In Value Stock Investing, Quality is Job One

How much financial bloodshed is necessary before we realize that there is no safe and easy shortcut to investment success? When do we learn that most of our mistakes involve greed, fear, or unrealistic expectations about what we own? Eventually, successful investors begin to allocate assets in a goal directed manner by adopting a realistic Investment Strategy... an ongoing security selection and monitoring process that is guided by realistic expectations, selection rules, and management guidelines. If you are thinking of trying a strategy for a year to see if it works, you're due for another smack up alongside the head! Viable Investment Strategies transcend cycles, not years, and viable Equity Investment Strategies consider three disciplined activities, the first of which is Selection. Most familiar strategies ignore one of the others.

How should an investor determine what stocks to buy, and when to buy them? Will Rogers summed it up: "Only buy stocks that go up. If they aren't going to go up, don't buy them." Many have misread this tongue-in-cheek observation and joined the "Buy (anything) High" club. I've found that the "Buy Value Stocks Low (er)" approach works better. A Google search produces a variety of criteria that help to identify Value Stocks, the standards being low Price to Book Value, low P/E ratios, and other "fundamentals". But you would be surprised how the definitions can vary, and how few include the word "Quality". In the late 90's, it was rumored that a well-known Value Fund Manager was asked why he wasn't buying dot-coms, IPOs, etc. When he said that they didn't qualify as Value Stocks, he was told to change his definition... or else.

How do we create a confidence building Stock Selection Universe? Simply operating on blind faith with one of the common definitions may be too simplistic, particularly since many of the numbers originate from the subject companies. Also, some of the figures may be difficult to obtain quickly, and it is essential not to get bogged down in endless research. Here are five filters you can use to come up with a selection universe of higher quality companies, and you can obtain all of the data inexpensively from the same source: 1. An S & P Rating of B+ or Better. Standard & Poor's is a major financial data provider to the investment community, and its "Earnings and Dividend Rankings for Common Stocks" combine many fundamental and qualitative factors into a letter ranking that speaks only to the financial viability of the rated companies. Potential market performance (a guessing game anyway) is not a consideration. B+ and above ratings are considered Investment Grade. Anything rated lower adds an element of unnecessary speculation to your portfolio. A staff of thousands does your research for you.

2. A History of Profitability. Although it should seem obvious, buying stock in a company that has a history of profitable operations is less risky than acquiring shares in an unproven, or start-up entity. Profitable operations adapt more readily to changes in markets, economies, and business growth opportunities. They are more likely to produce profit opportunities for you quickly.

3. A History of Regular Dividend Payments. The payment of regular dividends, and periodic increases in rate paid, are sure signs of economic viability. Companies will go to great lengths, and endure great hardships, before electing either to cut or to omit a dividend. There is no need to focus on the size of the dividend itself; Equities should not be purchased as income producers. A further benefit of using dividend payment as one of your selection criteria is the clear indication of financial stress that a cut communicates.

4. A Reasonable Price Range. You will find that most Investment Grade stocks are priced above $10 per share and that only a few trade at levels above $100. If you have a seven-figure portfolio, price may not matter from a diversification standpoint, but in smaller portfolios, a round lot of a $50 stock may be too much to risk in one position. An unusually high price may be caused by an unusually high degree of sector or company specific speculation while an inordinately low price may be a good warning signal. With no real structural size limitations, I feel comfortable with a range between $10 and $90 per share... but I would avoid most issues at the higher level.

5. A NYSE Listed Security. I'm not sure that the listing requirements for the NYSE are still more restrictive than elsewhere, but it is helpful to be able to focus on just one set of statistics since most of the information you need regularly is reported by Exchange (Market Stats, Issue Breadth, and New Highs vs. New Lows).

Never say no to a profit when the upward movement equals 10%, and you'll be able to do it again, and again, and again.

Your Selection Universe will become the backbone of your Equity Investment Program, so there is no room for creative adjustments to the rules and guidelines you've established... no matter how strongly you feel about recent news or rumor. Now you can focus on operating procedures that will help you diversify properly by position size, industry, etc., and on guidelines that will help you identify which stocks should be watched closely for purchase when the price is right. Keeping in mind that you want to sell each Equity Position at a target profit ASAP, you'll want to establish appropriate buying (and selling) rules. For example, I never consider buying a stock until it has fallen at least 20% from its highest level of the past 52 weeks, so I include those that are close or at this price level on a "Daily Watch List". Then, I select those that I would be willing to add to equity portfolios if they fall a bit more during the trading day. Your actual "Buy List" changes every day in both symbol and limit price.

You will need to apply consistent and disciplined judgment to your final selection process, but you can be confidant that you are choosing from a select group of higher quality, well-established companies, with a proven track record of profitability and owner awareness. Additionally, as these companies gyrate above and below your purchase price (as they absolutely will), you can be more confident that it is merely the nature of the stock market and not an imminent financial disaster... and that should help you sleep nights.

Steve Selengut http://www.sancoservices.com http://www.valuestockbuylistprogram.com Professional Portfolio Management since 1979 Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"

Investing vs. Trading - What's The Difference?

There is a question which is sometimes asked by those new to the financial markets, and even occasionally debated by experienced participants. That question is how one differentiates between trading and investing. Because both trading and investing - when one considers them from the perspective of the financial markets - are performed in very similar fashions, they are often thought of as interchangeable actions.

In my book, The Essentials of Trading, I followed along with this basic theme by introducing the idea that what differentiates the two is scope definition. Both trading and investing, after all, are at the most simple of levels application of capital in the pursuit of profits. If I buy XYZ stock I expect to either see the price appreciate or earn dividends - perhaps both. What separates trading from investing, however, is that generally in trading one has an exit expectation. This might be in the form of a price target or in terms of how long the position will be held. Either way, the trade is seen to have a finite life. Investing, on the other hand, is more open-ended. An investor will buy a company's stock with no predefined notion of when he or she will sell, if ever.

We can use examples to help demonstrate the difference. Warren Buffet is an investor. He buys companies which he sees as somehow undervalued and holds on to his positions for as long as he continues to like their prospects. He does not think in terms of a price at which he will exit the stock. George Soros is (or at least was while he was still actively running his hedge fund) a trader. His most famous trade was shorting the British Pound when he thought the currency was overvalued and ready to be withdrawn from the European Exchange Rate Mechanism. The position he took was based on a specific circumstance. Once the Pound was allowed to float freely, and quickly devalued in the market, Soros exited with a handsome profit. That meets the criteria of having a predefined exit, making it a trade, not an investment.

There is another way one can define trading as set against investing, though. It has to do with the manner in which the applied capital is expected to produce a return. In trading the appreciation of capital is the objective. You buy XZY stock at 10 expecting it to go to 15 and thereby produce a capital gain. If dividends or interest are paid out along the way, that is fine, but likely only a minor contribution to the expected profits.

In contrast, investing looks more toward income over time. That makes income production, such as dividends and bond interest payments, the major focal point. Do investors experience capital appreciation? Sure, but unlike in trading, that is not the prime motivation.

With these definitions in mind, consider what many people refer to as their single biggest investment - their home. Based our second definition of investing, however, a home is generally not an investment because in most cases is does not produce any income. In fact, it produces considerable expenses in the form of mortgage interest payments, utility bills, and upkeep. If anything, a home is a trade. We buy it and hope for its value to rise over time, increasing our equity. And the fact that many people expect to move in only a few years and sell at that point makes it even more of a trade rather than an investment. (Of course own rental property can certainly be viewed as investing, unless one is flipping it, which would definitely be more trading.)

As noted earlier, for many people trading and investing seem like the same thing. The mechanics of buying and selling are basically the same. Sometimes the analysis one does to make those decisions is identical as well. It's the intention and definition of objectives which separate trading and investing, though.

John Forman is author of The Essentials of Trading (http://www.TheEssentialsofTrading.com) and a near 20-year veteran of the markets. For a free e-book on getting started in trading go to http://www.theessentialsoftrading.com/FreeGuide-GSIT.html

Expectations For Trading Or Investing Returns

Clearly, anyone who trades does so with the expectation of making profits. We take risks to gain rewards. The question each trader must answer, however, is what kind of return he or she expects to make? This is a very important consideration, as it speaks directly to what kind of trading will take place, what market or markets are best suited to the purpose, and the kinds of risks required.

Let s start with a very simple example. Suppose a trader would like to make 10% per year on a very consistent basis with little variance. There are any number of options available. If interest rates are sufficiently high, the trader could simply put the money in a fixed income instrument like a CD or a bond of some kind and take relatively little risk. Should interest rates not be sufficient, the trader could use one or more of any number of other markets (stocks, commodities, currencies, etc.) with varying risk profiles and structures to find one or more (perhaps in combination) which suits the need. The trader may not even have to make many actual transactions each year to accomplish the objective.

A trader looking for 100% returns each year would have a very different situation. This individual will not be looking at the cash fixed income market, but could do so via the leverage offered in the futures market. Similarly, other leverage based markets are more likely candidates than cash ones, perhaps including equities. The trader will almost certainly require greater market exposure to achieve the goal, and most likely will have to execute a larger number of transactions than in the previous scenario.

As you can see, your goal dictates the methods by which you achieve it. The end certainly dictates the means to a great degree.

There is one other consideration in this particular assessment, though, and it is one which harks back to the earlier discussion of willingness to lose. Trading systems have what are commonly referred to as drawdowns. A drawdown is the distance (measured in % or account/portfolio value terms) from an equity peak to the lowest point immediately following it. For example, say a trader's portfolio rose from $10,000 to $15,000, fell to $12,000, then rose to $20,000. The drop from the $15,000 peak to the $12,000 trough would be considered a drawdown, in this case of $3000 or 20%.

Each trader must determine how large a drawdown (in this case generally thought of in percentage terms) he or she is willing to accept. It is very much a risk/reward decision. On one extreme are trading systems with very, very small drawdowns, but also with low returns (low risk - low reward). On the other extreme are the trading systems with large returns, but similarly large drawdowns (high risk - high reward). Of course, every trader's dream is a system with high returns and small drawdowns. The reality of trading, however, is often less pleasantly somewhere in between.

The question might be asked what it matters if high returns in the objective. It is quite simple. The more the account value falls, the bigger the return required to make that loss back up. That means time. Large drawdowns tend to mean long periods between equity peaks. The combination of sharp drops in equity value and lengthy time spans making the money back can potentially be emotionally destabilizing, leading to the trader abandoning the system at exactly the wrong time. In short, the trader must be able to accept, without concern, the draw-downs expected to occur in the system being used.

It is also important to match one's expectations up with one's trading timeframe. It was noted earlier that in some cases more frequent trading can be required to achieve the risk/return profile sought. If the expectations and timeframe conflict, a resolution must be found, and it must be the questions from this expectations assesment which have to be reconsidered, since the time frames determined in the previous one are probably not very flexible (especially going from longer-term trading to shorter-term participation).

John Forman is author of The Essentials of Trading (http://www.TheEssentialsofTrading.com) and a near 20-year veteran of the markets. John is Managing Analyst & Chief Trader for Anduril Analytics, which offers free trading reports at http://www.andurilonline.com/free-stuff.asp

Important Advice For Investing In Real Estate Property

When investing in real estate, they say that the three most important things to consider are "location, location and location." That's because the location will determine the value of the property. If your chosen property is in a prime location in the city, you can expect the price of the property will be much higher compared to buying properties from another area.

If you're seriously considering investing in real estate properties, you'll need the following:

1. Investment capital - or a legitimate means of acquiring it.

2. An adequate knowledge of both the real estate market and the neighborhood in which you're planning to buy your property.

3. Good management abilities and above-average negotiation skills in order to get the property you want at a price you can afford.

4. The ability to do repairs on the property, or to hire others to do them for you. Remember that if you're capable of making repairs yourself, you'll save a lot of money on your investment.

5.The name and number of a property inspector or engineer to help you determine a property's flaws.

While you may not always be able to find, evaluate and buy inexpensive homes that are either in foreclosure or "fix-uppers" that can be around quickly, you can still become a landlord for the property as itincreases in value. But be very careful to whom you rent, because you have to make sure that your property is well maintained.

Since investing means spending money in order to make more money, you'll need capital. This is one reason why many people venture into real estate after they 've saved a sizable amount of money, usually starting by selling their current home and then buying a buy a smaller place for themselves plus another investment property.

As mentioned above, location is an important factor in buying real estate, so make sure that you do your research first. Check out the area's schools, libraries, businesses and public amenities, attend city council meetings and surf the Internet to find out as much information as you can. Also look into plans for future developments in the vicinity of the property you wish to purchase.

Real Estate Investment Trusts

Real estate investment trusts are a great way of investing in real estate for a lot less money, and without the problems that usually come with being a landlord. Investment trusts are organizations that invest in various corporations involved in real estate, ranging from industrial parks to shopping centers and construction companies. They're listed on the NASDAQ and the stock exchange.

Basically, real estate investment trusts function the same as mutual funds, except that their diversified portfolios only invest in real state. They also pay the bulk of their earnings in investor dividends.

Things to consider before investing in real estate investment trusts:

1.The economic health of the areas where the key holdings are located. 2.Overall performance of the trusts, as well as its future projections. 3.The track record of the trust's management. 4.The current overall state of the real estate market.

Real estate investment trusts provide a much safer way of investing in real estate than actually buying properties.

Stu Pearson has an interest in Business related topics. To access more information on finance investment or on buy investment, please click on the links.

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