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Sunday, 27 February 2005
A Reader Writes "I would appreciate any kind of guidance."
Hello Friends! That beautiful picture is a shot of Boston College from the BC Homepage. What a beautiful school and a wonderful city as well. Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice. As always, please remember that I am an amateur investor, so please consult with your professional investment advisors prior to making any decisions based on information on this website.

Checking my mail today, I saw that I received a nice letter from Chris who wrote:
Hi Bob,

My name is Chris and I stumbled upon your website today in search of
stock pick blog rings. I am a senior at Boston College and am taking
a financial services class. One of our projects is to split up in
groups and to pick stocks to create a portfolio. We are given a
million dollars and are asked to choose stock and justify the
choices. One thing my professor is keen on is the use of blogs
whether to take them for their face value or to understand their
misdirection.

Your page seems primarily focused on your past picks and monitoring
them, however, I was wondering if you might have an recent stock
picks that might seem good. I was also wondering how you initially
go about picking some stocks whether it be analyzing PE ratios or
betas or any other type of regression analysis. I am really open to
learning anything here and would appreciate any type of guidance.

Regards,

Chris



Chris, I hope that I may be of help to you! I hope that as a blogger I can provide you with more direction rather than misdirection.

I would like you to pick the stocks for your portfolio. You are welcome to any of mine :). But it is important that you understand why you might pick a stock...and see if your philosophy of investing is similar to mine (and your group's).

The first thing I like to do is to peruse the list of top percentage gainers. I have found over the years that within those lists are stocks that are worth considering for investment. You will have to see if that approach works for you!

Next step is to go to the latest quarterly results. You can find these over at Yahoo finance. Let me know if you have a problem, just scan through the headlines and see if you can find the latest quarter's results. Basically, what I am looking for in the latest quarter are two basic things: growth in revenue AND growth in earnings. In addition, if the company provides some positive guidance, like raising guidance for future results, well that is "gravy".

(You may start seeing that there isn't much 'magic' about my approach...just a bit of homework!)

Generally, at that point, I will go to Morningstar.com and check the "5-Yr Restated" financials. What am I looking for? Basically, growth in revenue...as steady as possible, same for the earnings. In addition, Morningstar gives information regarding free cash flow, and I insist on this being positive, and if there is a positive trend as well, then that is noted! Finally, on the lower part of the page is a balance sheet. Not being an accounting wiz, I simply look to make sure that the cash and current assets are greater than the current liabilities and that the long-term liabilities aren't too burdensome.

Next step, I like to touch on "valuation"....you can see this isn't my number one screen. For this, I generally click back on Yahoo Finance to "Key Statistics" for the stock I am researching. What do I look for there? I like to at least look at the market cap of the stock, the P/E, the PEG, and a number on the Price/Sales. I report on the number of shares, and see if there are a lot of sales out short....if there ARE a lot of short sellers, well, on an up move there might be a bit of a squeeze...as these shorts try to cover.

Finally, I go over to Stockcharts.com and look at a "point & figure" chart....I have found that these are helpful in getting a good feel for long-term trends as the columns of climbing 'x's' battle with the declining 'o's'.

PHEW...by the way, that's a photo of Faneuil Hall, one of my favorite tourist traps in the Boston area.

Anyhow, that's how I pick my stocks! But equally important is a little strategy on portfolio management. In the past, I didn't have any idea at all about moving into equities and moving back into cash depending on the overall market tone. In fact, I still don't have a great way of doing this. What I have settled on is an internal mechanism of using the activity of my own stocks to determine my trading direction....

What do I mean? Well, first of all, let's set a fixed maximum of stocks you are going to hold in this "phantom" portfolio. If you do it like I do it, you might consider 25 issues.

First, start at 50% invested. That is, start with 12 or 13 issues and 50% of your cash utilized. Pick stocks that fit the criteria I have suggested...you can pick recent stocks that I have written about, or find new ones tomorrow off the top % gainers list....just follow my screening techniques...they really are just common sense.

Next, sell any stock that drops 8%. Don't replace that stock with another issue unless you have a "buy signal" from the rest of your holdings. What I like to use is a sale at a gain. Now, when do you sell at a gain? Well, for me, I am trying to sell my losers quickly and sell my winners slowly.

What do I mean about that? What I mean, is that I sell 1/4 of my holdings when the stock hits a 30% gain, another 1/4 at 60%, 1/4 at 90%, 1/4 at 120%...and then sell 1/4 at 180%, 240%....until 360%...then I plan to continue selling 1/4 positions at 90% gains....

I hope you follow. I actually do this in practice.

Next on the downside, if I have sold a stock once (30% gain), then on the way back down, I sell at break-even instead of waiting for an 8% loss. On stocks that I have sold at higher levels of gains, I let the stock retrace 50% of the highest gain before unloading the shares. I will sell if clearly there is bad news....but generally, I like to try to avoid my own judgments, and let the price of the stock determine my action.

There are LOTS of stock blogs out there hyping all sorts of stuff. My methodology is very unsexy in my humble opinion, but I believe it is pretty common sensical....(is THAT a word?)....anyhow, I hope my discussion is helpful. Please write back and let me know what you decided and how things work out.

Bob


Posted by bobsadviceforstocks at 6:43 PM CST | Post Comment | Permalink
Updated: Sunday, 27 February 2005 9:42 PM CST

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