 6 PM and 11 PM EST Monday through Friday.  You can also find replays of the show, and videos of the specific segments on CNBC.com by searching videos and then Mad Money.  If watching the whole show will just take too much of your time, you can also access a written summary of the show on thestreet.com.  There is an archive of the show that will allow you to read the summaries of past shows.

This week Jim Cramer has been breaking down the best stocks in the market.  What is really great about these specific break downs is that he is explaining how he compares stocks that are in different sectors.  In his book, "Real Money", Cramer thoroughly breaks down how to compare companies that are competing against each other in the same industry.  He does not clearly break down how to compare stocks against other stocks in completely different industries.  He is this week though, I know that I will be taking notes on how he does this as well as looking at what stocks he thinks are the best.  If you like trading stocks, so should you!

Comment Question Answer

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

'Are there different types of strategies?'

The simple answer is, yes.  There are many different types of stock investing strategies.  Each investor must come up with their own personal strategy or closely follow a classic investing strategy.

The main types of conservative investing strategies are index investing (efficient market hypothesis followers), buy and hold investors, income investors and value investors.  There is not an index investor who is famous world wide for investing in major indexes or mutual funds.  Buy and hold investors seek out high quality stocks and then hold on to them based on the fact that the stocks of high quality companies will out perform the overall market.  Income investors look for stable stocks that pay dividends to the stock holder.  These types of stocks are popular with retirees and they do historically well when the overall market is suffering.  Value investors attempt to use fundamental analysis, (looking in depth at a companies finances), to find stocks that are on sale or under priced.  Once they find stocks of good companies that are under priced they snap them up and wait for the rest of the overall market to realize the actual value of the stock.  Famous Value investors include Warren Buffett and Benjamin Graham.

Investment strategies that include more risk are position trading, swing trading, and day trading.  Traders make use of technical analysis, (the study of price charts), they look at charts for signs of where the market and the stock they are trading is going.  Position trading is practiced by Jim Cramer.  Position traders trade trends and use fundamental and technical analysis to judge when to by and sell their positions.  Swing traders rely more on technical analysis and look to buy and sell stocks quicker then position traders.  Channel trading is a type of swing trading.  Day traders trade the market on a day to day basis sometimes making multiple trades each day.  There are special tax benefits for people who qualify as day traders.  This allows day traders to avoid paying short term capital gains taxes.

I personally think that investors should learn as much as possible about as many types of strategies as possible and then develop their own strategy that blends the best parts of the classic strategies into their own unique strategy.  It is important to find out what strategy you feel the most comfortable with.  Some investors have a higher tolerance for risk then others.  Some investors like to dig deeply into company accounting while others like to rely more on news events and trends.  No particular strategy is perfect or fool proof.  If there was a perfect strategy all investors would have the same strategy!

David vs. Goliath. The individual investors flexibility advantage.

I was talking to my Dad relatively recently about the returns that I expect to get when trading.  The number I told him shocked him and he asked me how I figured a number anywhere close to that was possible.  He said, "Hedge fund managers and mutual funds do not get those types of returns.  How can a lone investor?!?!"
That is a good question.  Individuals have huge advantages over large institutional investors with their army of researchers and billions upon billions of dollars.
Individual investors have much more flexibility then large institutional investment firms.  It is much easier to grab 20 shares of AAPL then it is to grab 10,000.  It is also much easier to get out of that position once you are ready to exit.  Think of it this way, it is much easier to turn a fishing boat around then it is to turn an aircraft carrier around.  Some large institutions even have to worry about moving a stocks price when they buy up the amount of shares that their clients require.  As a lone investor we do not have that problem.
Because lone investors don't have clients they can follow their own strategy.  This is another advantage that we have over the institutions.  The only people we are answerable to is ourselves.  This gives the individual another distinct advantage.  There is no pressure to produce results for clients.  Hedge funds and Mutual funds are pressured in to making moves that will please their clients sometimes.  These can be moves that end up losing them money just so they can show that they are making gains to keep their clientele happy.  Fortunately this is a problem that the individual does not face.

Intelligence vs. Wisdom the "Efficient-Market Hypothesis"

 "This pony tail keeps me relevant.... right?"

I am over 1,000 page views! Thank you everyone who has viewed 17and17. I will continue to make improvements to the site.

1000 fun fact: If you start with $1,000 and get a 20% average annual return for 38 years you will have $1,020,000 if you do not have to pay taxes while compound interest on your initial investment.

The efficient-market hypothesis asserts that financial markets are "informationally efficient". That is, one cannot consistently achieve returns in excess of average market returns on a risk-adjusted basis, given the information available at the time the investment is made. The market is priced perfectly and no advantage can be gained by doing research, (fundamental, technical analysis etc.). Many very intelligent people believe that this hypothesis is true. They would have all investors invest in index funds that will mirror the average returns of the overall market.

Of course these closed minded financial atheists are incorrect. I'm sure that they are very intelligent men and women but they have boxed themselves in mentally if they truly believe this mendacious theory.  They lack the wisdom to think critically about the overall markets and the opportunities that they offer to wise hard working  investors. Fortunately you do not have to look far to find market prophets that disprove this silly hypothesis.  Jim Cramer, Warren Buffett, and Peter Lynch are a few famous examples.

Who has heard of Burton Malkiel?  He is a leading expert and proponent of the efficient-market hypothesis.  I googled Burton and the article did not say anything about his success as an index investor.  It listed out a bunch of academic credentials and papers that he had written.  Why is he running round writing all those papers....... For no money!?!? Because of course he is an academic like the other proponents of this theory. A theory that is in the end false.  But that is what academics do;  sit around make up theories and then write papers and argue amongst themselves.

I would like to make money in the stock market, not argue about silly theories.  When I first read about the efficient-market hypothesis I was very disappointed because I thought to myself, "All of my studying and following the market doesn't matter.  I should just get an index fund and forget about studying the market and investing."  After doing some research and critical thinking though it becomes very apparent that there is a ton of room to make money in the market and the market is anything but efficient or logical.  The market and investor emotion that goes with it can create investing opportunities that can last for days, months, and even years at a time.  Just look at the .com bull market in the late 90s.  Was Pets.com stock efficiently or perfectly priced when it had no earnings and was trading at a +100 multiple?  During the recent 2008 crash was Ford stock efficiently or perfectly priced when it was selling for $1.50 per share and the companies assets alone were worth $5 per share?  Or could a wise investor who studied the fundamentals have realized that Ford was a steal at $1.50 per share on 11/17/2008 when its components alone were worth $5 a share and then made a massive profit by selling Ford's stock a year later for $16 a share?

The invalidity of the efficient market hypothesis is as obvious as the opportunity for profit that the market affords us.  Every time I come across it in a book or an article I'm shocked that it still even exists. Keep in mind that intelligence does not always include wisdom, and you need a mix of both in order to succeed at investing or any other venture you choose to take on in life that requires strategic thinking.

Occupy Haight-Ashbury.... Please?

"Does this outfit make my mustache look big?"

Although the Occupy Wall Street movement is full of super snazzy dressers, (see image above), many of their tactics are asinine.  I wrote the following comment on a MSN.com message board.  Apparently one of the editors at MSN.com Money has a son that is 22, out of work, likes to smoke weed and break windows.  This editor must have let this kid post this article on MSN Money.  There can be no other explanation!  My comments about the article follow:

How sad that a movement that has so many valid points and goals is run by children and childish adults.  Now the good that could have been done will be down played by further ridiculous antics.  So the so called "1%" will use their media to highlight the moronic behavior and the far left aims of OWS.  This will over shadow the legitimate aims of the protests.

As far as the sophomoric pranks and disruptions that OWS is planning, stay out of normal peoples way.  I can safely speak for people who work 55 - 60 hours a week and ensure OWS members that we have zero patience for unneeded disruptions to our time or extra costs ran up by pointless vandalism.  If you dislike the super wealthy, make sure to target the super wealthy.  Here is a hint, they aren't the people you have bothered and disrupted so far.

OWS should actually be revolutionary and make a difference without disrupting the lives of normal people.  Smashing windows out, rioting, camping in parks, doing drugs, and playing bongo drums is not revolutionary, it is foolish and juvenile.  Way to put yourselves on par with EPL soccer fans!  I'm sure that America will take you just as seriously too.

Here is a link to the article in question:    http://money.msn.com/investing/watch-out-1-percent-the-kids-will-be-back-marketwatch.aspx?page=3&_p=f48bd103-1b63-4a89-b5f7-cef06f2b8d71&_nwpt=1

New Years Day Q and A

This question was posed to me in the comment section of my Happy 2012 post:

Anonymous said...
           How do u know all of that? When u say research what r u talking about?

Christopher Peterson said...

I certainly do not know all of that for sure! Part of investing is making educated guesses. This post describes the way that I am approaching the markets for early 2012, what I believe will happen. I will remain flexible because changes can happen at any time. As far as research, I will be following the stocks that I feel have value and monitoring their prices. I will definitely be looking for stocks that are great trades and investments. I will be adding to my overall investing knowledge, reading books, viewing charts, testing new strategies, etc.. I will also be writing reviews and descriptions of the specific books that I have read in the coming year. This could possibly give you more insight into the specific things I look at when I'm referring to research. Thanks for your question!

Anonymous said...
           What books r u basing these "educated guesses" on?  Y do u think u know so much about Europe and what their situation is?

Thanks for your follow up question.  I base my educated guesses on research that I have done and the news sources that I follow.  I am certainly entitled to my opinion about everything under the sun.  It is up to those who read what I write on 17and17 to decide whether they agree, disagree, or do not care about my opinion/educated guesses.

As far as the specific books I have read, like I said in my first reply I will be blogging about those in the future.  I have already written one blog about one of my favorite websites to get financial information.  I do not feel it is necessary to list the books I have read out. That would be silly.

I have not read a book on the European debt crisis; I do not know if anyone has written one.  I have gleaned that information from the news and financial statistics available on the internet.  Major countries in Europe have poor/unsustainable National Debt to GDP ratios.  The following statistics are available on the International Monetary Funds website:  National Debt to GDP ratios Germany - 83.96%, France - 82.33%, Italy - 119%, Spain - 60.12%,  Portugal 92.92%, Greece 142.76%.  These levels of debt are not sustainable obviously.  The main problem is not that the European Union has high debt to GDP ratios, it is the fact that the countries in the EU have not passed stringent austerity measures and their national banks have not passed serious stress tests.  The United States has a debt to GDP ratio of 94.36% which is way to high and also unsustainable.  What separates the U.S. from the EU is the fact that the U.S. dollar is the world reserve currency so the U.S. Federal bank can control and manage U.S. to some extent with that power.  The U.S. has vast natural resources that it is starting to tap into unlike western Europe.  The U.S. has banks that have been stress tested after the 2008 CDO/Banking crisis and U.S. banks are in a strong position because of that.  According to investor sentiment the U.S. is more likely to get its debt under control in the following years then the countries in the EU based on the more traditionally conservative fiscal values of the American citizenry as compared to more big government minded socialism minded European citizenry.  Lastly, if you look at the bond sales of European Union countries the high rates clearly reflect the risk and fear associated with the European Union, the countries in the Union, their austerity, wiliness to push through financial reforms that add needed austerity, and weakness of the European Unions banking system.

That is the basic information that I based my 'educated guess' on as far as early 2012 and Europe.  It seems obvious to me that there is just too much risk associated with the EU to be bullish about the market, (optimistic about world financial markets).

Tomorrow I will definitely return to much more basic information!  This particular person seemed rather insistent about getting an in depth answer to their question, and I thought answering it in the form of a post would help any readers understand a bit of my thought process regarding investing.