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 firstname.lastname@example.org
Anti-ESG investing Financial Times
If You Invested $10,000 in Mastercard in 2013, This Is How Much You Would Have Today - The Motley Fool
If You Invested $10,000 in Mastercard in 2013, This Is How Much You Would Have Today The Motley Fool
Should You Invest in These 2 Hot IPO Stocks? The Motley Fool
Investors who bought Bay Area real estate plan 'city of yesterday' Business Insider
Police investing fatal shooting in Wilmington's Southbridge neighborhood 1150AM/101.7FM WDEL
Analysts Predict A 19% S&P 500 Surge Soon — Lifted By 10 Stocks Investor's Business Daily
Despite political backlash, socially responsible investing is still ... Wisconsin Examiner
24 Things I Believe About Investing A Wealth of Common Sense
Large U.S. companies outperformed other investments over the last 20 years—but you should still diversify, pros say - CNBC
Large U.S. companies outperformed other investments over the last 20 years—but you should still diversify, pros say CNBC
Wealth Management And Investing Leaders: These Are The ... Investor's Business Daily
Biden-Harris Administration invests $3.9 million for Ocean ... - National Oceanic and Atmospheric Administration
Biden-Harris Administration invests $3.9 million for Ocean ... National Oceanic and Atmospheric Administration
Should You Buy Arm (ARM) Stock? | Investing | U.S. News U.S News & World Report Money
Investing $100/week into SHIB in 2023 would be this worth today Finbold - Finance in Bold
Charted: What are Retail Investors Interested in Buying in 2023? Visual Capitalist
Should Investors Buy UiPath Stock Right Now? The Motley Fool
Amazon to Invest Up to $4 Billion in A.I. Start-Up Anthropic The New York Times
Investing Lessons From Authors The Motley Fool
Community foundations embrace impact investing ImpactAlpha
3 Mistakes High Net Worth Clients Make When Investing The Motley Fool
A Quality Executive Compensation Plan Lowers The Risk Of Investing In John B. Sanfilippo & Son, - Forbes
A Quality Executive Compensation Plan Lowers The Risk Of Investing In John B. Sanfilippo & Son, Forbes
PhonePe's New Stock Broking App Makes Investing Accessible to ... Walmart Corporate
3 Dividend Growers Investors Can Buy Now and Hold Forever The Motley Fool
$100 Oil Is Back! Here's What Smart Investors Should Do Now The Motley Fool
President's Investing in America Agenda Provides Resources for ... US Department of the Interior
Bearish momentum is building - Citi By Investing.com Investing.com
S&P 500: September Slump Deepens as History Suggests ... Investing.com
Best Investments to Own During a Recession Morningstar
The 2 Stocks Investors Must Watch This Week The Motley Fool
Huge News for Disney Stock Investors The Motley Fool
Jaspreet Singh: How To Invest Your First $1,000 Yahoo Finance
10 Best Investments for 2023 | Investing | U.S. News U.S News & World Report Money
Smug S&P 500 Investors Miss Out On 8 Red-Hot Big Stocks Investor's Business Daily
GBP/USD Marks Its Worst Month of 2023 | investing.com Investing.com
'Magnificent Seven' investing playbook: Amazon's opportunities 'the same as its challenges,' analyst says - Yahoo Finance
'Magnificent Seven' investing playbook: Amazon's opportunities 'the same as its challenges,' analyst says Yahoo Finance
Bad News for Tesla Stock Investors The Motley Fool
22-year-old who lost $80,000 in crypto: 'I was investing with money I didn't necessarily have' - CNBC
Massive News for Nio Stock Investors The Motley Fool
Just Started Investing? Here's 1 Solid Company to Buy With $200 The Motley Fool
How Safe Is Investing in Gold? Morningstar
Is Now a Good Time to Buy Stocks? Warren Buffett's Sensible ... The Motley Fool
Creating a Financial Future - Putting Your Plan Into Action Part 1
This column has previously discussed "picturing the future that we desire", and outlining a plan to achieve it. We mentioned that the plan must include goal-setting, measurement, and implementation.
Use of a Franchise Business as a Family Tax Planning Strategy
Suggesting the use of a franchise business as a vehicle for family estate and tax planning. Specifically using as an example, The Car Wash Guys, a portable car wash franchise, where you will be purchasing a completely designed and outfitted car wash truck and the right to develop a specific city or regional area with out of pocket start-up costs between $25-50,000.
Investor Guide to Financial Health
Step 1: Spend less than you earnPerhaps the simplest financial concept is the toughest for us to conquer- spend less than you earn. After paying your living expenses (bills, loan and mortgage payments, cost of food, charitable contributions, taxes, etc), you can begin to save and invest toward your future.
Emotions: A Traders Worst Enemy; Get Rid of Fear and Greed - Youll be Glad You Did
You hear it over and over and over in books, forums, and chatrooms. Fear and greed, fear and greed, fear and greed.
Guru Focused: Robert Olstein's Short Sells
While it is rather rare that value gurus sell stocks short, Robert Olstein has been selling short in his Financial Alert Fund. The accountant-turned fund manager spots values by looking behind the numbers.
Better Investing Made Easy
If there were one piece of advice that an investor could ask for, the question would probably be something like "What do I need to do to invest better?" Better investing choices are sought by investors every day. Some find them and succeed, others do not.
Has your broker ever told you that a stock is "overbought" or "oversold"? He probably went on the explain that the stock you own (I hope you didn't) had gone down so far that it now was oversold and due for a rally. He might also have encouraged you to buy an equal amount to "dollar cost average" your position so that when ("if"- he didn't say that, I did)) it did go back up you could "get out even".
Your Portfolio and "Old Ironsides"
The USS Constitution first ventured into the waters in 1798. From there she became an icon of durability and success.
Bad News - Why The Financial News Media Can Cost You Money!
The communication innovations we have around us today like the internet, financial newspapers, and special interest television channels focused on investing like CNBC are a high speed pipeline of nonsensical chatter. All these sources of information mean that there is no shortage of media people trying to answer our questions about the stock market and specific stocks.
The Power of Small Numbers: Trading Success is Based on Consistency, Not Home Runs
Online trading is so seductive - just sit, click, and rake in the profits! But as anyone who has ever seriously attempted online trading will probably tell you, it's just not as easy as it sounds.Many beginning traders are seduced by the lure of the "home run", that big trade that makes you an instant millionaire and retires you overnight to your own private island paradise.
Learn How to Lose and Risk Management
One of the leading traders on Chicago Mercantile Exchange, because of a single trade lost everything!For all of his years of experience and money, he had failed to master the most important concept in trading: Risk Management!Each trader seems to have his own unique way of identifying market opportunities. One buys a stock in the hopes of never having to sell it, while another might hold a position in the market for a day or even just a few hours.
It Is Never Too Early To Start A Roth IRA!
The Roth is kind of weird until you get used to it in terms of how much you can put in (contribute) each year depending on how much you earn (compensation). Because of this you really have two limits, one dealing with your compensation and the other dealing with your contribution.
Success Trading for New Traders: What Does Bid and Ask Mean?
Do you ever wonder exactly what's going on in the trading pits after you've sent an order to purchase stock? You've no doubt seen market quotes either online or even in the newspaper. Have you noticed that there are always two sets of prices given? What exactly do those mean and where will my order get filled? Let's discuss the basics of the two prices you see.
Coca-Cola - A Value Stock?
There has been much talk lately about Coca-Cola and its potential as a value stock - as it now spots a dividend yield of 2.6% (which is the highest dividend yield since the late 1980s) and a P/E or less than 21 - right at the bottom of its five-year low.
When NOT to Invest
Unfortunately, many investors who are seduced by the lure of easy money try to become "active" investors before they have the skills, the resources, or the appropriate intellectual framework to do so.This is not to say that investing in stocks is extraordinarily difficult .
The best way to avoid being hit hard by a stock market crash or another Enron/Worldcom fiasco is to make sure you don't put all your eggs in one basket. Diversification helps ensure steady growth of your net worth as you accumulate more assets.
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 morningfrom customers wanting to know why the market was going down".
Invest or be Pink Slipped
Firing an employee seems to be easier and easier for corporations. Up until now you allowed them to set your clocks.
By definition, value investing is the process of selecting stocks that trade for less than their intrinsic value. A value investor typically selects stocks with lower than average price-to-book or price-to-earning ratios.
The Biggest Oil Opportunity in the World - And How You Can Profit From It
Where is the second biggest deposit of oil reserves in the world?In the oil sands region of Alberta, Canada. Oil sands are a thick, viscid mixture of bitumen, sand, clay, and water.
|home | site map|