ANYONE CAN BUY STOCKS – READ THIS IF YOU WANT TO MAKE MONEY!

 

Since the March crash, the stock market is on a bull run and new investors are jumping in the pool!  Just in March 2020, more people opened an account with E-Trade than all of 2019!  Several of you have asked my advice on buying individual stocks.

A STOCK PRICE CAN DO THREE THINGS: 

  • Go Up
  • Stay Flat
  • Go Down.

You and I want to invest in companies whose shares are going up.  To increase your odds of your shares increasing, analyze a company’s risk profile, otherwise you are GAMBLING NOT INVESTING.  Just like school, investing requires homework.  You likely spent months or years to save enough money to invest.  Take the time analyzing individual companies to pick the best stocks to invest your hard-earned money.

If you do not have the time, invest in the S&P 500 ETF.  More on that in the conclusion.  I invest in both the S&P 500 ETF and individual stocks.

HOW MUCH CAN YOU AFFORD TO LOSE?

When a company declares bankruptcy, it means the company has more debt than money and assets.  At that point, EVERYONE lines up fighting to recover their money. The good news, stock shareholders are owed money.  The bad news and reality, you are at the back of the line and the money is typically gone before you see a dime. Debt holders are ALWAYS first in line when a company can no longer pay all debts.  Ninety-nine percent of the time there are zero dollars left for stockholders.  Some major bankruptcies in 2020:

 

Pick a percentage of your savings and investments you are willing to risk.  Hint- think small percentages.  In my 30’s I was investing about five percent in individual stocks.  And I lost a LOT {I’m crying as I type, forgive any typos}  of that money, picking the most talked about companies, versus doing my OWN homework!  Below are the stock evaluation factors I should have used.

When your sister in law (that you told me is not that bright) tells you now is the time to buy XYZ, etc.- PLEASE IGNORE HER!

STOCK EVALUATION FACTORS

 

 

EARNINGS

Earnings are the amount of profit that a company produces, usually reported quarterly and annually. The reported earnings can move a stock price up or down.  Even when the company hits or exceeds expectations, the stock price can go down.  This can happen because the future outlook is lowered, or something the CEO says that the analyst assigned to a stock did not like.  In other words, it is hard to predict the price direction following an earnings report and call.

A publicly traded company will hold a quarterly earnings call.  Anyone can join by going to the company’s website.  If you own the stock or have an interest in the company attend these calls.  Remember, you own a small part of this company.  BE LIKE MIKE – YOU OWN IT!

You want to look for companies with strong fundamentals that can give you steady returns with less risk.  The major factor that causes a company’s stock price to increase is the prospect of FUTURE greater earnings.

EARNINGS/DIVIDENDS

In addition to earnings, a dividend can be paid if the Board of Directors decides to distribute some of a company’s earnings to its shareholders.   Dividends are payments made by publicly traded companies as a reward to investors for putting their money into the company. All companies do NOT pay dividends, for instance Apple pays dividends while Amazon does NOT.

INTELLECTUAL PROPERTY

 

Intellectual property, refers to inventions that have monetary value, used in commerce.  Well-known types include: Patents, Trademarks and Trade Secrets, etc.   Apple’s iPhone designs are intellectual property. Apple’s intellectual property rights are valued in the hundreds of $BILLIONS.

The Pharmaceutical firms developing a COVID-19 vaccine, own the intellectual property rights, typically protected by patents.  The U.S. government recently accused the Chinese government of stealing COVID-19 vaccine intellectual property.  The better a product, the more important and valuable those patents and protection.

 

GOODWILL

 

 

Goodwill is the value of a company’s brand name, solid customer base, good customer relations, good employee relations, and proprietary technology.  When Boeing lost two aircraft, killing over 300 people, the company damaged their Good-Will.  Did you want to fly a Boeing Max after those incidents?  Many stockholders BAILED OUT!

 

See Boeing stock chart below.  If a company damages their goodwill, the stock price will drop, and the shareholders lose money.  When contemplating purchasing a stock, consider the job they are doing protecting their goodwill/reputation and any likely short comings.

 

COMPETITION

You must identify the company’s major competitors.  Who has the better products today, next year, 10 years from now, Ford, General Motors, Audi, Tesla?  Most companies today have global competition.  You want to invest in the companies with the best products today and more importantly the future!

MANAGEMENT TEAM

The last place you want to see your firm’s CEO is behind bars!

When Jeff Immelt, former CEO of GE retired, the stock went up.  Not very good for his ego, but I assure you, his net-worth is A+.  As a FORMER  stockholder of GE, I believe the stock went up because Mr. Immelt, was a TERRIBLE  leader.  A review by the new CEO proved me right!

When Steve Jobs died, Apple’s stock went down.  There was a fear he was irreplaceable.  Looks like Tim Cook, current CEO, is doing a great job. He has added services revenue streams to Apple, that have grown earnings and are expected to grow in the future. 

Who is leading the company you are considering investing your hard-earned money?  Is she any good?  Do they have a steady number two identified?  My simple rule- If I would not work for a CEO, why invest my hard earned money in her company. 

 

CHANGING BUSINESS ENVIRONMENT

 

 

Kodak is a great example of failing to see the changing business environment. Kodak’s business model was selling their customers an inexpensive, good camera, and the customers spent hundreds or thousands of dollars each year on film, ink and paper.  This worked like magic until the digital cameras came on the market.  Who do you think was the first company to patent a digital camera?  The answer- Kodak.  Kodak did not want to harm their cash cow businesses, so after inventing the digital camera they locked it in a vault.

Kodak, once one of the most powerful companies in the world (“Kodak Moments”) filed for bankruptcy in 2012.  Today, the company has a market capitalization of less than $1 billion. Apple’s market capitalization today is ~$1.7 Trillion.  Kodak could have purchased Apple years ago!

{Note: Last week the government awarded Kodak a $765 million loan under the Defense Production Act so it can begin producing drug ingredients. The loan is the first of its kind.  This moved Kodak from a $2/share stock, up to a high of $46/share and it ended Friday at ~$21.85/share!- WOW}

 

CONCLUSION

In today’s low interest rate environment, you are not going to become wealthy by simply saving your money in a bank account or Certificate of Deposit (CD). Wealth is created when you save your money and invest it in good assets that appreciate in value.

A large/majority portion of your savings should be directed to your company’s 401K plan or your ROTH IRA.  Next comes nonretirement assets that you can place in: ETF’s, real estate investments, stocks, etc.  You select your investment assets based on your risk tolerance or ability to handle loss of your money.  If you CANNOT afford to lose your hard-earned cash – do not risk it.  Select low risk investments.

You are responsible for self-educating yourself on whatever asset you select for investing.

During Berkshire Hathaway’s virtual annual meeting back in May, 2020, Warren Buffett stated, “For most people, the best thing to do is to own the S&P 500 index fund.”  By investing in an S&P 500 index fund, you are investing in the 500 companies included in that index, achieving immediate diversification. If a few of those businesses perform poorly or even go into bankruptcy it will not significantly change your returns. When you own one company and the stock prices goes to zero, you now have $0.00.  When you own the S&P 500 ETF and that same company goes to zero, you now have 499/500 or 99.80% of your hard-earned money!

In a recession, the S&P 500 ETF can lose 40% or more of it’s value!  NOTHING IS RISK FREE!

Investors Versus Traders:  A trader owns a stock for the short term, makes a profit and sells.  That short time can be seconds (not kidding) or years.  An investor desires to own a stock for the long term, typically years.  I am an investor and buy stocks I hope to pass to my daughter one day.  When the company’s fundamentals and risk profile change, I can and do sell.  I once owned General Electric and Sears and sold both when the companies lost their competitive advantages and had lousy leadership.  And yes, I lost some of my hard-earned money!

Patience is perhaps the most important virtue in investing — and that’s a lesson I had to learn the hard way.

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ABOUT ME

I am a proud nerd (as my beautiful wife and daughter have told me) investment and finance blogger, with a NC State, Chemical Engineering, University Rutgers, MBA and Harvard University, Advanced Management education.

I left a corporate career because I had a desire for making a difference as a speaker and writer, to help others. I was blessed to be coached and mentored by strong women and men in both my family and professional life.  It is my time to serve and give back.

DISCLAIMER

I started my first business at ~13 years of age (small but brilliantly created plant nursery). I am a successful investor in stocks, options, real estate and happy to share my personal finance and investment lessons learned with you.

However, I am NOT a licensed financial advisor.  Please do not construe my suggestions on this blog, as recommendations for your personal situation.  For individual finance advice please seek your own licensed CPA or fiduciary financial advisors.  

I write this weekly blog to make an impact by reaching an audience and demonstrating the need for financial literacy. I will help you get there.

 

 

 

Powers Investments Management, LLC

This blog will provide, information and simple strategies, that will assist you to achieve YOUR financial objectives and long term targets. For over 30 years, I solved multi-million dollar problems, for Fortune 10-250, companies. My formal education includes: Business, Finance and Chemical Engineering {Problem Solving} at: Harvard, Rutgers and North Carolina State. And an additional 30+ years, managing my family’s investment decisions. I currently manage/advise people with net-worths ranging from the tens of thousands to several million dollars.

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