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!