“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!

Why Does Dividend Growth Investing Work So Well?

We have three simple answers to this question. They have to do with intrinsic stock value, outperformance of the market as a whole, and income protection in times of overall market decline.

Intrinsic Stock Value of Dividend Growth Stocks

First of all, steady dividend growth over the years is a result of a company making more money each year. A steadily increasing income stream indicates a strong intrinsic stock value. And a company with an intrinsic stock value in excess of its market price is always a good investment.

The market has a recurring tendency to be overly greedy when times are good and excessively fearful when times are bad. This fact can make the current market price of a stock an inexact predictor of underlying value in the coming years. A company sells a product that everyone needs and uses and has been successfully making money with that approach for decades or even more than a century. We refer to the likes of Coca Cola, Exxon Mobile, Colgate Palmolive, Procter & Gamble, and Eli Lilly and Company. These are investments with strong intrinsic value as they will endure and prosper over time.

The ability to steadily increase dividends over the years and decades is a sign of the intrinsic value of an investment and a guide to successful long term investing.

Market Performance Characteristics of Dividend Growth Stocks

Strong companies with high intrinsic value not only may pay increasing dividends over time but they tend to increase their share prices as well. Intelligent Income has a useful chart, courtesy of Ned Davis Research, in their article, 5 Reasons to Be a Dividend Growth Investor.

While it may seem counterintuitive, companies that consistently pay and grow their dividends have historically outperformed non-dividend stocks, further increasing the appeal of being a dividend growth investor.

[From the end of 1972 to the end of 1973,] companies that consistently grew their dividends during this time performed the best of any group and delivered the lowest volatility (standard deviation).

And, here is the chart showing that over a longer time frame, dividend growth investing provides the best returns.

A 10% return on investment, with dividends reinvested, will result in a doubling of value every ten years. This is a big part of why dividend growth investing works so well.

Dividends as Asset Protection in Down Markets

While dividend growth stocks outperform other dividend stocks and stocks that do not pay dividends, they also provide protection when the entire market is down. Intelligent Income again provides us with a useful graph courtesy of Hartford Funds. This shows us how much dividend income has contributed to total stock market returns over the years.

As we can see, steady and increasing income from dividends provides a significant return on investment over the years. When the stock market is languishing, dividends can provide a majority of returns, such as in the 1040s and 1970s. And, in the first decade of this century, when the market ended up lower than when it started, dividends provided the only income for someone who bought in 2000 and sold before the market recovered from the crash! And, we know that while the percent return of dividends is lower in years with a surging stock market, we also know that over time dividend growth stocks tend to outperform the rest of the market.

Criteria for Choosing Dividend Growth Stocks

We found an interesting article on Wallet Hacks about building a dividend growth investment portfolio. It is a first person account of how the author chose this approach and the criteria he uses to pick investments in this subset of stocks. He mentioned that Warren Buffett bought Coca Cola when it was low in 1988 and today gets a 45% dividend based on his original investment!

Buffett acquired shares of Coca-Cola in 1988. Back then he wrote “We expect to hold these securities for a long time. In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds.” (1998 letter)

The point of investing in companies that steadily increase their dividends is that you too can replicate Buffett’s success.

An easy approach to investing in dividend growth stocks is to pick a fund that simply does the investing for you. The author mentions Vanguard Dividend Appreciation Index Fund Investor Shares (VDAIX) although Fidelity and others offer similar products. The advantage is that you only need to make one investment and not several. And, you are getting a decent mix of blue chip dividend stocks such as Coca-Cola, P&G, Pepsi, Microsoft, J&J, Wal-Mart, IBM, Medtronic, CVS, and 3M.

Alternatively, you can choose your own stocks. In this case, choosing companies that have paid dividends for decades and have been increasing them for a quarter of a century or more is a good place to start. Then, to make sure that a great company is not starting to fade from the scene, look for “dividend coverage.” This is earnings per share divided by dividends per share. A good coverage is 2 or more. In other words, the company is paying out less than half of its earnings in dividends and is not simply jacking up the dividend in order to disguise a failing business!

And, when should you buy these companies? Because you are not trying to time the market and are relying on long term appreciation of stock price and dividends, you can simply invest a set amount every month, quarter, or year as your cash flow allows, using intrinsic stock value as a guide.

Why Does Dividend Growth Investing Work So Well? PPT

The best investing tips commonly have to do with how to go about the business of investing. Specific investing tips from your broker, your best friend, investment advisors, or news sources should be investigated by both fundamental analysis and technical analysis before they are acted upon. The problem with second hand investing tips is that they are often yesterday’s news. The market has already acted upon them and driven the stock price up. The best of all investing tips usually come from successful investors and are general in nature. Successful investors like to buy at bargain prices. Successful investors commonly sell stocks and get out of the market when it does not make sense.

Stock investors use fundamental analysis and technical analysis to pick stocks to buy and sell. Long term value investors primarily use fundamental analysis to determine intrinsic stock value and let that be their guide. Short term investors use technical analysis of the market to profit from trends, both up and down. Which system do you use for investing? What are the strong and weak points of each approach?

Value Investing

The first system for investing is to assess the long term value of the investment. There are investors who have used the principles of value investing to become very wealthy. This approach requires patience and the ability to keep your money in an investment for many years. Last year we asked how many years are required to make an investment long term to qualify for true buy and hold investing.

Calculating intrinsic stock value takes into account the long term. If a company shows long term promise its intrinsic value may well exceed its market value and it is a stock to buy and hold. Then, to take advantage of the market you need to hold the stock for a decade or more in order to see the long term benefits of buy and hold investing.

If your system is to calculate intrinsic value you will buy and hold stocks with the promise of a healthy income stream for years to come. You can apply this approach to any given stock tip to pick the winners and ignore the losers.

The down side of long term value investing is that if you need your money for an emergency or an expected expense like a child’s college education you may well end up pulling money out of the investment during a down market and lose money.

Technical Analysis and Short Term Investing

The second system of investing is to use statistical analysis to predict and profit from temporary swing in the market. Short term investment and even day trading both allow you to avoid the problem of having to pull money out of a down investment. This is because you mostly hold cash and only buy and sell when the market presents an opportunity.

There are two things a person may be looking for in a short term investment. One is a place to park their money that is safe and pays better than a bank savings account. The other is a way to profit from the ups and downs of the stock market. The first just has to do with checking out interest rates on T Bills, CD’s, and other short term debt instruments. The second is where technical analysis tools such as Candlestick pattern formations can help a person to trade stocks and make a substantially better profit than the bank offers or even what one can gain from long term investing.

In this case when you are presented with an investing tip you will not look at fundamentals. You will look at market price patterns and buy or sell for the short term in search of profits. The down side of this approach is that no one is perfect at market timing. Thus you will miss out on opportunities and also lose money at times by making poor choices. On the other hand, when you choose correctly you may make the same profit in a couple of days that a long investor will need to wait years for!

In either case, the point is to use a system. Modify your system as needed. And always use your system to avoid falling into the twin traps of greed and fear that torpedo so many investors.

Playing the Market

Back in the 1920’s, the roaring twenties; playing the stock market was common. Stocks were going up and it was hard not to buy a stock and not see its value rise. Unfortunately the stock market crashed in 1929 and the overall stock market lost nearly half its value. Many stocks lost all of their value and companies went out of business. Unfortunately the tendency to play the market has not gone away. As the Chinese market rose a couple of years ago to new heights investors picked stocks based on lucky sounding names. And the Chinese market crashed. The dot com bubble and crash and the 2008 crash were likewise set up by inflated stock values as investors fought to get into what appeared to be an eternally rising market. How do you avoid playing the market? This is where the concept of intrinsic stock value comes in.

Benjamin Graham and Intrinsic Value

The intrinsic value of stock is its fundamental value based on predicted earnings. Investors compare intrinsic value to market value and when the intrinsic value of stock in a solid company is more than market value the stock is typically considered a buy. This is because the market will eventually catch up and price the stock accurately. If you are holding a stock whose intrinsic value is less than market value it is time to sell the stock before the market corrects down to the real value of the stock based on projected earnings. It was in the wake of the 1929 crash that Benjamin Graham came up with the concept of intrinsic value. And in 1949 he published a book entitled The Intelligent Investor which included his ideas.

Analyze the stock to determine its price based on predicted future income and then subtract the current stock price. Calculate expected company cash flow and then discount to current dollars. Determining intrinsic value of stock is a discounted cash flow valuation. The key to determining intrinsic value of stock is getting a clear idea of the medium and long term prospects of the business in question. Successful stock investors learn to judge how well a company will manage its assets, products, costs, R&D, and marketing. When the picture is clear an investor can make an informed decision. If the market price is less than the intrinsic value of stock it is time to buy and if one owns the stock and the prices are reversed it is time to sell.

A Formula for Calculating Intrinsic Value of Stock

Here is the original formula that Benjamin Graham suggested as modified in 1962 and again in 1974.

• Preceding twelve months earnings per share, EPS
• A constant of 8.5 representing an expected price to earnings ratio, P/E ratio, for a company that is not growing
• g being an estimate of long term growth (five years)
• A constant = 4.4, the average yield of high grade corporate bonds in the early 1960 decade
• Y = The current yield of AAA corporate bonds
• V = intrinsic value

The formula is as follows:
V = (EPS x (8.5 + 2g) x 4.4)/Y

How to make money through investing in stocks is to consider the intrinsic value of every stock that you want to buy and every stock that you hold.

How to Make Money through Investing in Stocks PPT

Price versus Value

Over the long run the stock market prices stocks fairly. High priced stocks get that way because they make money and show promise of making more. Low priced stocks may seem very attractive. But our first of three investing mistakes to avoid is to buy just based on price. Valuewalk reviews investing mistakes and reminds us to look at value and not price.

Focusing on the Stock Price and Not Intrinsic Value

There are two parts to common investment mistake. If the intrinsic value of a stock is 50% or even 100% higher, then waiting for the stock to drop a measly 2% before buying doesn’t make sense. I have found myself quibbling over wanting to buy it “just a little cheaper”. How many times have you found yourself submitting a buy order and entering the bid price just a few cents lower than the stock price?

Stop quibbling over cents.

The second point is that the stock price does not dictate intrinsic value. If the stock drops 20%, it’s easy to get worried, but the best thing to do is nothing. I’ve made the mistake of making an emotional decision. The stock price is not an indicator of intrinsic value.

Remember intrinsic value and how to calculate it.

The Past Does Not Always Predict the Future

The second of three investing mistakes to avoid is the belief that recent market performance is always indicative of future performance. FoxBusiness refers to this as chasing past performance in its articles about investment mistakes.

When it comes to investing often people spend their time chasing past performance instead of looking out for new opportunities. If the best place to be in 2014 was U.S. large capitalization stocks chances are a slew of investors will be putting their money in the same place in 2015. That may seem logical, but Bernstein says it’s something you should avoid doing. “The biggest mistake in the late 90s was no one wanted to own small and mid-cap stocks,” says Bernstein. “What happened was for the next six years large cap was the worst place to be and small and mid-cap dramatically outperformed.”

This brings us back to fundamentals and intrinsic analysis. These are your friends over the long term. To the extent that you can very accurately time the market you can make a lot of money in a short time, but it is a rare bird that does not get burned eventually using this approach.

Cut Your Losses

The point of investing is to make money. But, what happens when you buy a stock and the price falls, and falls again and falls again? The third of our three investing tips to avoid is to learn to cut your losses. USA Today refers to this as the one major investing mistake.

The day you hit “buy,” you’re kind of giddy with excitement, and you check the stock price every day thereafter. And what do you do if the stock goes down?

If you’re like most people, you’ll likely hold onto it. Maybe it’s just a temporary setback, you might think, or perhaps the market is in disarray. Maybe it’s just undervalued! You even consider buying more. And maybe the days turn to weeks… turn to months. And it’s still sitting there.

This brings us back again, to analysis of fundamentals. Why is the stock going down? Do not let the psychology of fear and greed defeat you. Analyze. Many years ago Xerox was making a comeback. It was subject to a takeover bid. The takeover artists become over extended and had to sell to meet margin requirements and the stock fell to half it price. Those who knew the fundamentals bought and doubled their money in one day as the stock recovered. On the other hand IBM missed the boat on personal computers early in the game and the stock fell and then flat lined for ten years. Know and use the fundamentals both to buy winners and to cut your losses on losers.

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European stocks and the euro felt the effects on Monday of a stark warning about the currency bloc’s economic prospects, keeping pressure on rock-bottom oil prices following weak data from Asia.

ECB policymaker Ewald Nowotny’s warning of a “massive weakening” of the economy followed a rating downgrade in the bloc’s third largest economy Italy, buoying bond markets as investors positioned for a fresh round of central bank stimulus.

Europe’s index of top shares, the FTSEurofirst, dipped 0.6 percent, as weakening Chinese trade and data showing Japan’s recession to be deeper than initially expected fed global growth fears.

How much will the Euro zone economy weaken? How far will the Euro fall? And how will these factors affect European investment prospects?

When to Invest

If you are looking for deals in European stocks you may wish to wait and see how bad things get. The old saying from Rothschild is to invest when there is blood in the streets. That is to say, wait until things are at their worst and then pick up deals before thing start to get better. For example construction companies took a recent hit and could also be beneficiaries of stimulus cash. Bloomberg reports the European stock decline.

A slump in construction and chemicals companies sent European stocks down after a four-week rally. The Stoxx Europe 600 Index slid 0.5 percent to 349.37 at 12:30 p.m. in London after a 1.1 percent increase last week propelled it to its highest level since January 2008. Sika AG tumbled 19 percent today and Cie. de Saint-Gobain SA also fell as a hostile bid by Europe’s biggest supplier of building materials sparked a management revolt at the Swiss company. The DAX Index dropped 0.5 percent from a record after a report showed German industrial production climbed less than forecast. Bayer AG declined after a trade group said 2015 sales growth for the nation’s chemical industry will be similar to this year’s.

The economy in the euro area is “ticking along at the bottom. No major drama but no real sign of growth either,” said Lex Van Dam, a fund manager at Hampstead Capital LLP in London. “European markets remain underpinned by the Draghi put, but it’s worrying that he seems to be losing support within his own monetary committee.”

European stocks recent hit a seven year high with a month long rally. Now things might get bad as economic news worsens. The general opinion is that the European central bank will start another round of stimulus measures. Correctly anticipating how these measures will affect the economy will be a good guide to European investment prospects.

Deflation

The overriding concern of policy makers in Europe is that they will descend into a period of deflation similar to what has plagued Japan for more than two decades. The Dallas News refers to this prospect as Europe’s economic bugbear.

But it’s not debt – Europe’s main economic problem in recent years – that is driving speculation the ECB will switch on the printing press to help the economy. It’s deflation.

Longer-term deflation encourages people to put off spending and can prove difficult to reverse because it requires altering people’s expectations. It can lead to years of economic stagnation, as in Japan over the past two decades, or at worst, into something more pernicious, such as the Great Depression of the 1930s.

European investment prospects hinge on whether or not the central bank will be able to avert a slide into long term deflation in Europe.

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In order to be successful in this market, Jim Cramer recommends investors stop bottom fishing. Rather, avoid the catfish and stick with the top players; gone are the days where the ugly stocks need to be bought.

“I know the idea of chasing winners can be upsetting, but unfortunately, 2014’s been all about angling from the 52-week high list, and it won’t stop now with just 20 shopping days until the end of the year,” the “Mad Money” host said.

Airlines have done well as the cost of fuel has fallen. With no immediate end to the fall in oil prices, airline stocks are likely to be good for value investing for 2015.

Selective Gains in 2015

The general consensus is that the US economy will slow in 2015 and the market advance will not be as broad as in 2014. Kiplinger’s stock market outlook for 2015 is that the market will be more volatile and that you will need to think a bit before value investing for 2015.

But for now, the bullish case is not only intact, it’s strong. A vibrant stateside economy will provide strong support for U.S. stocks, while Europe’s woes will create some compelling bargains. Analysts expect earnings growth in 2015 of 8% to 10%, on average, for companies in the S&P 500. With shares in the broad market selling at 16 times estimated 2015 earnings, prices of U.S. stocks carry a slight premium, but are nowhere near the peak levels of past market tops. And plenty of themes from lower oil prices to a rising dollar to a stronger consumer could pay off for investors in 2015.

With the price of oil lower people are paying less to gas up their cars and less to heat their homes. This typically translates into more retail sales, eating out at restaurants and vacations. These facts point to possible sectors for value investing in 2015.

The Prices of Oil and Natural Gas

How Much Does It Cost to Produce Oil?

A measure of the total cost to produce crude oil and natural gas is the upstream costs. The upstream cost includes lifting and finding costs. Lifting costs are the costs to operate and maintain oil and gas wells and related equipment and facilities to bring oil and gas to the surface. Finding costs are the costs of exploring for and developing reserves of oil and gas and the costs to purchase properties or acquire leases that might contain oil and gas reserves.

The price of oil is all about the US fracking boom and OPEC trying to protect its market share. In the Middle East it costs about $17 to produce a barrel of oil. This includes finding the oil and then bringing it to the surface. In the USA this figure is $31 on land and $52 offshore. Thus the Saudis and others better afford a drop in the price of oil than US companies engaged in high tech extraction of oil trapped in shale deposits. Value investing in 2015 will have a lot to do with how long OPEC continues to produce oil at the current rate and how badly they want to protect market share at all costs. So long as high production continues as both Japan and Europe slide into recession prices will remain low.

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About $4.3 trillion has been wiped from the value of global equities over the past four weeks on concern global economic growth is slowing. The European Central Bank started purchases of covered bonds today in an effort to stimulate the region’s economy, according to three people familiar with the matter. Chinese expansion will slow to about 4 percent annually after 2020 following decades of rapid growth, the Conference Board said before gross domestic product data due tomorrow.

If, indeed, the global economy is going to slow substantially that will eventually have an effect on the US stock market. On the other hand much lower energy costs in the USA and continued low interest rates may keep the market afloat. Accurate fundamental analysis is necessary to make the decision to buy or sell stock futures.

Stock Futures

According to Investopedia the futures definition is as follows:

A financial contract obligating the buyer to purchase an asset (or the seller to sell an asset), such as a physical commodity or a financial instrument, at a predetermined future date and price. Futures contracts detail the quality and quantity of the underlying asset; they are standardized to facilitate trading on a futures exchange. Some futures contracts may call for physical delivery of the asset, while others are settled in cash. The futures markets are characterized by the ability to use very high leverage relative to stock markets.

Futures can be used either to hedge or to speculate on the price movement of the underlying asset. For example, a producer of corn could use futures to lock in a certain price and reduce risk (hedge). On the other hand, anybody could speculate on the price movement of corn by going long or short using futures.

Depending on your read of the market you will choose to buy or sell stock futures. Your interest may be speculation or it may be your desire to hedge risk.

Buy or Sell Stock Futures

Investors buy stock futures when they believe that the value of a stock will go up and they sell stock futures when they believe that the value of a stock will fall. Investors.com notes that stock futures rose on Tuesday, Oct. 21, because of strong quarterly reports.

Stock futures rose Tuesday bucked up by quarterly earnings reports and an updraft on European markets.

Dow futures traded 64.3 above fair market value, and well below their early highs. S&P 500 futures pared their gain to 12.9 points. Nasdaq futures were steady and up 36.3 points.

Big footprints stamped across premarket action on the stock market today, with Kimberly Clark (NYSE:KMB), Travelers Co. (NYSE:TRV), Verizon (NYSE:VZ) and United Technologies (NYSE:UTX) ticking higher after delivering quarterly results.

If you believe that the market is headed up you probably want to buy and if you think that the big correction is just around the corner you perhaps want to sell. As always do your own homework before deciding to buy or sell stock futures.

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Qualities of the Ideal Stock Investment

The ideal stock investment is in a company that makes something that fulfills a basic need. The company should control its market sector through patents, aggressive research and development, continual new product development or by having such a high cost of entry business that competitors cannot make a dent in their profits. The company also needs to have a substantial margin of safety. This can be cash in the bank or unencumbered property. It should also include the fact that whatever the company makes will not soon be obsolete. Obviously a prosperous carriage maker at the end of the 19th century would have had to move into the auto market. And the company must not be so dominant in its sector that it is broken up by antitrust legislation such as happened with AT&T, the widow and orphan stock of much of the 20th century.

Making Things That People Need

The best investments in the coming years will be in things that make a difference. Drought is plaguing much of the world and causing civil strife. Cheap and efficient water purification systems could make huge differences in many parts of the world. One of the best stock investments today for profits tomorrow could well in a startup company that will provide clean and pure water where it currently does not exist. The internet is here to stay and the world is wired. A company like Cisco that virtually controls the world of routers will likely prosper into the indefinite future. And anyone who invents a cure for cancer will write their own ticket, so long as patents last.

Making Things That People Want

We wrote years ago about investing in beer. They were making beer in 9,500 BC. It will be around for at least that long again. This is a product that makes money and will not go away. Consumer products in general are safe long term investments. What one gives up in quick profits is made up in steady gains and dividends.

Doing It Right

Good management can make a huge difference between moderate profits and great profits. Where are the best stock investments today? Look for a well-run company. Look for a company that keeps its costs down and efficiently brings products to market. As always to your own homework and be satisfied with routine, steady profits.

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Risk Management in Your Life and Investments

Investing is part of life and not a separate entity. So, it is important to have your financial life in order before even starting to invest. Build a stable financial platform for your life first of all.

Pay off any credit card debts: It is difficult for a beginner to make 18% a year on investments but that is what you are probably paying on credit card interest.

Build a cash reserve: Put enough money in a bank account for six months of food, utilities and mortgage payments. Investments do not always do well so do not find yourself losing money on an investment that should have gone to buying food for your children.

Buy instead of renting: One of the best investment deals around is still the deduction of mortgage interest from your federal taxes.

Once you have done these things the next basics of successful investing are to decide why you are investing and to develop investment strategies to get what you want.

Decide How Much Money to Put at Risk

There are generally safe investments like many dividend stocks and there are growth stocks that may result in a hundred fold return on investment or may go bust. The basics of successful investing require that you diversify your investment portfolio to include safe albeit low paying investments and investments with the potential to let you retire early to a life of ease. The longer you have to invest before you want to use your money the more risk you can take. If you are simply investing for retirement you can pick a handful of higher risk stocks knowing that if you lose money on them you can make it back with the slow steady returns of you conservative investments. If you are investing to put your children through college you will have a shorter time frame.

Learn and Practice

While you are waiting to get enough money together to start buying stocks start reading about the stock market. Learn about the various market sectors. You can get a lot of quick information from sources like the Google or Yahoo Finance pages. And continue to read. There is always a lot of hype written about the markets and individual stocks. Read what the experts say and then wait to see what happens. For example, at the top of a market rally there tends to be a lot of enthusiasm that evaporates along with inflated prices as the market crashes. And, pick a couple of stocks that you like. You can simply note the price in a notebook and pretend that you bought it or you can buy one share of a stock like Apple for about $100. In either case you will learn how to pick stocks, follow them, read financial reports and when to sell before a correction.

Look for article II of basics of successful investing next week.

Basics of Successful Investing I DOC

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