There are already law suits against several major banks pressed by the attorney generals of all fifty states. These suits will be dwarfed by the US Federal Housing Agency if it, in fact, goes forward. There have been large numbers of bank foreclosures in the wake of the 2008 stock market meltdown and worst recession in nearly 80 years. Now more of the major banks may be at risk. There is talk already of another bailout with the US tax payer picking up the tab, again. However, this time the talk leans toward taxpayer ownership of these banks. If the situation gets bad enough banks will need to issue stock to raise capital. Doing so will drive down their stock prices. The investor interested in picking bank stocks at bargain prices will need to read the situation carefully with bank stock analysis in order to get in at the bottom of the price curve and not throw away their money on buying a stock on a bank that then goes bankrupt. Buying preferred stock might be an option in such a case as it puts one ahead of ordinary shareholders for payment if a bank goes under. Certainly how to invest in stocks of failing companies is to tread softly but there is a history in the USA of not letting the biggest companies fail. Many have earned handsome profits applying a “blood in the streets” strategy to buying failing stocks.

As always we are not suggesting that one buy bank stocks or avoid them. Bank stock analysis whether it be of Bank of America or any of the big banks currently in trouble can be instructive. The Federal Reserve chairman, Ben Bernanke, implied that the Fed would step in with further economic stimulation if the slowly recovering economy weakens. Successful bank stock analysis will take more than guessing what the Fed will do next or if their will another fiasco on Capitol Hill when in dealing with the US debt dilemma. Investment research including close reading of quarterly financial reports will give investors an idea of just how bad the situation is and when it appears on the verge of recovering. Those who time their investments just right could end up with handsome profits.

As technology moves into banking AI, there will be many changes and those who don’t keep up will loose ground.

More Resources

Dollar Cost Averaging

Dollar cost averaging is an investment approach in which a person invests the same dollar amount every pay period, month, quarter, or year. The first practical advantage of this approach is that a person can budget how much they will invest from every paycheck, bonus check, or whatever. The second practical advantage is that dollar cost averaging keeps you from investing too much when stocks are expensive and allows you to buy more when stocks are cheap.

Ideal Ways to Apply Dollar Cost Averaging

Smart investors take advantage of the tax benefits of an IRA or 401(k) plan from work. And, if your employer adds a little to your 401(k), so much the better. Simply select an amount to invest in either, or both, of these investment vehicles and stick with it year after year. When the stock market is overpriced you will not be tempted to pay too much and when the market is soft, you will get more stocks for your money.

Dollar cost averaging also works if you are using a mutual fund as an investment vehicle and especially if you are investing in an ETF that tracks the S&P 500 or another broad-based market index.
(Investopedia, Dollar Cost Averaging)

Benefits of Dollar Cost Averaging

As we noted at the beginning of this article, timing the market works for some folks. But, these folks have tons of available cash, the time and expertise to analyze intrinsic stock value on many potential investments, and the experience needed to “pull the trigger” at the right time to buy or sell most profitably. These folks are not the average investor who wants to put a little money aside with each paycheck and needs to know the best way to do this. For most folks, dollar cost averaging with a reliable set of investments is the way to go.

Motif discusses the real world of mom and pop investors and the benefits of dollar cost averaging.

A lot of people have a tendency to spend any leftover money in their bank accounts after all their bills are paid each month instead of investing for their retirement. In cases like these, using the disciplined trading approach of dollar cost averaging not only prevents them from procrastinating on their investing goals, it also helps them save for retirement and avoid wasteful spending.

Dollar cost averaging can also help investors who tend to be hesitant with investing and hoard cash out of fear or uncertainty. Having some cash on hand can provide peace of mind during volatile markets, but holding too much cash for too long can weigh down your portfolio’s return over time due to inflation. Plus, dollar cost averaging can help investors put their money into the market as quickly as possible on a consistent basis.

In writing about investing, we commonly deal with issues like fundamental analysis, best stocks to invest in, and where the market is likely going next. But, the folks at Motif hit the nail on the head in their discussion of the benefits of dollar cost averaging as it applies to the average investor who needs to develop a disciplined and reliable approach to putting money away and letting it grow for their retirement. Dollar cost averaging helps investors make their investments in a routine fashion and alleviates the risk of making bad decisions when trying to time the market or pick individual investments.

Dollar cost averaging in a bull market keeps an investor from buying too much when prices are too high and dollar cost averaging in a bear market lets an investor purchase at bargain prices when the market is bottoming out. When considering dollar cost averaging versus timing the market, most folks do just fine with an ETF tracking the S&P 500 and dollar cost averaging.

Mistakes to Avoid in Dollar Cost Averaging

US News and World Report has some good advice about following the rules mistakes to avoid in dollar cost averaging. Here are the high points of their slideshow.

Not Starting Dollar Cost Averaging Investing Early Enough

This is a practical and profitable approach to investing and to get the most out of it you need to get in early and take advantage of the compounding effect of steadily growing investments.

Not Being Consistent with Dollar Cost Averaging

This approach works when you apply it routinely. When you start second-guessing the system you are trying to time the market. Consistency pays off with dollar cost averaging.

Keep Your Investment Portfolio Balanced

If you have your money in an ETF that tracks a broad market index or in a mutual fund with the same properties, this is not an issue. But, if you have a nice selection of dividend stocks and AAA bonds, one may outpace the other. At some point, you may want to rebalance your portfolio or simply start using the ETF approach.

Letting Fear or Greed Control Your Investing

U.S. News notes that investors tend to abandon the dollar cost averaging approach at the worst possible times, such as when a bull market is about to collapse and they lose money. Or they sell everything just as a bear market is about to rebound. The point of dollar cost averaging is to pick a broad-based set of investments and stick with the investment program through thick and thin. Let the dollar cost averaging approach work its magic in both up and down markets over the years.

Not Keeping Track of the Costs of Investing

Dollar cost averaging works for a wide range of investment choices. But, if you are paying an old fashioned stock broker huge commissions for small investments every two weeks, you need to rethink your approach. Likewise, if your mutual fund’s fees are eating up your gains, perhaps an ETF that does not charge management fees will be a better choice. But, no matter which you use, dollar cost averaging, correctly applied is a good long term investment approach.

What Makes Dollar Cost Averaging Work for the Average Investor?

The first thing for an investor to do is to get started early in life. The beauty of dollar cost averaging with an ETF that tracks the S&P 500 or one of its sectors is that the investor does not need to have done a lot of research in picking good investments. The next benefit is that the investor develops a discipline early in life that becomes an investing habit. Then, the compounding effect of good investments takes over to create wealth over the years. Follow this link for more insights about the pros and cons of dollar cost averaging.

Where to Invest Money to Get Good Returns

Over the long term, the U.S. stock market has outperformed all other investment vehicles. When investing in stocks, the best approach is to start early, invest regularly, and choose a mix of safe stocks and growth stocks.

To get financial security is why people invest in stocks. Sometimes, people get lucky and pick just the right stock at the right time and get rich in a hurry. Much more commonly, people succeed by determining intrinsic stock value when purchasing and using dividend reinvestment plans to reduce the cost of buying new shares and to accelerate the growth of their investments.

To the extent that you need your money earlier, rather than later, you may choose stocks that have greater growth potential but these are commonly not good investments for beginners because it is all too easy to pick a stock that looks promising but fizzles out and takes your hard-earned money with it.

Safe Places to Invest Your Money

The first place that people should consider for an investment is their own home. Over the years, you will pay less on mortgage payments than for rent. And, the mortgage interest deduction on your taxes is a sweetheart deal that no investor should pass on. Then, the question is how to invest without losing any money. As we note in our article, there are four ways to invest and protect your investment capital.

• Bank deposits that have Federal Deposit Insurance
• US Treasury Bills, Notes, and Bonds held to maturity
• Investment Grade AAA and AA Bonds held to maturity
• Long term investing with a focus on intrinsic value

The first three best ways to invest your money, if you simply want to reduce risk to a minimum, are ones with lower rates of return than the stock market but the security of essentially holding cash. To make this work you need to hold your bank CDs, Treasuries, and corporate bonds to maturity or only sell when interest rates fall and you can make a profit on selling a bond or treasury. This is one of the best ways to invest your money if you want minimum risk and especially if you will need the money soon and don’t want to take the chance that the stock market will correct at the worst time for you.

The fourth of our best ways to invest your money is low-risk over the long term. You will invest in stocks that have been paying dividends for over a century and other very stable companies that provide a steady appreciation in value combined with maximum security. These are investments that let you sleep soundly at night

ETFs and Low Maintenance Investing

There are folks who have made millions and millions of dollars in the stock market by carefully researching their investments, precisely timing their purchases, and paying attention to the market every hour and every day. And, then there are the rest of us who have a regular job to go to and do not have all day to research stocks with fundamental analysis tools to find the best picks.

One of the best ways to invest your money in the stock market is to invest in an ETF (exchange traded fund) that tracks a broad range of the U.S. stock market such as a fund that tracks the S&P 500. Many of these funds have outperformed more closely managed investment funds in recent years. These are very good investments for beginners because they tend to do well and are diversified across the wide range of stocks. There is always a risk that the entire market will crash (and then return as it always does) but there is no risk that a single stock will tank and take down your investment with it such as happened recently with Kraft Heinz.

How to Invest Money to Make Money Fast

The best ways to invest your money are those that reliably offer the best return with the lowest risk. That having been said, there are times when a little research, a little foresight, and a bit of patience follow by prompt and well-timed action can pay off handsomely.

Beware of “investing tips.” All too often the person giving the tip wants you to invest in a penny stock to drive the price up so that they can sell at a profit before the stock falls again. If you think that a tip might be valid you need to analyze the fundamentals of the company and have a good sense of the technicals that drive day by day stock movement. This can be done, but requires attention to detail. Here is a personal example from years ago. It shows how an investor can pay attention to a stock, understand why it is going up or down, and profit by investing at just the right time.

Xerox Rise and Fall

Xerox developed the first plain paper copier in 1959. The Xerox 914 was the most successful single product ever sold at that time. Xerox dominated the photocopier market in the 1960s until the mid-1970s. They had essentially 100% of the photocopier market and were the subject of an anti-trust suit which they lost in 1975. They were forced to license all of their patents to competitors, mostly Japanese. By 1979 Xerox had 14% of the photocopier market and their Japanese competitors were selling copiers in the USA for less than it cost Xerox to produce them. At the same time, Xerox management decided to diversify into insurance. They took huge losses when a hurricane hit the Gulf Coast.

Xerox Recovery and the Take-over Bid

In the 1980s Xerox cut costs, reduced its insurance business profile, wrote off losses, and improved its product line. It started making money again and its stock price started to rise. At this time a group of “take-over” artists started buying up Xerox stock and buying options contracts on the stock. They drove the price up a bit and were close to being able to take over the company, which they would have broken up and walked away with a tidy profit.

But, the “take-over” guys were too highly leveraged. They ran out of money and had to start selling their shares. Xerox, had climbed to $60 a share with better management and paying off its hurricane losses. When the “take-over” guys ran out of money and started selling, the price of Xerox fell to $30 a share within just one trading session.

Best Ways to Invest Your Money when You Have Done Your Homework

Those who had been following the Xerox story and had invested in their recovery understood what had happened and that the stock would go back to its $60 range once the “take-over” guys were done selling and went away. So, some of us bought Xerox at $30 a share the first thing the next morning. By the next day, the price was back to $60 a share.

The point of this narrative is that you can make money in a hurry in the stock market but you typically need to do your homework first and then you need to stay in touch with the market in order to time your investment correctly in order to turn your research and insights into a profit. This really is one of the best ways to invest your money, providing that you have the time, energy, patience, and a knack for timing the market.

Best Way to Find Good Stocks

Finding good stocks to invest in can be broken down into three steps. What information sources do you use? What criteria do you look for? And, how do you verify what are the best stocks to buy right now and for the long term?

Useful Information when Searching for Good Stocks to Buy

There are lots and lots of business and stock investing-related websites. They provide lots and lots of information. But, they also have the tendency to promote individual stocks, investment management companies, and their own unique points of view.

Information about the Economy, Markets, and Stocks

A good place to start if you are looking for unbiased information about stocks, the markets, the economy, trade, and more is Bloomberg News. The best way to find good stocks is not to immediately start looking for hot stock tips but rather to educate yourself about the things that drive stock profits and stock prices. The business section of The New York Times is a good source of unbiased information as is The Wall Street Journal. To the extent that these sources of information try to sell anything, other than online subscriptions, is when they tend toward one side or the other of the political spectrum. But, each of them is an excellent base from which to start. Our first choice is Bloomberg.

Specific Stock Investing Information

If you have a stock in mind and want to know its price history, dividend, and a thumbnail sketch of the business, both Google Finance and Yahoo Finance are good sources of information. These are good news sources but not as in-depth as the Times, Journal, or Bloomberg. But you can look up information about specific stocks such as this graph of the Apple stock price going back to 1981.

The information that you find on a chart on Yahoo Finance or Google Finance is not colored by the opinions of someone who is pitching that stock. Rather it is basic and useful which is the best way to find good stocks.

Sources of Stock Tips

If you have followed our advice so far you have educated yourself about the economy, the markets, foreign trade, and other factors that drive profits and stock prices. And you know where to go (Yahoo Finance and Google Finance) to check out stock price history, P/E ratio, and dividends. But, where do you find information about good stocks for dividends, cheap stocks on the rise, or simply the best stocks to buy today. Here is where the stock commentators are useful. These folks follow the markets and have lots of useful information along with their own strong opinions. CNBC has good investing information as do Market Watch, Barron’s, Investor’s Business Daily, and The Motley Fool. Jim Cramer’s “Mad Money” is full of useful tips and entertaining as well.

For those who are not interested in doing a lot of research on their own, following these sources for stock investing tips can be profitable. They commonly write about good stocks for cheap, good stocks for day trading, and what they consider to be the best stocks to buy today. However, we strongly suggest that you use their tips as a starting point and not an endpoint in picking profitable stocks for the long term.

Criteria for Choosing Stocks

The basic things to consider before choosing stocks are these. What are your investing goals, horizon, and risk tolerance? And, what do you know personally that will give you solid insight into specific sectors of the stock market? In one of our core articles about investing in stocks, we note that time spent considering how long you will be investing before you need money for retirement, college for the kids, or money to start your own business will affect your choices. And, when your work, your hobbies, or your life experience give you an advantage over other investors in any given market sector, grab that advantage with both hands and hold on!

Risk versus Reward in Stock Selection

When investing, there should always be a balance between risk and reward. Part of your money should be in investments that are as secure as you can find. We dealt briefly with this in our article about how to invest without losing any money. Then, you will want to look at any prospective investment and consider how the company makes its money and how it can be expected to keep doing that over the long term. This is where having your own insights into a specific line of business are useful and those insights should always be used.

Specific Stock Selection Criteria

Some investors prefer to look for good stocks for cheap. But, these may or may not be the best stocks to invest in today. The best dividend-paying stocks should be part of your investment portfolio. But, when is a high dividend yield dangerous? Read the article for insight into how failing stocks sometimes sport high dividends before they fade away. As we noted, you should always look for stocks in sectors where your knowledge and experience give you an advantage. This is because you will have better insight into how a company makes a profit and if they are likely to continue to do so over time. And, this leads us to our last part of the best way to find good stocks.

How to Verify Good Stocks to Buy

So, now you have a few stock prospects that you picked up from following Bloomberg and The New York Times, listening to Jim Cramer’s Mad Money, and even a stock tip or two from family and friends. How do you verify that any or all of these are good stock picks for your time frame, risk tolerance, and area of expertise?

The Fundamental Value of a Stock Investment

When you buy a stock you are looking for it to reward you in two ways. You want its stock price to appreciate over time and you would be pleased with dividends that you can reinvest during your working years and collect during retirement. For these things to work out you need a stock that makes money over the years, increases its profits as it goes, and has a substantial margin of safety in terms of low debt, money in the bank, a famous and strong reputation and brand, and has a business model that you clearly understand.

Intrinsic stock value is what you are looking for. This is a calculation based on your assessment of forward-looking earnings. This approach evolved in the years after the 1929 stock market crash and in the years of the Great Depression. For those who paid attention, it replaced the idea that one would simply “play the market” in hopes of making a profit. Investors who follow this approach use fundamental analysis to determine if a company will continue to sell its products and services at a profit over the years, add more products and services, and manage the business wisely in order to most efficiently use those profits to reward shareholders.

Our best way to find good stocks may sound time-consuming but, if you are into investing for the long haul, what is your hurry? Experts like the famous investor Warren Buffett have said that they commonly throw out 19 out of 20 stocks that they consider in an intrinsic value calculation as “too difficult to call.” Here is where your own expertise comes into the picture. You are not trying to find investments for a multi-billion dollar portfolio. You are looking for three or four stocks whose businesses you understand, which have good track records, and are likely to keep making money for their shareholders for at least as long as you choose to stay invested.

What Are You Paying for a Safe Investment and Is It Really Safe?

This is a valid question in our extended bull market. Investors are paying a premium for companies with strong balance sheets and a long history of success. But, is the price you are paying going to protect you? Forbes writes that in many cases safe stocks are no longer safe.

You probably know that fast-growing stocks in exciting industries may be pricey. But boring, slow-growing stocks are often expensive, too, if they’re perceived as safe.And while you might not realize it, there’s a good chance you’re paying through the nose to keep your money safe.

Their first point is that investors pay a price for perceived investment safety. Then the problem is whether or not the price you pay is really buying safety as they look at P&G versus Amazon.com.

They make the point that the average P/E ratio in the S&P 500 is 21 while the P/E ratio for P&G is 25. A main selling point for these folks is that when the stock market crashed a decade ago P&G fell by a percent or so. The risk Forbes sees is that Amazon.com is moving into P&G’s product line by delivering dish soap, diapers, and batteries to people’s door every day. If you wonder which of your investments will Amazon.com kill next, wonder if Procter & Gamble is on the list.

A List Investments at Risk of Being Killed off by Amazon.com

Kiplinger goes beyond Forbes by looking at dozens of companies whose very existence is threatened by Amazon.com and online sales in their article, 49 Companies Amazon Could Destroy.

Amazon is willing to try its hand at almost any sort of business, does well at the bulk of them – and threatens to destroy dozens of other companies with its success.

From groceries to online pharmacy sales with a foray into video game development as well, Amazon.com tries its hand at anything and usually succeeds. If you have several safe investments in your portfolio and Amazon.com decides to move into that niche, how safe are you. Here is the beginning of the list that Kiplinger put together.

O’Reilly Automotive (ORLY), AutoZone (AZO) and Advance Auto Parts (AAP)
As delivery networks get better and inventory management technology improves, these previously safe businesses are now worried.

Kroger (KR), privately owned Albertsons and the grocery arm of Walmart (WMT)
People are getting more and more comfortable with ordering all sorts of food items and even snacks to be delivered to their home, especially with Amazon Prime and no charge for delivery.

Audiobooks.com and Playster
These folks are directly threatened by Amazon.com and their own company, Audible.

Barnes & Noble (BKS) and Joseph-Beth Booksellers
These folks are still hanging on despite worse sales figures every year. It is only a matter of time.

Beam, Dailymotion, Hitbox, Mixer, YouTube Gaming and More
This niche is about people paying to watch other people play video games. And Amazon.com has the most popular platform, Twitch. This is one more niche that they intend to own.

Best Buy
Despite an impressive turnaround, Kiplinger thinks that these folks will be driven down by Amazon.com in the end as people will opt for lower prices and home delivery.

Duracell, Energizer Holdings
This last one gets us back to the safe stock niche. These are leaders in the market and Duracell is one of Berkshire Hathaway’s holdings. Although Amazon.com does not have a well-recognized battery brand behind them, they do have pricing, delivery, and customers who are simply used to buying from Amazon.com.

Which of your safe investments will Amazon.com kill next? Take a look at the Kiplinger article for the complete list.

What Are Safe Investments in a Competitive World?

Any student of investing knows how Sears went from being the retail giant of the world to an afterthought. Likewise, we all know how digital photography virtually removed Kodak’s reason to exist. But, we have always believed that a product that people will always consume with a strong brand name will last forever. Procter & Gamble is a well-run company that fields a lot of brands and essentially wrote the book on business management. Coca Cola is known and consumed everywhere on the planet. But, in both cases, management needs to keep up with the times, effectively manage product lines and listen to what consumers are saying. A sad of example of an old company not doing that is the Kraft Heinz fiasco.

We always suggest that investors use the principle of intrinsic stock value to guide their investing. We also mention in that article that the trick to making the concept work is to learn how to anticipate future earnings. When experts like Warren Buffett throw out 95% of their evaluations as too difficult to pick, what is the average investor to do?

First of all, the average investor does not need hundreds of stocks but rather just a handful. Understanding how the company makes its money and how it will withstand threats, like Amazon.com, are basic to good analysis. And, the other rule is to pay attention as you go. With stocks like Procter & Gamble you can sleep at night but should spend a little time each year thinking about whether to add more to that stock or buy something else.

“Playing the Market” in the 1920s

A common expression during the steady rise of the American stock market in the roaring twenties was to “play the stock market.” Many people believed that one only needed to pick a stock and wait for it to become more valuable. It seemed that no matter what stock a person bought, they were making money by “playing the stock market.” It was a much better deal than going to the casino because at the casino there was a much greater chance of losing your money.

All of that lasted until 1929 when the stock market crash started from Black Thursday (October 24) to Black Tuesday (October 28). The Dow Jones Industrial Average began the 1920’s at 100 and peaked in 1929 at 381.17. It then lost nearly half its value down to 198.69 in the 1929 crash. (Dow Jones history 1920-1929) Then, despite a brief recovery, the market and the Dow continued to slide until the Dow reached 41.22 in July of 1932. (Wikipedia Wall Street Crash of 1929) A huge number of wealthy investors were wiped out during this period but some regrouped, learned from their mistakes, and moved on to create safer and more profitable ways to invest. One who stands out from this era is Benjamin Graham.

(Dow Jones history 1920-1929)

Benjamin Graham, Intrinsic Stock Value and Value Investing

It was in the aftermath of the stock market crash and during the dark days of the Great Depression that Benjamin Graham introduced the idea of value investing in Security Analysis, a book he coauthored with David Dodd and with help from Irving Kahn. In the book he wrote about intrinsic value, margin of safety, and the fundamental analysis of stocks instead of buying on sheer speculation.

(Consejos de Inversión Bolsa Mania)

Intrinsic Stock Value

The revolutionary idea that Graham taught was that the intrinsic value of a stock was totally independent from its market price. In Security Analysis the authors argued that an investor could determine the intrinsic or real value of a stock by looking at factors like the company’s assets, earnings, and dividends paid. These would indicate the ability of the company to make money over the coming years which would in turn determine the eventual market value of the stock. The point was to estimate a company’s future cash flow based on analysis of past and current performance as well as current assets and business plan.

Mean Reversion

Graham believed in efficient markets. Despite the frequent irrationality of investors in bidding up stock prices based on greed or letting them fall in fits of panic, the price of a stock eventually moves toward its true value. Graham taught that investors should calculate the intrinsic or true value of a stock and then compare it with the current stock price. When the current price of the stock is less than the intrinsic value the investor should buy. And when price of the stock is more than the real or intrinsic value he should sell or avoid the stock. The mean reversion is the belief that over time the intrinsic value of a stock and its market price will converge. This will happen in periods of market efficiency.

Efficient Markets

Graham was not just a theorist who lectured at Colombia Business School in New York. He was a successful investor in his twenties making as much as $500,000 a year! He was also wiped out, like other investors, in the stock market crash. It was from his own experiences that many of his ideas and his later success emerged. And one of these ideas was that markets may overvalue a stock or undervalue a stock but markets will eventually find the correct or rational price which will be the intrinsic value of the stock.

Margin of Safety

Graham’s concept of intrinsic value was not just based on expected cash flow but also on the stability and financial security of a company. Businesses with assets like factories as well as cash in the bank instead of a lot of debt have a margin of safety. Likewise, a company with a strong and well-known brand name is likely to do better during economic downturns and be better positioned to rise again as the economy improves. Such stocks will make money year in and year out and have increased intrinsic value.
(Investopedia Benjamin Graham)

Determining Intrinsic Stock Value

The dictionary defines intrinsic stock value as its fundamental value. Add up predicted future income of a stock and subtract the current market price. In looking for the true value of a stock instead of its book value or market value one uses fundamental analysis which is another idea that came out of Graham’s work. Using fundamental analysis one can say that intrinsic value is the expected cash flow of a business discounted to current dollars, a discounted cash flow valuation.

The problem in applying an intrinsic value calculation to a stock is that all too often the medium and long-term prospects of a company and its earnings are not clear. None other than a student of Graham and one of the most successful investors ever, Warren Buffett, has said that he throws out the vast majority of possible investments as too difficult to call! To make the intrinsic stock value concept work in the real world investors need to have a clear idea of how a company makes its money and how that business plan will continue to work. In doing this the investor looks at how a company manages its assets, the viability of its products and services, its R&D, marketing, and competitors.

Intrinsic Stock Value Formula

After writing about the concept for years, Graham provided a formula in 1962 and updated it in 1972. Here is the original 1962 formula for calculating intrinsic stock value.

V = EPS x (8.5 + 2g)

V is the intrinsic stock value
EPS is the trailing 12 months earnings per share
8.5 was the P/E ratio at the time for a “zero-growth” stock
g is the company’s long term rate of growth

Here is the 1974 revision.

V = EPS x (8.5 + 2g) x 4.4 / Y

In 1962 the average yield of high grade (risk free) corporate bonds was 4.4%. Y was to be the current yield of AAA corporate bonds.

(Investopedia Benjamin Graham)

It is noteworthy that Graham added the interest rates of bonds to his calculation as government spending for new social programs as well as the Vietnam War (Guns and Butter) drove interest rates sky high and ushered in a period of “stagflation.”

Applying Intrinsic Value to Investing

Graham’s 1949 book, The Intelligent Investor: The Definitive Guide to Value Investing is an investor’s Bible. In it he says that the intelligent investor buys from pessimists and sells to optimists. Because the smart investor has done his or her homework this investor knows the true value of a stock which is the value that the market will eventually arrive at via mean reversion.

The “V” for intrinsic stock value is used to find the Relative Graham Value or RGV. Simply divide the intrinsic value of a stock by its current market price. This is the RGV. An RGV of less than one means that the stock is currently overpriced and should be avoided or should be sold if it is in the investor’s portfolio. An RGV of greater than one is indicative of an undervalued stock for which the market has not yet caught on. This is a stock to buy and hold at least until the mean reversion occurs and the market price catches up with the intrinsic value of the stock.

Intrinsic Value Is Not Just a Buy and Hold Investing Tool

An ideal investment is one that makes money and allows you to sleep soundly at night. Calculating intrinsic value helps on both counts. But market can be irrational in both up and down directions. As such a stock that is undervalued and a buy according to intrinsic value could become an overvalued stock when market euphoria drives the price up beyond where fundamentals would support the price. Even long term buy and hold investors need to pay attention to the well-chosen stocks in their portfolio to make sure that they still are good investments based on their intrinsic value.

Does Intrinsic Stock Value Work for Every Stock?

The answer to this question comes from Mr. Graham’s famous student, Mr. Buffett. Warren Buffett and his long term partner in picking investments, Charlie Munger, say that about five percent of the time they can reliably pick a winner using this approach and the rest of the time they simply throw out the possible investments as too difficult to call! A good example of how applying an intrinsic value approach works in investing, look at how well Buffett’s company, Berkshire Hathaway has done over the last 28 years. The stock has appreciated from $7,000 a share to $307,000 a share over that time.

(Berkshire Hathaway Class A, Google Finance)

Intrinsic stock value is a valuable tool for smart investors. Using it requires work and attention to detail. And, by using it, investors typically make more money and sleep better too!

Proven Stock Market Strategies for the Passive Investor

You have a good job, a successful business, or perhaps you came into a large inheritance. Thus you have money to invest. You have heard that over the years the U.S. stock market has been the best place to put money for the long term. But you do not believe that you can learn enough to “beat the market.” So, you would rather take a safer approach. For most investors the most effective and proven stock market strategies are to put their money into highly diversified index funds such as those that track the S&P 500, use dollar cost averaging, and when owning dividend stocks, always reinvest dividends.

Passive Stock Market Strategy with Index Funds

The use of index funds for passive investing has become more and more common in recent years to the point when nearly half of the money invested in the U.S. stock market is in funds that track the S&P 500, its subsets, or other stock indexes. At some level, passive investment can be risky but not so much as trying to pick individual stocks when you do not have the skills or time to devote to the task.

Dollar Cost Averaging

This is a strategy for when you invest and how much you invest but not a strategy for what investments to buy. However, dollar cost averaging is most effectively applied to conservative long term investment portfolios of value investments. As we note in our article about how to invest in stocks, an investor sets aside a certain amount of money to invest with each paycheck or every month. They start this approach early in their investing career and continue for years and years. Because they invest a set amount of money they buy fewer shares of stock when prices are high and more shares of stock when prices are low. This approach is useful for two reasons. First of all, an investor does not pay too much in a bull market but takes advantage of low prices in bear markets. And, they invest all of the time so that their money is always working for them over the years.

Dividend Reinvestment is a Proven Stock Market Strategy

When a company grows to a certain point its rapid growth phase is over. It makes lots of money and needs to find a way to reward its investors and keep its stock price up. One way is to pay dividends. As a stock appreciates in value over the years and decades its dividend at a set percent of its stock price appreciates as well. The dividends paid today by Coca Cola, Microsoft, and others are multiples of their share prices back around 1990. And, when an investor uses dividend reinvestment plans with these companies the dividends are not paid out but are reinvested even in fractional shares and without any fees or commissions.

Proven Stock Market Strategies for Active Investors

And, then there are individuals who like active stock investing, have areas of expertise which give them advantages in picking investments, and are willing to devote the time and energy required to do the job right. There are really just two basic approaches for these folks. One is to attempt to time the market in order to catch a stock just before it rises or falls in value. Then the investor buys or shorts the stock, waits until its market value changes, and then cashes out with a profit. The other approach follows the time-honored approach of Benjamin Graham, the father of “value investing.” In this case, the investor looks for strong intrinsic stock value in a stock that the market is ignoring and underpricing. He or she purchases this stock and then moves it to the “passive” corner of the portfolio where it simply appreciates and creates riches over the years.

Five Proven Stock Market Strategies

Each of these five approaches to active investing and trading can be very profitable when executed properly. However, they require time, expertise, energy, and an appetite for risk. These approaches include the following:

1. General trading based on anticipating the ups and downs of the market
2. Selective trading of individual stocks over a few months to a year
3. Buying low and selling high
4. Finding and buying strong growth stocks
5. Scouting out stocks at bargain prices

Although the time frames for these proven stock market strategies are different, they all work on the same basic principle. The investor evaluates stocks based on how the market is likely to treat them and on the fundamentals that eventually set the stock price. Investors hope to make money when they find a stock that the market has valued incorrectly either in the short term or in regard to its long term value.

The “tools” that investors use may vary but all are versions of fundamental analysis. This kind of approach goes back to Benjamin Graham who was an investor during the heyday of the 1920s stock market and for decades thereafter. His intrinsic value approach is based on projected future earnings. Other methods include comparing P/E ratio (price to earnings ratio) of a stock to other similar investment opportunities, following a “moving average” of the stock price, as looking at “margin of safety “ issues such as depressed stock prices of companies with huge cash reserves, not debt, and lots of property. The “game” is always to look for market inefficiency and buy or sell the stock before the market adjusts. Very short term traders use technical analysis tools to predict short term market and stock trends and trade accordingly.

Consistency Is Essential for All Successful Stock Market Strategies

As we said, any and all of the approaches we mentioned can be very successful. But the success depends upon sticking with the approach, adjusting tactics as necessary, and not jumping around to different approaches every time the market fluctuates. For beginning investors, a good “exercise” is to go to Investing.com and look at the last 50 years or so of the S&P 500 index.

In February of 1970 the index was 89.50 and today it is 2861! However, over the years there have been significant peaks and valleys in the S&P 500 as recessions took hold and market crashes and corrections occurred. Despite the ups and downs of the market, long term investors have seen their stock investments appreciate on the average 10% a year. Investors and traders who were able to correctly “time” the market or individual stocks can do even better if they are willing to do the work, take the time, and accept the risk.

Small and Medium-sized Business Downsizing in China

The South China Morning Post is beginning a series about the China economy.

Chinese President Xi Jinping warned on January 21 that the Communist Party needed to pay particular attention to the risks to social stability from rising economic problems, as evidence increasingly suggests that the nation’s employment situation is deteriorating rapidly, particularly among small and medium-sized businesses.

An important aspect of this situation in China is that the prospect of a significant economic downturn is not just that there could be a recession or even an “economic hard landing” but that it could lead to significant social unrest. The article goes on to give examples of companies that have reduced their labor forces by more than 75%! The end result is survival, not repayment of debts or prosperity.

Chinese economic statistics have always been suspect, so anecdotal evidence is often relied upon to get an accurate picture of what is going on. What is known is that China has taken over a lion’s share of production in many industries from the rest of the world. Seventy percent of world electronic production capacity now is in China and the risk of a permanent trade war is taken very seriously, especially considering the amount of debt that companies and whole industries have taken on. As noted in the South China Morning Post article, many smaller Chinese businesses got into the habit of simply borrowing, expanding, and having enough money to service their debts. Now the world is changing and companies are downsizing very rapidly.

How Do Job Cutbacks in China Relate to Your Investments?

China ADRs

The first point of concern would be investments that you might have in Chinese companies. Investing.com lists 403 Chinese companies with ADRs available in the USA. If you are invested in any of these, you need to do your fundamental analysis and make sure if you want retain the investments in your portfolio or not. If you do not believe that you can do an accurate job at this because of sparse data, it might be better to sell.

Offshore Investing

The next issue is any other investment you might have offshore from the USA. We recently wrote about how offshore investment in Brazil was starting to look promising with the new government. But, Brazil and other exporters of raw materials will all have the same problem if China experiences a significant economic slowdown and quits importing at its current rate. The resource curse of boom and bust cycles is inherent in commodity exporters. There are relatively secure value investments offshore but you need to do your homework to find them and to assess their intrinsic value.

Direct Foreign Investment as a Guide

To know where to put your money offshore, a useful resource is the World Bank’s Foreign Direct Investment page of statistics. The most recent figures show that worldwide foreign direct investment was $2 Trillion in 2017, down from $2.5 Trillion in 2016. China received $168,223.58 million ($168 Billion) in 2017 versus $354,828.00 ($355 Billion) for the USA.

Meanwhile the European Union as a whole received $604,920.21! And Brazil came in at $70,685.05. It would appear that as the world economic situation worsens that money is flowing into developed economies more so than developing economies. Since this is where the smart money is going, smart investors will probably follow suit.

The World Bank updates these figures every year so it is always a useful resource for those wanting to invest offshore.

How Investments in the USA Will Be Affected

An old friend of ours recalled when the stock market crashed in 1929 and all of the businessmen in his small Midwestern town were not worried. New York was a long ways away and what happened there would never affect the prices of corn, soybeans, beef, pork, or eggs. Three years later our friend was burning corn cobs in his stove to keep the office warm because corn was cheaper than coal. The US Congress has picked a trade war with the Smoot Hawley Act and the US economy entered the Great Depression.

If you think that what happens in the country that consumes more natural resources than anyone else does not matter in the rest of the world you are dead wrong. Companies like Boeing, 3M, Procter & Gamble, Deere, Caterpillar, Apple, and many many others derive a substantial portion of their incomes from trade with the rest of the world and with China in particular. When a company in China lays off 700 of its 1,000 workers, those workers have no jobs or take lower-paying temp jobs. The effects ripple through the economy and more companies lay off more workers and the downward cycle continues. The growing Chinese economy has been a consumer of many Western products. We in the West would like to have more access their economy and that is a lot of what the looming trade war is all about. The risk is that China will not open up to the West but will look inward instead. Apple already downgraded its projections for China for the coming year. This is how job cutbacks in China relate to your investments if you have multinationals in your stock portfolio. Trouble in China will spread to many developing nations and sales of goods by the USA will suffer.

The one bright spot for the USA and other developed economies is that foreign direct investment and cash via the Forex market will seek safe havens in these economies.

What Can You Do?

Some time back we wrote about how to invest without losing any money. As economic risks increase a wise investor will rotate part of his or her holding into AAA bonds (Microsoft and Johnson & Johnson, US Treasuries, and even CDs at the local bank. Any stock investments should be value investments until the economic situation in China and elsewhere improves. If the economy and market worsen, there will likely be quite a number of deep value investments for those willing to do their homework.

How Do Job Cutbacks in China Relate to Your Investments? PPT

Amazon, Netflix and Microsoft together this year are responsible for 71 percent of S&P 500 returns and for 78 percent of Nasdaq 100 returns.

The three stocks make up 35 percent, 21 percent and 15 percent of S&P 500 returns, respectively, while making up 41 percent, 21 percent and 15 percent of Nasdaq 100 returns.

While some companies in the S&P 500 are simply appreciating less rapidly than the tech darlings, others are losing ground. The best performers are those with the best and reliable earnings quarter after quarter. The question for the wary investor is how to spot overpriced investments in this mix. In this regard, Market Watch says that the average stock is overvalued.

The offer three charts, all of which demonstrate that the market is flirting with the sort of valuations that preceded the 1929 crash that ushered in the Great Depression, the Dot Com crash, and the 2008 crash that gave us the Financial Crisis and the Great Recession.

The three charts show three things. First, the market is trading about 70% above its historic mean and this has only happened before in the days preceding a crash. Second, the total stock market cap compared to the US GDP is also at a historic high seen only in the days prior to previous market crashes. And, third, the prices of stocks are excessive in relation to the so-called “replacement” value of the companies. This is the Tobin Q ratio. In order to avoid being badly hurt when the market eventually corrects, smart investors can use any or all of these approaches to decide what investments to hold and which to sell.

Margin of Safety

We mentioned that the leading stocks in the S&P 500 are there because of continued great earnings. But, which of these companies is vulnerable to a significant reduction in earnings in the event of a recession. And, which of them has a margin of safety to protect them in the event of a downturn. A margin of safety can be money in the bank or tangle assets like property and factories that are unencumbered by debt. A margin of safety can also be a business whose products and services will not be significantly affected by an economic downturn.

Microsoft has about $82 billion in long term debt. It is also the only US company, besides Johnson and Johnson, to have AAA bond rating. Microsoft also has about $134 billion in cash. Apple has about $97 billion in long term debt and about $244 billion in cash on hand. Both of these companies have significant margins of safety in case of a financial downturn. The question is what happens to their revenue if the economy tanks? Microsoft is no longer so dependent on its Windows software for profits but Apple still needs to come up with the better and more impressive set of smartphones and tablets every year or so.

A margin of safety issue that is appropriate to how to spot an overpriced investment is that both of the companies are in a “high cost of entry” business. This is to say; the development of patents, product lines, and internal skill sets is such that there would be an almost insurmountable cost to replicate either business. This is where Tobin’s Q ratio comes into play. To the extent that a business controls an irreplaceable niche in the tech world, they are protected against financial devastation in the event of a market correction. One of the ways to spot an overpriced investment is to use this sort of analysis or approach.

How to Spot Overpriced Investments PPT

Fraud Convictions for Manafort and Guilty Plea by Cohen

Just yesterday Trump’s former campaign manager was convicted of several counts of fraud and his former lawyer pled guilty to other crimes, while also implicating the President of the United States in a cover-up. The New York Times writes about all the President’s crooks.

On Tuesday afternoon, the American public was treated to an astonishing split-screen moment involving two of those people, as Mr. Trump’s former campaign chief was convicted by a federal jury in Virginia of multiple crimes carrying years in prison at the same time that his longtime personal lawyer pleaded guilty in federal court in New York to his own lengthy trail of criminality, and confessed that he had committed at least some of the crimes “at the direction of” Mr. Trump himself.

Let that sink in: Mr. Trump’s own lawyer has now accused him, under oath, of committing a felony.

Only a complete fantasist – that is, only President Trump and his cult – could continue to claim that this investigation of foreign subversion of an American election, which has already yielded dozens of other indictments and several guilty pleas, is a “hoax” or “scam” or “rigged witch hunt.”

To say the least, this could be bad news for Trump. But, back to the point, will Trump’s problems cause you to lose money?

For Now, Wall Street Does Not Care!

CNN Money reiterates what we said in our article about the mid-term elections. Smart investors are only interested in politics to the degree that governmental changes directly affect business. CNN writes about why Wall Street is unfazed by the Trump-related turmoil.

“The market has known there’s a political circus in DC for the entire time of the Trump presidency,” said Nicholas Colas, co-founder of DataTrek Research.
“Investors don’t really care who the president is. They care about earnings and interest rates,” said Colas.

Earnings are booming, thanks to an economy that grew at a four-year high of 4.1% last quarter. Unemployment dropped to 3.9% during July. This week’s turmoil does little to change that.

Is there any scenario in which an investor should be worried? We noted in our article about the mid-term elections that uncertainty tends to drive stock prices down prior to elections, but markets tend to recover nicely once the political dust has settled. Is there any reason to be more concerned this time around?

The “I” Word and Increased Uncertainty

In our opinion, the main issues facing investors are a possible full-fledged trade war and a nine year bull market that will eventually correct strongly. Investors deal with these issues every day. Trump’s problems enter the mix because of his combative nature. Rather than just letting things run their course, the current President may well decide to pardon Manafort and attempt stop the Mueller investigation into Russian meddling in the US electoral process. If there is a Democratic majority in the House of Representatives next year, and especially if there is a Democratic majority in the US Senate, the specter arises of impeachment proceedings.

So, would impeachment of a sitting US President hurt your investments? Remember that Bill Clinton was impeached by a Republican House of Representatives in 1998 and in 1999 the Democratic controlled US Senate acquitted him of the charges. During the Clinton years, the stock market had one of its best 8 year runs ever!

If things go really badly for the sitting US President, the issue for investors will be uncertainty and not the specifics of what is going on in the world of politics and legal proceedings. Will Trump’s problems cause you to lose money? The answer is that if you lose money in your investments, it will probably not be the President’s fault!

Will Trump’s Problems Cause You to Lose Money? PPT