| |
| |
|
|
|
|
|
Stocks: Reduce Risk Yet Maximize Profits
It is important to note that every smart investor wants to minimize risk while maximizing profit potential. Yet conventional investment theory tells us that in order to increase returns, you have to increase risk. You may be surprised to find that this conventional wisdom is not always true. When I was a professional stock trader, I made most of my profits from appreciation in my portfolio, not in short term trading. In other words, I was a position trader. Any losses in my stock positions were taken out of my paycheck at the end of the month - in fact, I had to pay back any loss. If you are in this position, you desperately want to learn all the techniques to make large profits without risking much. I became an expert out of necessity. So while my trading account had virtually no losing months, my gains were as much as 300% per year. In my stock picking, I first looked for stocks that were so cheap they could not go down. If they did go down, I was happy to buy more because at those prices, you could buy the whole company and sell off the assets for a profit. From this group of "safe" stocks, you select the ones most likely to have large appreciation. A stock is cheap in my book if it sells below the liquidation value of its assets, and most cheap if it sells anywhere near the net amount of cash it has on hand. So the first two measures of value I looked for were book value per share and cash per share. Book value is the value of the shareholders equity carried on the books of the company. Generally, since you are buying a share of stock, you will want to know the book value per share. The one caveat to looking at book value is that companies often have intangible assets on the books, goodwill and the like. You have to take these intangible assets with a grain of salt. The safest thing is to look for "tangible book value." Book value per share is often calculated for you in the various Internet financial stock search programs available. The next indicator to look for is cash per share or working capital per share. Working capital is current assets minus current liabilities. These assets are near to cash or will generally be turned over in one year: receivables, inventory and the like. To measure the health of working capital, divide current assets by current liabilities to get the "current ratio." A current ratio of two to one or better usually indicates a solid company. As long as the company does not have any long term debt, or at least none coming due in the near future, the company is solvent and should be around for a while - little or no bankruptcy risk. Next, we look for low price-earnings (P/E) ratios. In my opinion, buying high P/E stocks to chase growth companies is inviting real risk. If the company disappoints in earnings, not only will the stock drop from lower earnings, the P/E ratio will deflate as well, giving you a double hit. OK, so you have found a company that is selling at or below book value with a current ratio better than 2:1, and a low, low P/E. It may be that the stock will not go down, but will that stock go up? Picking growing industries and growth companies is more than I can tell you here, but there are two simple things you can look for first: (1) Is the company buying its own stock, or has it bought its own stock at about this price, and (2) are the insiders making hefty purchases of their stock? Next, you can look at the ratio of revenues or sales to market values or the dollar amount of sales per share. Generally speaking, the company with a relatively high amount of sales per market value or sales will have more action on the upside. That company has more revenues to make profits from. After you have narrowed the field using the above techniques, there will be no substitute for intense homework about company prospects to find which of those cheap stocks that truly give you superior returns, what I call my "Home Run Stocks." About The Author John Lux is a former OTC Trader and author of the book, "How to Find a Home Run Stock." To read the book and find your own Home Run Stocks, click http://www.asklux.com/investing-books/home-run-stock.htm. Email John at john@asklux.com
MORE RESOURCES:
Investing - Google News |
|
|
|
RELATED ARTICLES
Remembering TEOTWAWKI and Learning from It Its only been about 5 years since we had major scares in the marketplace regarding Y2K. You might recall that many computer systems were not programmed to be able to understand the change from 1999 to 2000. Eight Questions to Ask Your Financial Advisor You may like your financial advisor, but is he really looking out for you? All advisors are not created equal, and you have a right to know what makes them different! You also have a right to ask yours if he compares!(1) Do you use a holistic approach to financial planning by determining my values and goals?(2) Do you work on a fee-only basis, a commission basis, or both, and why?(3) Do you have company-established insurance requirements, or do you recommend insurance only when it is needed by your clients?(4) Do you attempt to 'beat' the market through timing and selection, or do you believe that attempts to do so are not worth the additional level of fees and risk? Are you aware that a vast majority of my returns will be based on asset allocation, rather than timing and selection?(5) Are you a Registered Investment Advisor, and therefore a fiduciary? In other words, must you legally and ethically put my interests above your own?(6) Do you meet with your clients at least three times a year to refine their portfolio and find out how events in their lives may have changed their financial goals?(7) Do you return phone calls the same day you receive them, and are you available to answer questions as they arise?(8) When you wake up each morning, do you ask yourself how you can best be of help to your clients that day?Adjust these questions as you see fit, and depending upon what your own objectives and needs are from an advisor. The best advice is to never be afraid to ask!© 2004 Matthew S. Before You Start Investing There maybe several reasons why you to want to invest your money. You may want to retire early, want to build your own business in the future, or to pay for your kid's education. Gold; What Type of Gold to Buy JewelryThe advantages are:? Gold Jewelry is the easiest of the gold to buy and has the enjoyment of being able to be worn.The disadvantages are:? Retail Jewelry is often marked up by 300% or more in the shops. Investigate Before You Invest "Through wisdom is a house built. And by understanding it is established. Trading For A Living - Part 2 In part 1 of this article I started to look at the financial implications of giving up the day job to instead start trading full time for a living. There are more than just monetary considerations as we will see later, but for now, there are some more costs to ponder. The Difference Between Investing and Trading Investing and Trading are not the same thing. The returns you seek, the length of time it takes to achieve those returns, the amount of risk one is prepared to take, and the commitment one can make to monitor the investments dictate the strategy of whether to invest or trade. Consolidation Period The economic data reported Fri showed continued above trend growth with disinflation (at the core level, excluding food and energy) in the second quarter. Real output growth has slowed from about 4% in 2003 & 2004 to just over 3 1/2% so far this year, while a core inflation rate fell from 3% last quarter to 2%. Success Trading: Yet More Basic Terminology for New Traders In this day and age of online brokers for virtually every market out there, there are some very useful tools that will help protect your account and lock in profits when you have them. It is our recommendation that you use a good online broker and take advantage of not only the low commissions they offer, but also the automated tools that are available. New U.S. Mint Coins a Golden Opportunity In April, the U.S. Options Education : Opinion versus Fact! The most basic aspect of trading is learning to differentiate between what is FACTUAL and what is OPINION. If you stay interested in the financial markets long enough you will discover that there are a lot of sharks out there who have become expert at making that task very difficult. Trading Tips No 3: Online Trading and Investing: Buy, Hold, and Hope So you have learned how to trade the markets by mastering a few trading tools like Moving Averages, Channels, Stochastics, MACD, or RSI - that is a great accomplishment achieved by only a few. However, having the tools and rules to trade markets successfully, year in and year out, is only half of the challenge. Direcway & Wildblue Set to Square Off this Fall? There is a cat fight brewing between Direcway LLC, Starband and Wildblue Communications for the large number of people in the U.S. Reasons For Joining An Investment Club Whether you're a novice investor or an experienced stock picker an investment club may be beneficial to growing your investment portfolio. This article explains what an investment club is, why you should have an investment program and finally why you should join an investment club. Angel Investors: Who They Are & When Are They Appropriate Angel investors are individuals who invest in emerging business ventures. Angels typically provide both capital and know-how to companies who are in either their start-up or expansion phases. The Myth of the Earnings Yield AbstractA very slim minority of firms distribute dividends. This truism has revolutionary implications. When It Comes To Investing, Asking The Right Questions Can Help You Make The Right Decisions Are you ready to open your pathway to financial independence?Well you should be. The sooner the better. Oil and Gasoline Price Uncertainties The Light Crude Continuous Contract hit an all-time high at $70.85 a barrel, while Unleaded Gasoline Futures spiked 50% or $1 a gallon on Tuesday. Larry, Moe and Curley, Investment Brokers Larry, Moe and Curley were sitting in their favorite restaurant just off Wall Street having their usual 3 martini lunch and were discussing the day's events and their client portfolios.Larry:"I had 12 calls this morning from customers wanting to know why the market was going down". Secret Stock Options Trading Strategies the Experts Don`t Want You to Know To understand stock options, we need to look at Webster’s Dictionary’s definition of the word strategy.Webster’s Dictionary defines the term strategy as1.
|
