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Which of Your Safe Investments Will Kill Next?

We invest to make more money, do the things in life that we want, and have enough for a comfortable retirement. It has always been good advice to balance your investment portfolio with a combination of the very safe and the somewhat risky investments with growth potential. We often mention our article about how to invest without losing any money. Although the main focus is on cash in the bank, treasuries, and corporate bonds we also give a nod to value investments which are “safe stocks.” Unfortunately, many investments previously thought to be safe have been destroyed in the era of online sales. Our question right now is which of your safe investments will kill next?

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

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 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 kill next, wonder if Procter & Gamble is on the list.

A List Investments at Risk of Being Killed off by

Kiplinger goes beyond Forbes by looking at dozens of companies whose very existence is threatened by 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, tries its hand at anything and usually succeeds. If you have several safe investments in your portfolio and 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. and Playster
These folks are directly threatened by 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 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 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 does not have a well-recognized battery brand behind them, they do have pricing, delivery, and customers who are simply used to buying from

Which of your safe investments will 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.


Think of old, safe stocks when you wonder which of your safe investments will kill next?

Sears Was the Best and Then It Was an Afterthought


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?


When you wonder which of your safe investments will kill next, think of big old companies that do not listen to the consumer.

Kraft Heinz Did Not Listen to Its Consumers


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, 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.

What is Intrinsic Stock Value?

Intrinsic stock value is a concept that emerged from the carnage of the 1929 to 1932 stock market crash. It is a way to invest rationally as opposed to investing by guess work, which is closer to gambling. To get a sense of the way this concept changed the face of investing we need to go back to an era where investing in the stock market really did resemble gambling at the casino.

“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.

The rise of stocks and subsequent crash in the 1920s gave rise to a new way to invest. What is intrinsic stock value? It is a rational means of investing.

Dow Jones Industrial Average: 1920s

(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.

To understand what is intrinsic stock value you should learn from Benjamin Graham, the father of this concept.

Benjamin Graham, Father of Intrinsic Stock Value

(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.

What is intrinsic stock value and how is it used to improve investing? Look at Berkshire Hathaway stock for a clear example.

Berkshire Hathaway, an Example of Intrinsic Value Investing

(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!

Best Stocks to Invest In

For generations, the U.S. stock market has been the best and most reliable money-making machine on the planet. But, how to get started investing and take advantage of the stock market’s power is always the issue. The average return on the basket of stocks in the S&P 500 has been 10% per year per year ever since the index began as the Composite Index of 90 stocks back in 1926. Today the S&P 500 is a group of 500 stocks that accurately mirror the U.S. stock market as well as the U.S. economy. Are the best stocks to invest in the individual stocks in this index? In this article, we would like to offer some investment tips for beginners and even look at some of the best long term stocks to buy right now. But, our best advice is really not about exactly which stocks to buy today but rather how to go about the process of investing so that you can always understand which are the best stocks to invest in today and tomorrow and for years to come.

(Investopedia: S&P Annual Return)

Knowing Which Are the Best Stocks to Invest In

Our opinion at Profitable Investing Tips is that there are always best stocks to invest in. However, these stocks change as time goes by. Knowing what makes the current favorites the best stocks to invest in is how to succeed always in the business of investing. In this regard, there is an old saying in regard to how to help someone in need.

Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.

Although the idea is old, the current quote may only be about 50 years old.

(Quote Investigator: Give a Man a Fish)

We at Profitable Investing Tips would like to follow this example and rather than routinely give you short-lived stock tips, we prefer to give you, our readers, the tools to know how to invest in stocks both now and for years to come.


When you are looking for the bests stocks to invest in you need to do more than just look at someone's list.

Someone’s List of Best Stocks to Invest In


Investing Goals, Timelines, and Risk

As we note in our companion article, investing in stocks, we invest to make money, attain specific goals, and be financially secure. It sounds simple but most truths are. The U.S. Securities and Exchange Commission advises beginning investors to define your goals as a first step to investing in stocks.

A good idea when investing is to be very careful with a portion of your money so that a bad investing decision, a market crash, and recession, or some other unforeseen problem does not totally wipe you out. In this regard, we wrote about how to invest without losing any money. Read this article for some useful thoughts about how to treat the most conservative part of your investment portfolio.

Some of the most successful investors are also some of the richest people in the world. Warren Buffett, the so-called Oracle of Omaha, comes to mind. People who invest over the very long term benefit from that 10% per year per year market appreciation that the stock market offers. They make a lot of money in a bull market and may lose some in a bear market, but over the years their investments continue to appreciate. And, because they do not attempt to time the market, they are not caught with short term losses on investments that they first made. Although there is the promise of great profits when you pick just the right stock at just the right time, jumping in and out of investments carries its own risk and a greater investing overhead in terms of fees, commissions, and taxes.

The best stocks to invest in over the years are from companies that make money year in and year out and who business plans are likely to continue to work for decades to come.

How to Get Started Investing

When we think about how to start investing at 18, just out of school, what comes to mind are penny stocks simply because they are cheap. But, the best stocks to invest in for beginners are not necessarily the cheapest stocks. And, you do not necessarily need to wait until you have saved up to buy even a single share to get started investing.

Fractional Share Investing

With fractional share investing, beginning investors can invest in the stocks of their choice. The Balance lists seven excellent choices for fractional share investing.

If you want to invest in the stock market, you might be scared off by the perception that you need thousands of dollars right from the start. But that isn’t true – in fact, you can get involved without even buying a whole share of stock at once. With fractional share investing, you can buy as little as $5 or $10 of a stock in a single trade.

Rather believing that you will never be able to buy stocks that sell for more than $1,000 a share like or Alphabet (or Berkshire Hathaway at more than $300,000 a share) beginning investors can go to a brokerage that buys these stocks and then resells fractions of shares. Here is their suggested list of brokerages.

  • Stockpile
  • Motif
  • M1 Finance
  • Folio Investing
  • Betterment
  • Stash
  • Computershare

Additionally, when you have purchased stock from a company like 3M (about $210 a share) you can sign up for their dividend reinvestment plan. This allows you to buy fractional shares with your quarterly dividends, without paying fees or commissions. This is another good way to purchase good companies without paying a lot.

Investing Using Dollar Cost Averaging

When a beginning investor purchases inexpensive stocks, or preferably fractional shares of excellent stocks, the best approach is to simply pick an amount that you can afford to invest and put that into stocks every payday, every month, or every quarter. U.S. News wrote about dollar cost averaging.

DOLLAR-COST AVERAGING is a disciplined way for investors to build wealth in their portfolio over time while helping them avoid emotional-driven decisions.
Many people mistakenly believe that they need thousands of dollars to start investing for their retirement, causing them to be risk-averse in opening a traditional investment retirement account or Roth IRA. But nearly anyone can get started with the strategy. For instance, this style of investing can help novice investors who have recently opened a retirement portfolio, and don’t have a large sum of money for an initial investment.

Always buying the same dollar amount of stocks works because by purchasing more stocks when prices are low you will get good deals and by purchasing fewer stocks when prices are high you will not overspend in an overpriced market.

Best Stocks to Invest in Now

You can take stock tips from your barber or a taxi driver. You can take stock tips from any of the numerous pundits on the various investing publications. But, you need to do a bit of homework to verify that the suggested stock tip is really a good idea. There are two ways to approach this decision. First, is this a stock that has, in your mind, a temporary low price? If so, you are in the business of marketing timing. You buy the stock, wait for the price to go up and then you sell it before a volatile market takes the price down again. This is short term investing and to do it successfully you are more interested in how the market views this stock than in its long term value. As noted in our article about proven stock market strategies, this is simply a matter of buying low and selling high.

But, what if you want the best stocks to invest to buy right now but hold onto forever? The first part is the same. You are looking for stocks that are cheap and likely to go up in price. The second part is that you are not looking for a stock that will have a higher price in a month or two but a stock that will keep appreciating value for ten, twenty, thirty years, or more!

The Real Value of a Stock Investment

Back in the “Roaring Twenties” it was common to “play the stock market.” Stocks were going up and almost no matter which one you bought it was more valuable the next year or even the next month. Then the 1929 stock market crash ushered in the Great Depression and not many folks wanted to “play the stock market” any more. Nevertheless, the market recovered and money investing before the 1929 crash is what is used in the estimate that the market returns 10% per year per year on the average!

It was the in years after that the 1929 crash that a new view of investing appeared. It was an approach that did not dwell first of all on the price of the stock but on the ability of the company to make money and the likelihood that the company would continue to do so for the indefinite future. Intrinsic stock value is based on anticipated earnings. In order to determine if a stock is a good investment today and for years to come an investor needs to understand what the company does to make money and how that business plan will continue to work for years to come. Then the investor determines what that ability to generate income will do to the stock price over years and he or she compares that projected stock price to the current market price.

Best Stocks to Invest In Based on Intrinsic Value

Kiplinger wrote about what they consider to be the 10 best value stocks to buy now. Here is their list.

  • Berkshire Hathaway
  • Loews (NYC holding company, $2.1 billion stock portfolio plus insurance companies, hotels, a packaging business, and oil businesses)
  • Viacom
  • J.M. Smucker
  • CVS Health
  • Macy’s
  • Best Buy
  • Southwest Airlines
  • Dollar Tree
  • Lennar

If you are interested in any of these stocks, start by reading the Kiplinger’s article and then do your homework. The point of using intrinsic stock value is a guide is that it helps you determine if a stock is a good long term bet instead of something to buy, hold for a few months and then sell. But, even though a stock with strong intrinsic value is always a good bet long term, these stocks are better when you pick them up at bargain prices. Such was the case when Berkshire Hathaway bought lots of Coca Cola stock at depressed prices in the late 1980s. Today the dividend paid on these shares of stock is close to half the original share price!


The best stocks to invest in have an intrinsic value greater than their market price.

Intrinsic Stock Value versus Market Price


Why Is the Stock Price Depressed?

As we noted before, there is a temptation to buy penny stocks because they are affordable. But, why is the stock cheap? Is the price depressed because the company has long term unfixable problems? Are its competitors taking away all of its business? Are its debts so overwhelming that recovery is merely a fantasy? When this is the case, the stock is cheap but not cheap enough! On the other hand, there are stocks that have fallen off the Wall Street “radar.” They have made changes and will soon be reporting fantastic earnings. Once the earnings are reported the stock price will skyrocket. These are absolutely the best stocks to invest in when you find them. But, be careful. Some such stocks are “story” stocks and the story may never materialize. These stocks are being hyped. When the stock price goes up the folks hyping the stock will sell, leaving your investment to plummet. This is called a “pump and dump. Investopedia offers advice about how to avoid getting pulled into a pump and dump scheme.

Investors should be wary about notices that a stock is about to take off – especially when they are unsolicited – no matter how tempting it may be. Consider the source and check for red flags. Many notices come from paid promotors or insiders, who should not be trusted. If an email or newsletter only talks about the hype and doesn’t mention any of the risk, it’s probably a scam. Always do your own research in a stock before making an investment.

This advice takes us back to the beginning. The best stocks to invest in are those that have money-making potential in excess of what the market as a whole currently appreciates. When someone is talking up a storm about a stock, check it out. But, remember something that the famous investor Warren Buffet said. It was that when he and his team look at stocks and their intrinsic stock value, they throw out 95% of the stocks they look at as being “too difficult to call.” And, if you don’t know and cannot be sure, do not buy the stock. There is absolutely nothing wrong with leaving your money in your bank account until you make a decision that you can live with!

Investing in Blue Chip Tech Stocks

The stock market was driven to higher and higher values since the financial crisis largely due to earnings of a handful of tech stocks, Alphabet (Google), Microsoft, Apple,, Facebook, and Netflix. Are stocks from large companies like these the best stocks to invest in? Facebook is having issues of its own and may be left out of this discussion. But, many smart investors do not worry about finding a “needle in the haystack” stock that is underpriced and due to skyrocket. Rather, they are perfectly happy with a stock that pays a nice dividend (which they reinvest) and appreciates nicely in stock price year after year. For this approach to work, you still need to understand how the company makes its money and how they will continue to do so into the indefinite future. But, many believe that the best stocks to invest in are not only ones that provide a nice return on your capital but also allow you to sleep soundly at night.


The best stocks to invest in are ones that make money and let you sleep at night.

Investments That Let You Sleep at Night

Proven Stock Market Strategies

There is always someone giving investment “advice” as they promote one stock or another. But, what proven stock market strategies can you follow profitably over time? In this article, we look at a general approach to reliably profitable investing and then at specifics. For most investors, the best approaches are the simple ones. These are folks who have money they want to put away for retirement, a rainy day, putting the kids through college, or starting their own business. These folks have neither the time nor the inclination to get overly involved in the details of stock market investing but they do have money that they need to invest. And, then there are those who wish to become truly active investors in hopes of gaining a better return by picking and choosing individual stocks, timing the market, and engaging in shorter term investing and trading.

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.


One of the proven stock market strategies is to use dollar cost averaging.

Benefits of Dollar Cost Averaging


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.


A proven stock market strategy is to buy a stock and like Coca Cola and hold on to it forever.

Coca Cola


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 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.

There are proven stock market strategies that both ignore and take advantage of the ups and downs of the S&P 500

S&P 500 All Through January 2019

Can Passive Investment Be Risky?

Over just the last few years the proportion of the US stock market that is invested passively has moved up to 45%. Investors are attracted to ETFs (exchange traded funds) because of their low overhead. And, many have outperformed actively traded vehicles like mutual funds and other actively managed investment vehicles. But, can passive investment be risky?

Passive Investment Is on the Rise in the US Stock Market

CNBC reported that passive investing automatically tracking indexes has risen to nearly half of the US stock market.

Passive investing, made up of funds tracking market barometers, has now taken over nearly half the stock market as more investors shun stock-pickers and flock to index funds.

Market share for passively managed funds has risen to 45 percent, up a full point from June 2018, according to data this week from Bank of America Merrill Lynch. That continues a trend over the past decade in which investors have moved to indexing, particularly through exchange-traded funds.

Despite the risks that some see in this approach, investors are pleased with the results and are even applying it to buying bonds! But, can passive investment be risky? It turns out that there are valid concerns. But, first, just what investment vehicles are we talking about?


More and more investors are putting their money into vehicles like ETFs that track market indexes but can passive investment be risky?

Active versus Passive Investment Management


Passive Investment Funds versus Active Investment

Investopedia discusses active versus passive investing.

Active investing, as its name implies, takes a hands-on approach and requires that someone act in the role of portfolio manager. The goal of active money management is to beat the stock market’s average returns and take full advantage of short-term price fluctuations. It involves a much deeper analysis and the expertise to know when to pivot into or out of a particular stock, bond or any asset.

This investment approach obviously applies to when you choose stocks yourself using an approach like intrinsic stock value. It also applies to when an investment professional oversees a fund that invests in millions or billions of dollars in stock investments.

If you’re a passive investor, you invest for the long haul. Passive investors limit the amount of buying and selling within their portfolios, making this a very cost-effective way to invest. The strategy requires a buy-and-hold mentality. That means resisting the temptation to react or anticipate the stock market’s every next move.

The prime example of a passive approach is to buy an index fund that follows one of the major indices like the S&P 500 or Dow Jones.

Such investments have become popular for three main reasons. Their fees are very low because no one is getting paid to research stocks to buy and sell, an investor always knows exactly what investments are in the fund, and because there is not a lot of buying and selling, investors are not paying a lot of taxes on capital gains every year!

The Value of the Passive Investment Approach

As noted, funds that track the S&P 500 and other indexes are cheap to run and this fact shows up in a lower “investing overhead” for the passive investor. In the last few years as the bull market has exploded in the aftermath of the Great Recession the passive approach has made excellent money and often out-performed many active investors.

Here are three very large funds that qualify as passive investment vehicles.


This vehicle is a unit investment trust that manages about $280 Billion in assets. It is up six times its initial value per share in 1993. Because of its huge size this fund is very liquid for those who choose to buy and sell. And, it has performed very well for passive buy and hold investors.


Can passive investment be risky? Take a look a the ups and downs of the SPFR over the years.



iShares Core S&P 500 ETF (IVV)

iShares is an ETF that manages about $165 Billion by tracking the S&P 500. It can be traded like a single stock for those who wish to buy and sell and has been good to buy and hold passive investors. IShares is trading at three times its single share value at the depths of the stock market crash but is less than double what it started at in 2000.


This fund has been doing well but can passive investment be risky? Notice that the fund has fallen as well as risen.

iShares Core S&P 500 ETF (IVV)


Vanguard S&P 500 ETF (VOO)

This fund is a true ETF that manages about $106 Billion. Is the newest of the three having begun in 2010 although Vanguard has been around for a long, long time. The shares are up to 250% of their original value.


The Passive Investment fund has been doing great for 9 years but can passive investment be risky? Look at what happened last December!

Vanguard S&P 500 ETF (VOO)


As can be seen, these three funds are managing half a trillion dollars in stocks. The total S&KP 500 market cap is about $22 Trillion and the total US stock market cap is around $30 trillion. But, remember that there are a lot more such vehicles as of today they manage nearly half of all US stock market equity.

Now, what is the down side of this approach?

Can Passive Investments Be Risky?

Critics of the current infatuation with passive investing say that the great bull market since the Great Recession has strongly influenced our view of these investments.

Passive Investments Can Be Inflexible

First of all, these vehicles track the market and are up because the market is up. When the market falls, so will they! Warren Buffet pulled a lot of investments out of the market and held a large amount of cash just before the dot com crash. He said the market did not make any sense. He did not lose when the market crashed and was ready with lots of cash to buy bargains as the market recovered. ETFs and other passive investment vehicles will not and cannot do this as they are forced to buy and sell to maintain a mix of stocks that reflects the index that they track!

Passive Investment Vehicles May Need to Sell into a Falling Market

When the next crash comes, and it will, a well-structured ETF that tracks the S&P 500 could weather the storm and recover. But, what if its investors panic? On a normal day these funds buy and sell to adjust their mix of stocks. If just one in ten of their investors want to cash out, the selling will drive the share price lower and lower. And, as the market in general goes down, the mix of shares making up any given index may shift dramatically. This sets up a scenario where the fund needs to buy and sell in large volumes and not as efficiently as they would normally. And, as the value of the fund’s shares fall there is likely to be panic among novice investors who have never seen a real crash. The end result could be a race to the bottom in share prices of the ETFs and the market!

Active Investors “Police the Market” While Passive Investors Are Along for the Ride

The eventual price of any stock is determined by its intrinsic value. It is the pool of active investors and especially the investing professionals who use fundamental analysis to determine how much a stock is worth and will be worth going forward. When more and more investors follow the passive route, the determination of intrinsic stock value is being done by an increasingly small portion of the market. This sets the market up for the herd effect which is all too often seen in offshore investing but increasingly affects US markets.

Is Passive Investing Worth the Risk or Not?

The responsibility of the average investor is not to his or her fund, pension plan, or other vehicle with lots of passive investors depending on his or her decisions. The responsibility of the average investor is to his own best interests. For the time being, passive investment vehicles are still doing well and, unless you have some great ideas about what else to invest in, leaving things as they are is an option.

If you worry that the market may correct more strongly or crash, it might be a good idea to diversify a little. Some time back, we wrote about how to invest without losing any money. With this approach an investor will take of portion of his stocks or ETF shares and sell. Then he or she will buy CDs at the bank, US Treasuries, AAA corporate bonds, or a handful of stocks carefully chosen to successfully ride out a market downturn.

If you are a passive investor, it is not your responsibility to worry about how passive investing affects the market as a whole. But, you need to be aware that a passive investment can be risky and take some sensible precautions.

Investing in Stocks

The reason for investing in stocks is to attain financial security. While some people may make a spectacular investment decision by chance, the vast majority who succeed at investing in stocks save their money and invest over a long period of time. Success in investing starts with defining your goals. What do you want to get out of investing? Make a list with the most important goals like having enough money for retirement, putting your children through college, or saving up to start your own business at the top of the list. Then consider how many years are left for you to attain each of these goals. The point is that your choice of investments needs to fit the available time frame.

(U.S. Securities and Exchange Commission: Define Your Goals)

The best returns on investment over the years come from routine stock investments.

Investing in Stocks

Investing in stocks needs to be part of your total financial strategy. Before you start putting money into the stock market, pay off your credit card debt. A typical interest rate on credit card debt is 24% per year. You are not likely to get this rate of return as a novice investor, so pay off your credit cards before investing in stocks. And, put three months-worth of expenses in the bank so that you are not continually selling your stocks to cover routine living expenses! Now you are ready to consider how to invest.

Investing in Stocks vs Bonds

For those who have heard the horror stories of folks losing everything in the 2008 stock market crash and financial crisis, how to invest without losing any money is a major issue. As we note in our article about investing and not losing money, a portion of your investment portfolio should be conservative. A simple way to do this is to purchase certificates of deposit at your bank. These are protected against loss up to $250,000 per depositor per bank by the Federal Deposit Insurance Corporation, an agency of the U.S. government.

(FDIC: Deposit Insurance at a Glance)

Alternatively, U.S. Treasuries are backed by the “full faith and credit” of the U.S. government and will not result in any losses if held to maturity. The next conservative investment in line is an AAA corporate bond. The two U.S. corporations with this bond rating are Microsoft and Johnson & Johnson.


Besides investing in stocks, consider AAA corporate bonds like Microsoft of Johnson & Johnson

Microsoft Logo


But, in order to attain your goals you probably need to get a larger return on investment than with these conservative vehicles. Over the years, stocks have offered the most potential for growth.

(Fidelity: Three Reasons to Invest in Stocks)

This brings us to the mechanics of investing stocks. The best approach according to most experts is to allocate a set amount of money with each paycheck, every quarter or annually as money becomes available. Then, which is best, investing in stocks now or later, investing in stocks with dividends, letting a mutual fund do your investing for you, putting your money in index funds, or simply investing in stocks online by yourself.

Investing in Stocks Now

Once you have put your financial house in order it is time to invest in stocks. When you invest early in life you get to take advantage of the exponential growth of wise investments. The rationale is that a well-chosen investment in the stock market may appreciate as much as 12% a year on the average. When you leave this investment in place you benefit from the “rule of 72.” Divide the number 72 by your average yearly percent return on an investment. This gives you the number of years required to double that investment!

With a common stock whose appreciation plus dividends come to 12% on the average it will take six years to double your money. Start investing in stocks now when you are 25 years old and you will have seven x six = 42 years until you reach age 67. Double your investment seven times and you will get a 2x2x2x2x2x2x2=128 fold appreciation on your initial investment! The $100 that you invest in a well-chosen stock at age 25 could be worth 128 x $100 = $12,800 and that is just the $100 that you invested in one month.

The basic reason that investing in stocks builds wealth better over the long term is that with stocks you get more “doublings” over the years when you start early and continue over the years.

(Investopedia: Rule 72)

Investing in Stocks with Dividends

In our article about dividend stocks, we note that some companies have routinely paid dividends for more than a century. Not only is such an accomplishment an indication of the safety of such investments but when dividends are reinvested and added to the usual stock appreciation it makes “rule 72” work faster! Look for companies with dividend reinvestment plans when considering dividend stocks.

Investing in Stocks vs Index Funds

Although we would like to think we can pick the best investments, even experienced fund managers can have a hard time beating the S&P 500 over the years. As such, many investors choose a fund that tracks a major stock index like the S&P 500 or a sub-category of the S&P 500 such as consumer staples, consumer discretionary, energy, communication services, financials, health care, industrials, materials, information technology, real estate, and utilities. And, there are many sub-sectors within each of these categories as well. We commonly suggest that if you are picking your own investments that you should start with things that you know about as your knowledge and insights will give you an advantage over other investors.

(The Balance: Sectors and Industries of the S&P 500)


A good option when investing in stocks is to simply invest in an index that tracks the S&P 500

S&P 500 All Through January 2019


Investing in Stocks Short Term vs Long Term

Short term investing requires skill at market timing. Basically, you need to recognize an opportunity early in the game, make your investment, and then sell when the stock reaches a plateau or starts to fade. There are investors whose only method of investing in stocks is this approach. While some of these folks do very well, many routinely lose money chasing an elusive dream. When an investor repeatedly buys and sells stocks he or she incurs a cost with every transaction. Fees and commissions can eat up what would otherwise be moderate profits. This is the main reason why old, rich investing legends like Warren Buffett do not try to time the market. Rather they look for long term value and unique buying opportunities.

Long term investors know that the eventual price of a stock is determined by its intrinsic stock value. This is the value of the stock based on its projected future earnings. Successful long term investors only invest in stocks when they clearly understand how the company makes money and how their business plan will result in continued earnings into the distant future. Carrying this approach to success requires a bit of homework and patience. Imitating the investment portfolios of the most successful investors like Buffett is a place to start. Buffett himself has said that as he and his team look for clear indications of strong intrinsic stock value they end up throwing out 19 out of 20 possible investments.


When investing stocks a good way to start is to copy the investments of "old pros" like Warren Buffett and buy stocks like coca cola

Coca Cola


The best way to start with this method is by imitation of successful investors and then add more investments of your own as you gain experience. A key factor is to keep track of what you have in your portfolio and use the intrinsic value calculation contained in our article to not only decide what to buy when investing in stocks but what to unload when the company’s business plan is no longer working!

Investing in Stocks vs Mutual Funds

Many folks have the money and want to save and invest for retirement, sending the kids to college, or being able to afford to live the life they always dreamed. These same folks may well be too busy with their work and their lives to devote sufficient time and effort to making and following their investments with the degree of skill and attention that they deserve. Many of these folks will look for someone to invest for them. One approach is a mutual fund. Fidelity explains what a mutual fund is.

Mutual funds are investments that pool your money together with other investors to purchase shares of a collection of stocks, bonds, or other securities, referred to as a portfolio, that might be difficult to recreate on your own. Mutual funds are typically overseen by a portfolio manager.

(Fidelity: What Are Mutual Funds?)

There are several advantages to investing in a mutual fund instead of directly investing in stocks. First of all, stocks like sell for more than $1,700 a share and shares of Warren Buffett’s Berkshire Hathaway Class A stock sell for more than $300,000 a share! These are good investments and anyone who is routinely investing $100 a month cannot buy a single share. But, a mutual fund can and they do. A well-managed mutual fund invests in a range of stocks, bonds, and other investments to provide a good return on investment for the investors in the fund.

The “downsides” to investing in a mutual fund are two. The investor pays a fee to have his or her money “managed” by the fund. And, all too often, a mutual fund does not outperform an index fund that tracks the S&P 500! But, if you do not have the time and energy to do your own investing in stocks, consider a well-managed mutual fund with low fees or simply put your money into an index fund that tracks the S&P 500.

Investing in Stocks Online

For many investors, the old days of going through a traditional stockbroker for investing in stocks are gone. Today many if not most investors use an online stock broker. A good online broker offers research capabilities and often does not require an account minimum and does not charge annual fees like a mutual fund would. Popular online brokers include Vanguard, E-Trade, Fidelity, Charles Schwab, Ameritrade, and Merrill Edge. The same principles apply to investing in stocks online as to investing through a broker. On one hand, you will not be sold a “bill of goods” on a stock by a broker who is “pushing” it this week, which is a good thing. And, on the other hand, you will not have a wise old investment pro to guide you towards good investment choices and away from bad ones either.

Is Investing in Stocks Worth It?

Some folks will read this article and think that investing in stocks sounds like a lot of work. They will rightfully wonder if it is worth it to invest in stocks rather than simply putting their money in U.S. Treasuries or CDs in their bank. The truth of the matter is that if you are building an investment portfolio for retirement, to start your own business, to pay for college, and to live the life of your dreams, you need a balanced investment portfolio.

This means putting some money in the bank, building a ladder of CDs, purchasing US treasuries and AA corporate bonds, and investing in stocks. Always remember that you need to balance safety with the power to grow your investments. However, the “rule of 7” works best for well-chosen stocks. If you are not up to the challenge of picking your own individual stocks due to time constraints, go with index funds or swallow hard and pick a mutual fund.

How to Spot a Value Trap Investment

Over the years we have often cautioned investors to beware of penny stocks, especially those that have seen better days. While investing in a grand old name in hopes of a recovery it is important to learn how to spot a value trap investment. This issue came up recently when we wondered what was wrong at Kraft Heinz. As bargains become harder to find in an aging bull market there is a temptation to go bottom feeding in search of an investment miracle. Here is some advice about what to watch out for.


If you are going to invest in Kraft Heinz today you need to know how to spot a value trap investment.

Kraft Heinz Products


Spotting a Value Trap

A couple of years back Bloomberg published a useful article with 12 signs a cheap stock is a value trap.

The historically high price-to-earnings ratios being placed on equities today make cheap stocks even more alluring. That makes sense, but be advised that the market is littered with “value traps” or stocks that look cheap but never substantially rebound.

Any way you cut it, value is profoundly out of favor, and not just in 2017. Although proponents of these investments typically are patient people, the long-term differential is large enough to be worrisome. Over the last 10 years, growth has outperformed value by more than 100 percent in small caps and by 50 percent in large caps.

Thus, knowing how to spot a value trap is doubly important at this time. Here are dozen suggestions from Bloomberg. The ideas are theirs but rewritten by us for the sake of brevity.

Still Troubled at the Top of Its Operating Cycle

The U.S. economy and the vast majority of stocks have long recovered from the 2008 stock market crash and financial crisis. If the company you are looking at is performing poorly in the best of times it may well be a value trap. Something is wrong as is not being fixed or cannot be repaired.

Low Profits but High Management Compensation

When a company falls on hard times it typically puts the screws to management by cutting salaries and tying compensation benefits to performance. When this is not the case, management is milking the company for every last dollar before bailing out. This is a strong sign of the stock being a value trap.

Lack of Fresh Insights

When an industry like the U.S. auto industry is centered in one city or area like Detroit, everyone works with and socializes with like-minded people. But, when fresh ideas are needed this can be a real hindrance and create value traps of otherwise strong companies.

Market Share Continues to Slip

When someone else starts taking market share away from an old stalwart, you need to see them fighting with all that they have to regain that share and succeeding. Otherwise, they have become a value trap.

Too Many Fingers in the Pie

Many times a well-established company has many stakeholders such as labor unions, foundations, or old family control. The goals of these folks may not be consistent with a good return on investment by those who hold their stock. Consider such companies to be value traps until proven otherwise.

Not Managing Capital Effectively

A company that has historically been a cash cow may have gotten by for years by just putting money in the bank instead of reinvesting in R&D, acquisitions, and the like. When this company starts to slip it needs to shift gears or it is a value trap. And, the changes in how they manage capital need to be clearly articulated to investors and need to begin to show results.

Fat and Inefficient Management Structure

It is said that when Sears built the Sears Tower that they took up 22 floors for management, each floor a different level. No one was paying attention to how management was being carried out and no one was making changes. When a company does not upgrade and modernize how it operates on the day by day and decision by decision level, it becomes a value trap because its competitors will outperform it every day of the year.

Unrealistic and Fantasy Management Goals

When a company is in trouble it needs to regroup and it needs to explain those plans to both employees and investors. When management’s new goals are simply unrealistic no good will come of them. You can often see this by looking at old financial statements and the goals articulated in previous years and the fact that nothing useful has happened, ever! This situation is a clear sign that the company is a huge value trap. The better situation is when management promises a little but delivers a lot on a recurring basis.

Too Much Debt

The final nail in the coffin of most struggling companies is that they cannot pay their mounting debts with their dwindling cash flow. No matter how hard they try, how creative they are, and how much they economize, excessive debt is a killer and makes a stock a value trap.

Muddled Thinking and Poor Insight

The so-called strategic vision or the company is all muddled or simply lacking. When management’s plans for the coming years ramble on and repeat themselves, it is time to consider that stock a value trap, absorb your losses, and move on.

Split Attention between CEO and Board Chairman Responsibilities

When it is time to turn around a failing company it takes all of the time and attention that the CEO has. When he is spending a third of the time answering to the board of directors when he or she should be making changes from the ground up that is a sign of impending failure. Turnarounds need the full attention of the CEO or they become and remain value traps.

The Takeover Activists Are Nowhere in Sight

When a company has been mismanaged but has a lot of hidden value, there is always a Carl Icahn or his clone interested. When nobody shows up, that is a clear sign that the company really is a value trap and you should avoid it as well!

How to Spot a Value Trap Investment

The tips provided by Bloomberg are useful in spotting and avoiding a value trap. They all fall into the categories of fundamental analysis and evaluation of intrinsic stock value. While growth stocks have been leading the market in the last few years, there is a definite place for value in your portfolio. The trick is recognizing true and lasting value in an investment by understanding and appreciating how a company makes its money and how it will continue to do so well into the future.


How to spot a value trap is to consider the story of Eastman Kodak's rise to dominance and eventual decline.

Eastman Kodak

Is Your Investment Story Profitable?

Successful investors have a story that drives their investment decisions. A prime example is Warren Buffett who notes that the U.S. stock market prospers on the back of a growing U.S. economy. He looks for companies that reliably generate profits year after year and is a disciple of the intrinsic stock value approach to investing as he was, in fact, a student of Benjamin Graham who discovered that approach. So, the man who is perhaps the most successful investor of all time has a simple story that drives his investing. Is your investment story profitable?

Simple Investment Stories

The concept of investment stories came to mind after reading an article posted a couple of years ago by Motif. They noted that simple stories drive markets. The article is a good read as they look at investment themes that dominated investing during various periods and how those themes worked out over the longer haul.

You know that adage, “stocks are sold, not bought”? What often drives stocks are simple, plausible stories. In fact, Nobel-winning economist Robert Shiller has made the case for how both financial markets and economies are heavily influenced by stories.

Investors often call these stories their “investment thesis.”  We at Motif like to call them themes, ideas, trends, or motifs. We believe it is far more intuitive for investors to think this way rather than the traditional investment “style boxes” used by mutual funds or risk premium “factors” favored by academics. For example, “small cap value,” which combines academia’s two favorite factors into a mutual fund style box, doesn’t resonate with most investors.

We ask, is your investment story profitable? We might also ask if the current investment story will continue to be profitable or will collapse like a house of cards bringing on another stock market crash, financial crisis, and financial ruin for many. While the Buffett investment story is for long term, buy and hold investors, there are perfectly profitable investment stories for the short term. But, they require that you are able to get in at the right time and get out while the getting is still good.

An example they bring up in the Motif article is the stimulus to the market by ultra-low interest rates in the years following the financial crisis.

For example, the market’s belief in the power of the Fed’s experiments with ultra-low interest rates and quantitative easing (QE) helped drive the S&P 500 much higher from 2010 to 2014, though those policies may ultimately prove disastrous in the long run, as market bears believe.

Right now, no one, including the Fed, knows the long-term impact of these actions.  But much to the chagrin of market bears, until a bear market disaster finally hits, financial markets can and do move significantly higher than one may expect based on pure fundamentals, such as earnings growth, cash flows, price-earnings ratios, credit spreads, and yield curves.

The same to a lesser degree can be said for the Trump tax stimulus which put a lot of money in the hands or corporate America, allowed for repeated stock buybacks, and may well have keep the market up in the last year. A problem with stories is believing in them after they are no longer true or believing in a story when something else is what is driving the market. This is when investors overstay their welcome and not only see their dreams of profits go up in smoke but watch their investment capital go the same way as well!

Is Your Investment Story True?

There is a lot of hype in the markets, especially when a company wants to float an IPO. There are also stories offered by companies that have fallen on hard times and are hoping that they can attract new investors and keep their stock price from falling too drastically. We have written that dividend stocks can be perilous when an investor just looks at the size of the dividend and does not do any fundamental analysis of the company involved. If a company’s stock falls precipitously and they do not change their dividend, investors may be attracted by a 12% or 15% dividend which will disappear in a flash the next quarter as the company “regroups.”


When you see Kraft Heinz as a rebound opportunity, is your investment story profitable or are you falling into a value trap?

Kraft Heinz Products


An investment story that turns out not to have been as true as we might have liked is Kraft Heinz. This was considered a “widow and orphan” stock, solid with a good dividend. But, these folks have not keep up with changing food tastes and preferences of the American consumer. As such, any attempt at creating a story about this stock in preparation for a recovery are met with skepticism and the suspicious that this stock is now a value trap. Nevertheless, there may be smart enough investors out there who will be able to anticipate when Kraft Heinz has fallen enough to be a good buy again. Then the story needs to be the recovery of a grand old company. Time will tell on this one.

What Will the Boeing Story Be?

We just asked in a recent article, Why Invest in Boeing? We were pretty positive about this company as a long term investment based on their technological expertise and dominance across several areas of aerospace endeavors. But, now there have been two crashes of the new 737 Max 8 jet and both China and Indonesia have ordered these jets to be grounded until the problem can be figured out. It is especially worrisome that some experts are saying that new automated technology designed to make these jets safer may have malfunctioned and caused both planes to crash shortly after takeoff.
Boeing fell 11% on the news and could fall more if these events lead to a general discomfort with Boeing technology. Investors in Boeing will need to decide what they investment story is with the aviation giant and be ready to change that story as events unfold!


When you look at Boeing as the perfect investment is your investment story profitable to leading you into long term losses?

Boeing 787 Dreamliner


Constantly Re-evaluating Your Investment Story

If your investment story is the same as Warren Buffett’s, you have two tasks to perform. One is to simply keep track of the growth of the American economy and the other is to find and analyze prospective investments. But, if your investment story is the story of the day such as the growth of emerging markets, the migration industrial production out of China and into other Asian economies, or a miraculous resolution of the Brexit mess, this will require constant attention and a good hand at market timing.

A good investment story that lets you sleep at night may be less profitable but a red hot investment story that makes great short term profits may be the stuff of headaches and ulcers.

When Are Cheap Investments the Best Investments?

A couple of years ago we wrote to beware of penny stocks. The point being that cheap investments are not necessarily good investments. After all, there is probably a good reason why a stock is selling for a low price. On the other hand, companies that are just starting out and are not being watched by Wall Street analysts may be very promising but no one is watching. The bottom line for stock value (as opposed to price) is intrinsic stock value. When you have unique insights about the stock in question and the big guys are not watching, you can often make very profitable investments in this area. In this regard we got to thinking, when are cheap investments the best investments?

The Largest Valuation Gap in 70 Years

CNBC writes about the current gap between cheap and expensive stocks. This is called the valuation gap and it is historically large. The last time there was such a difference between the high flyers and the lowest echelons of the stock market was when Harry Truman was President, the world was ravaged from World War II, and the Korean War was brewing.

For investors struggling to find opportunities after a stellar rebound in the aging bull market, value stocks might be the best bet.

Case in point: Cheaply priced stocks are getting cheaper as expensive stocks have gotten extremely pricey, pushing the valuation gap to the widest in 70 years, according to AB Bernstein. The record dispersion puts cheap equities in a sweet spot as other pockets of the market start losing the appeal because of their high prices.

What the analyst emphasizes is that the best time for buying value stocks is the point at which valuations have been spread out the most. Many analysts have commented that this must recent upsurge in the stock market is certainly not being driven by value and fundamentals as earnings are getting worse and growth projections in the USA and abroad are not very positive.


When are cheap investments the best investments? It is when the valuation gap looks like it does today.

Stock Market Valuation Gap


What CNBC says is from a technical perspective as they look at value stocks as a technical factor. It turns out that when valuations surge to extreme levels, the value stocks whose prices have been left behind tend to outperform in the coming six to twelve months.

Of course, for long term value investors, when fundamental analysis of a stock shows value and the price is low, this becomes a historic buying opportunity.

Unique Investments in Industry “Disruptors”

In this case, we take a look back a couple of years at Trade Desk which was selling for $29 a share after its IPO in September of 2016 and was trading at $49 as recently as May of 2018. Since then the stock has taken off and is pushing $200 a share today. When are cheap investments the best investments in cases like Trade Desk? It is when they change how things are done in an industry or even create entirely new sectors. When this happens it often takes insight more so than analysis of fundamentals to get in when the valuation is still cheap. But, companies like Microsoft and Apple were similar stories back in the day and have routinely offered buying opportunities along the way.

Doing Your Homework on Cheap Investments

Yahoo Finance looks at cheap stocks as well and suggests 7 cheap stocks with potential for price appreciation. They also offer a note of caution about just looking at the cheap part!

Stocks under $5 usually aren’t the best stocks. After all, almost every company prices their initial public offering at $10 per share or more. Thus, if a stock is trading under $5, that means the stock has most likely been subject to a 50%-plus sell-off, which is a sign that the company is having major trouble.

For this reason alone, stocks under $5 should be classified as high-risk stocks by investors.

But, some of them should also be classified as high-reward stocks. Again, stocks under $5 got there because investors sold them in bunches. That means investor sentiment surrounding these stocks is depressed, and expectations are low. If the company can top those low expectations and sentiment dramatically improves, these same really beaten up stocks can become huge overnight winners.

They mention both Snap and Pandora with both doubled in stock price recently. The seven that they offer as buying opportunities are these.

Blue Apron: makes meal kits
Pier 1: Struggling but possibly recovering retailer
Big 5 Sporting Goods: sells sporting goods
Groupon: coupon and savings platform whose demise is not imminent
Francesca’s: woman’s clothing retailer up for acquisition
Blink: charges electronic vehicles
Sirius XM: broadcasting

The arguments for buying these stocks range from “all of the damage has already been done” to “putting their house in order” to “just wait until the need for their services catches up” which is the case for Blink as more and more electronic vehicles are sold.

In each case, investors should be wary and should realize that these stocks are risky propositions. And, in every case, these are not stocks to buy hold and forget about unless you have an investing “death wish!”

Recognizing the Right Value Story

There are times when the stock of a company is falling like a rock and everyone is bailing out, only to discover that the investment makes a huge comeback. One case in point was Sears several years ago. Yes, Sears was the leading retailer, fell behind the times and lost pretty much everything. Even today it is in trouble. But, in the early days of its demise the stock made a huge comeback. This was because investors finally realized how much property Sears owned!

Unencumbered property is generally considered part of a company’s margin of safety. However, in the case of Sears, they were unable to change how they did business, stay ahead of the issue of online sales, and only delayed the inevitable by selling their real estate arm to General Growth in 1995.

Nevertheless, for anyone who looked past Sears as a cheap and dying stock, recognized them as a real estate investment, and then purchased shares, it was a great investment. However, that factor only lasted while it lasted, making Sears a very good investment for a very short time.


When Are Cheap Investments the Best Investments? It is when nobody recognizes their hidden value.

Sears Was Briefly a Great Investment


When Are Cheap Investments the Best Investments?

The moral to this story is that cheap investments are the best investments when the market is looking elsewhere, when there is overlooked value, and when market enthusiasm drives up valuations into the stratosphere while leaving value stocks behind. Such may be the case today.

Why Invest in Boeing?

Not long ago we wrote about whether or not Boeing would need to outsource production in order to remain profitable. That question largely had to do with the threat of a long-term trade war and Boeing potentially losing markets as a result. The trade war may well be on its way to at least a temporary resolution so the question is why invest in Boeing over the long term? Essentially Boeing is a cash cow with a dominant position in an increasingly higher and higher cost of entry business. Its only real competitor is Airbus as the two of them control more than 85% of the commercial aviation market.


Boeing was founded by William Boeing in 1916 as Pacific Aero Products Co. He changed the name to The Boeing Company two years later. In 1997 Boeing merged with McDonnell Douglas in 1997. Boeing is the largest US exporter by dollar amount. The company ranks number five in the world as a defense contractor. Boeing manufactures and sells airplanes, rockets, satellites, and helicopters of its own design. It also leases products and provides lifetime product support to everything that it sells.

High Cost of Entry Business

Why invest in Boeing? Our first reason is that they are in a high cost of entry business. They deal in state of the art, high technology, and produce very expensive products, which they are able to routinely sell at handsome, profits for years and even decades. The amounts money needed to compete in this arena are huge, the skill sets needed take decades to develop, and the base technologies are closely held.

State of the Art Jets

The most recent major addition to Boeing’s fleet of jets is the 787 Dreamliner. This wide-body, long haul, mid-sized jet is roughly a fifth more fuel-efficient than its predecessors and competitors. Built with composite materials, the plane is lighter and cheaper to operate than other jets of comparable size and range.

Its noise-reducing features are state of the art as are it mostly electrical flight systems. The jet entered testing in 2009 and finished testing in 2011. Boeing spent roughly $32 Billion developing this jet.


The Dreamliner is one of the main reason why to invest in Boeing.

Boeing 787 Dreamliner


Not only did Boeing spend $32 Billion in development, but also it took just over 10 years from concept to a flying and sellable jet. Now the 787 is a mainstay in the commercial aviation market and Boeing is looking to develop the next start-of-the-art commercial jet. The only other company with comparable resources is Airbus.

Missiles and Satellites

Going back to the Minuteman missiles in silos across the wheat fields of North Dakota and grasslands of Montana to the current partnership with Lockheed Martin in the United Launch Alliance, Boeing has been in the rocket business. They still maintain missiles for the US nuclear deterrent and run the United Launch Alliance with Lockheed Martin. They maintained the Space Shuttles when that program was still running. This is again, a high cost of entry business that takes huge amounts of resources, state of the art technological skills, and the capacity to guard what are essentially state secrets forever.


Because Boeing is part of the United Launch Alliance is Why Invest in Boeing

United Launch Alliance Orion


Boeing does this work and does it at a profit as part of its Defense, Space, and Security division. This company is one of the mainstays of US military readiness and able to make a steady profit year in and year out.

Why Invest in Boeing?

As we so often come back to on these pages, long term successful investing depends on the analysis of intrinsic stock value and Boeing has this is spades! The company routinely makes money. This ability starts with the ability to turn new technology into marketable products. But, it is more with Boeing because they have such a wide range of skills and virtually control the commercial jet business along with Airbus. When they have to, they share little and inconsequential parts of their knowledge base to do offshore fabrication to maintain customer bases. Then they do all design, critical manufacturing, and assembly in the USA.

Adding Boeing to Your Portfolio

The Motley Fool writes about 3 Stocks to Build Your Portfolio Around. The first on their list is Boeing.

If you’re looking for one stock to build your portfolio around, one great company you can count on to hold its value over time while paying you a steady dividend, I can’t think of a better place to start than Boeing.

In business for more than a century, Boeing clearly has staying power. This company isn’t going to disappear until someone invents a better way to move quickly over long distances across large bodies of land and water. And while Boeing doesn’t have a monopoly on building planes, it arguably has the next best thing: an oligopoly between it and its rival Airbus, which between them account for roughly 88% of all commercial aircraft revenue.

With $13.6 billion in annual free cash flow to back up its $10.5 billion in reported earnings, you know that Boeing’s earnings are of exceedingly high quality, and more than sufficient to cover the dividend. Boeing’s payout ratio, in fact, is a very low 38%, meaning that only 38% of earnings suffice to pay the entire dividend.

Boeing has been paying dividends for decades and has been steadily increasing their dividend for the last seven years.

Boeing is a major player in commercial aviation and in the defense industry. This allows it to use technologies and skill sets developed in one arena and apply them to another. They are also important to the US economy as the exporter who rivals all of US agriculture in how much money they bring back to the USA. Although Boeing has substantial cash reserves, they do not have a large hoard of cash offshore.

There are certainly companies that have grown faster, but as the folks at The Motley Fool note, until someone invents a new technology for moving people and cargo quickly from one continent to another, Boeing will have customers. And, as higher technical skills make that job more efficient and profitable, Boeing will remain at the head of the line.

another, Boeing will have customers. And, as higher technical skills make that job more efficient and profitable, Boeing will remain at the head of the line.

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