Tuesday, December 28, 2010

Investing Success - How to Know if You Have It

Ever since my first losing trade, I hated the feeling of losing money. I continued to look for ways to lower my risk of loss, knowing that there were always going to be losing investments.

As a result, I learned that you can't measure progress if you don't have a stable starting point (current state). And measuring your success and failures is required if you want better results, investing or otherwise.

And in turn, I steadily increased my use of processes for investing.

So it was great to read the following blog post at The Reformed Broker: Trade School: If It Can’t Be Measured, It Can’t Be Managed.

If you're not measuring both successes and failures, how on earth can you manage your portfolio or trading account?

Start 2011 off on the right foot and start get things stabilized by making your list of personal finance goals TODAY!

Friday, May 28, 2010

Should Personal Finance Writers Be Liable For Bad Advice

George Mannes (money.cnn.com) wrote an article on the "responsibility" that personal finance writers have regarding the advice they provide.

My blog is all about education, so this topic is something that I think about often. And I think that Mr. Mannes last sentence sums things up nicely:

As I have learned from personal experience, if people think I've given bad advice, word gets around pretty quickly.

I tend to stay away from providing advice, simply because your advice must be customized for your unique financial situation. And even then, you are ultimately responsible for your financial future (Principle #1)!

So don't take anyone's word for it, unless it is your own.


Should personal finance writers be liable for bad advice?

George Mannes - CNN Money


Monday, April 26, 2010

Fundamental Analysis Techniques: Estimate the true "Value" of an Investment

Fundamental analysis techniques use financial data to estimate the "true" value of an investment instrument. The purpose is to compare this value with the current market value, and find investments that are mispriced.

If the "true" value is lower than the current market price, a trader would consider the investment vehicle "overvalued", which is a sell signal.

When the estimated value is higher than the current market price, the investor would say that the investment was "undervalued", which is a buy signal.

The financial data used in the estimation can be different, based on the type of investment.

In addition, fundamental analysis techniques take into account macroeconomic factors such as global, national, and industrial outlooks, as well as interest rates.

Warren Buffet's success with this type of analysis is well-publicized, and he is considered to be one of the best fundamental investors.


  • Markets, over a long period of time, tend to be driven by fundamental factors, making fundamental analysis a useful tool for assessing potential, long-term market conditions
  • Generally Accepted Accounting Practices (GAAP) allow investors to calculate and compare true value and financial information for different companies

  • Markets do not always behave in agreement with fundamental information
    • Companies with superior fundamentals can fall in price and lose money for investors during a market correction or recession
  • Standard accounting practices are not set in stone, and do have some flexibility
    • Companies can use "earnings management" and/or report "pro forma earnings" to improve their financial picture
  • Standard accounting practices are not guarantees
    • Companies still manipulate their financial data ("cook the books")
    • Enron and WorldCom are recent examples

Click here to read the full article -- Permalink -- "Fundamental Analysis Techniques: Estimate the true "Value" of an Investment"

Key Financial Info

  • Sales
  • EBITDA (Earnings Bedore Interest, Taxes, Depreciation, and Amortization
  • Net Income
  • EPS
  • Dividend/Share
  • Price/Earnings (P/E Ratio)
  • Price/Book Value
  • Price/Sales
  • Price/Cashflow
  • Return on Equity (ROE)
  • Return on Assets (ROA)
  • Operating Margin
  • Net Margin
Financial Risk
  • Debt/Equity

The price-to-earnings ratio (P/E Ratio) is one common data point used in fundamental analysis. You will need the current market price for the investment instrument you're considering, as well as the earnings per share (EPS) of that same instrument.

Dividing the current price by the earnings per share will give you the P/E Ratio. For example, go to the Yahoo! Finance (Click here to open Yahoo! Finance in a new window) or Marketwatch (Click here to open Marketwatch in a new window) webpages and look up a quote for Microsoft (MSFT).

These sites have a lot of information in the "profile" or "key statistics" pages. The pages have done some of the heavy lifting for you, but most of the fundamental analysis techniques listed on this page will require that you look at the companies financial statements. Assume that MSFT stock is currently trading at $25.50, with an EPS of $1.62 / share.

As stated above, the P/E Ratio is calculated by dividing the price per share (25.5) by the earnings per share (1.62). This gives you a P/E Ratio of ~15.74. On a side note, you may have noticed the abbreviation "TTM" next to the EPS (and the P/E Ratio the sites calculate for you). TTM stands for "trailing twelve months". This means that you are using the earnings from the past twelve months (verses forward looking earnings). Now its time to make some comparisons.

Lets assume that Microsoft is part of an industry group that has an average P/E ratio of 20. So MSFT has a lower P/E ratio than its industry group, meaning that it is undervalued when compared to its industry group. That said, you need to take into account all the different facts that affect price and earnings before truly deciding whether the P/E ratio is accurate. This is true for all fundamental analysis techniques.

Sunday, April 18, 2010

The Number One Rule for Investment Clubs

There are several things to consider when joining investment clubs, but there is one rule that will keep you from making a HUGE mistake.

A great friend, former colleague and business partner (owner of Entrepreneur-Starter-Kit.com) recently asked the following question:

"What are the dos and don’ts of joining an investment club?"

This is a great question, because investment clubs are an excellent way to learn about investing and trading. Which means leveraging other peoples knowledge, and saving yourself time and money.

The right club allows you to learn about investing in a pressure free environment, hear a variety of opinions, share ideas and strategies, and even pool your money for greater buying power.

Click here to read the full article -- Permalink -- "The Number One Rule for Investment Clubs"

Thursday, March 25, 2010

Is Your Financial Advisor a Yes Man?

Recently, I posted an article from CNN Money to Twitter (@investsafely) regarding investment advisors, entitled "Do you have a yes-man problem when it comes to financial advice?"

To summarize, the article covered a study on investment advisor bias. Actors went to advisors with fake investment portfolios. Long story short, the advice was largely based on the current holdings of the "client".

In other words, instead of looking at each person’s goals and objectives, advisors looked at the current investments and recommended more of the same.

One follower asked the question: "So what is the solution?"

Click for the full article -- Permalink -- "Is Your Financial Advisor a Yes Man?"