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Step One in Stock Analyzing; Look at facts. July 29, 2008

Posted by shaferfinancial in Uncategorized.
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*****Remember the following is only the ramblings of the town fool who does not have a license to sell securities or give advice on what securities to purchase.  This post as well as this blog is for entertainment purposes only and represents the collective foolishness of the the writer only.  Do not follow his advice unless you perform your own independent research and come to the same conclusions.  Listen to the licensed experts as well as cable TV if you want the collective wisdom of Wall Street.******

I am going to show you how I analyze investments starting with stocks.  Here is a comparison between the S & P 500 Stock Index and Berkshire Hathaway for the last 10 years.  Remember you can invest in BRKbs for only a small one time ($12 fee), while even the cheapest index fund will cost you .5% a year.

There is a fact in stock ownership that gets overlooked.  That is profitable companies tend to stay profitable as long as some fundamental change in the environment doesn’t happen.  This is Warren Buffett’s key point.  So anytime you are looking at making an investment, then you need to create a chart like this that goes back at least 10 years.  If you are in mutual funds then substitute your actual mutual fund with the stock index I picked.  Key is this is how I start out.  Since I think that Berkshire Hathaway is the gold standard, I always compare to it as to well as the S & P 500 stock index.

Now remember this is not how financial planners work, so if you have a financial planner you can direct him/her to do the charting in this manner for you.

 

This is the chart for a real estate investment trust that invests in health care facilities.  About five years ago I did a chart and found it outperformed the S&P 500 by a wide margin as it does now.

Remember this is the first step I go through.  If it hasn’t outperformed the S & P 500 for the last 10 years I drop the idea.  If it doesn’t perform as well as Berkshire Hathaway and is a equity stock, then I don’t buy it unless I put it in the highly speculative category and decide I can afford to throw money at it to lose.  If it passes the ten year performance test, then I move on to step two.

 Step 2 is a mind game.  Does this company make things that people will use ongoing?  Are there technological inventions coming down the pike that might make these things obsolete.  Think of General Motors.  Are people going to buy SUV’s (majority of profits came from SUV’s) ongoing?  Are there technological advances that might make GM cars obsolete?  Finally, are they a forward looking  company?  In other words do they make decisions based on the right now, or how the world might look in the future?  And finally, what is the long term trajectory of its earnings.  Don’t even go there if is doesn’t have any earnings; I made this mistake once in the late 1990’s!  Remember, the only thing that matters is earnings, everything else is speculative!
Step 3 is a look at the financials.  What is the history of profits?  How much debt?  What is the P/E ratio?  Return on Equity?  Dividend history?  Cash flow?  How much cash is on hand?  Management History?  Take a look at what the professionals say about the company.

Finally, Step 4.  If it passes the first two steps, and  step 3 looks promising, then apply some patience.  All stocks go up and down.  Wait until the stock takes a dip and then buy.  This is another Buffett speciality.  He identifies stocks and companies he likes, and then waits until the price drops to his point, then he pounces!

Now I keep my stock portfolio concentrated.  This is another Buffett idea.  But having said that, since most is in Berkshire Hathaway which owns outright over 60 companies and owns stock in another 30 or so it by itself is diversified.  The only way to get double digit returns, in my opinion, is to be concentrated.  And the only way the numbers work for the middle class to build wealth is to get double digit returns.  So for me the  risk that I end up with little money in retirement is what I am worried about.  My wealth plan requires me to invest this way in order to make a comfortable retirement.

Next post on analyzing real estate.

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