Old School Value

This is part 4 of the How to Invest in the Stock Market series.

How to Invest in the Stock Market: Part 1 | Part 2 | Part 3 | Part 4 (current page)

To conclude this series on learning to invest in stocks, I originally planned to list up some sites, blogs and other resources but figured the investing blogroll I have up already is sufficient.

Rather, I would like to close out this series with 10 points on my reflections from investing and what it has done for me over my short investment period.

Reflections on Investing

If you have followed this series from the beginning, you’ll know I started with nothing. No knowledge and close to no money. I was biased that the market was equivalent to gambling and believed that working hard and going up the corporate ladder was the only method to success since I had no interest in economics, finance and business. I had laser tunnel vision in trying to do well at work. The fact that I have an engineering background and my thought process was wired to be analytical didn’t make it easier for me to “look around”.

1. Investing broadened my mind

I love the process of investing and I also have a thirst for knowledge. The resulting proceeds is the icing on the cake. My friend (probably reading this) tells me I should teach since I seem to be better at teaching people what to pick rather than doing it out myself

Investing has broadened my mind by forcing me to think in different ways and to look at a situation from different angles and perspectives. It broke the mold that many engineers have of straight line and top-bottom thinking.

2. Investing proved I was wrong

I was the type of person you hate to get into arguments with because I always had to be right and I would always find some way to prove it. If I didn’t have the facts with me at that point in time, I would gather it later and let you know why I was right again. When I first started this blog, it started off with a bang by receiving negative comments from people because the methods I use were “hideous” to them. I would spend as much time on a comment as I would on an article just to point out every single detail. You get the idea.

Investing has shown me that I am wrong. People leaving comments have proven that I am wrong and then the market nails that fact in. The more important thing now is that I don’t care whether I am wrong. I like to be told constructively that I am wrong. I listen to why people believe I am wrong. I ponder their points and if what they say is true, I now admit my mistake, learn and move on to more lessons.

3. Investing has helped me to ignore noise

Investing has helped me in determining what was real useful information and what was noise. It has helped me to become efficient in processing data and to ignore the noise that fills the world today.

4. Investing taught me about businesses

I would never have dreamed on wanting my own business. Investing and looking at stocks as pieces of businesses has placed a desire to start my own business and I am in the process of doing so. The things I have learnt by reading annual and quarterly reports, financial statements and books have all been beneficial in how to approach starting and running a business.

5. Investing has made me responsible

I would probably still be spending my cash on gadgets, toys and other useless things to satisfy my hobbies rather than working towards the things that were important. I’ve dropped the hobbies that were time wasters and concentrated on helping my wife feel secure by managing our finances properly.

6. Investing reminds me of my purpose

I don’t invest to purely just accumulate wealth. That isn’t something I believe in. I have a purpose and reason for why I invest and it isn’t to get rich or retire comfortably. This helps to prevent me from getting over greedy. Do you have a purpose or is it just to get rich?

7. Investing has made me part of a social community

I was never into the whole internet friend/community thing. Just never bothered, but I realized that interacting with like minded and driven people was stimulating in so many good ways.

8. Investing makes me want to help others

You’ve heard horror stories of people losing their entire wealth in the market and going bankrupt. They bring devastation not only to themselves but to their family and other close relationships. I don’t want this happening to anyone so at any given chance I enjoy discussing financial issues to help others.

9. Investing organizes my thoughts

I’m not a very good speaker as I tend to jump between points often. When performing research and writing on this blog, I am required to lay out my thoughts in an easy to follow and understandable manner which in turn helps me to see things clearer as well. If my writings were jumbled and all over the place, I’m sure you wouldn’t be here reading anything I had to say.

10. Investing has opened up different avenues of skills

The whole process of investing and this blog has taught me many new skills. I now understand web design platforms, some coding, graphic design, sales, marketing, SEO and other little bits and pieces that truly are valuable. How do I know this is valuable? Well, I’ve been able to use every piece of information accumulated for a personal business project I am currently undertaking.

Conclusion

Investing is more than just gaining money. The 1000+% return with VNDA sure would have been nice but investing opens up a pandora’s box. Some refer to it as a journey or a game but whatever you call it, have fun with it, don’t go wild or do crazy things.

One final important point I would like to make is that, if I can do it, so can you.

This is part 3 of the How to Invest in the Stock Market series.

How to Invest in the Stock Market: Part 1 | Part 2 | Part 3 | Part 4

Advanced Level Investing - Well…Not Really

For lack of a better description, I’ve titled this stage as advanced.

Following on from Part 2, the next step I took was to try and understand how the financial statements provided a future view of the company. Financial statements only provide a snapshot of the company at the time of writing and there wasn’t any useful information that explained how to interpret each line to determine the ongoing business.

I was stranded on a frustrated plateau for many months until I got to reading The Art of Short Selling. Most books I’ve read tell you what to look for when buying a business. This book focuses purely on the warning signs of the business. Eventually I was able to understand statements better and wrote a series on analyzing and interpreting each financial statement.

An excellent advanced application of analyzing financial statements can also be found at Investopedia.

Special Situations

So after all the reading and studying, I’m now at a point where I can study the company and be fairly confident in my analysis approach. But buying and holding just didn’t cut it for me. I wanted to find opportunities in places people didn’t know about and somehow I came across my first merger involving Tribune and made a tidy profit of 10% in less than a month while the market was sliding down.

Something clicked.

I did a little searching and found that Greenblatt had written a book, You Can Be a Stock Market Genius, specifically on special situations after which I wrote a series on special situations involving merger arbitrage, spinoffs and tenders.

It was also around this time that Interactive Corp (IACI) spunoff 4 divisions. HSN Inc (HSNI), Ticketmaster (TKTM), Tree.com (TREE) and Interval Leisure Group (IILG). Too bad I didn’t purchase any of them because the volatility of the market got to me. I look back and kick myself for the 200%+ returns from HSNI and TREE and 30+% of the other two.

Ben Graham Cheap Cigar Butts

The only downside to special situations is that the profitable ones don’t appear so often. This led me to start going through Ben Graham’s screen to find many cheap distressed companies. These are the businesses that have one last puff remaining in them. Buffett referred to this as cigar butt investing.

Now that I am comfortable going through the financial statements of each business except financial institutions, I am now over the fear of the dreaded “penny stock”. A company that is undervalued at $1 or $100 have the same thing in common. They are both undervalued. So by focusing on the financials and operations of the business, great opportunities can be found where people fear to tread.

Take iGo Inc for example. It’s stock price is $0.62 with pretty good volume, yet the stock is rock solid. The company lost its biggest customer that accounts fo 42% of revenues but the stock dropped 0% on that news. That’s right, 0%. How many companies can boast the same thing?

Bankruptcies, Debt and Distressed Debt

Bankruptcies and distressed debt is a completely new field for me so I’m afraid I can’t elaborate. But I currently hold GGP and will definitely learn something from it.

Selling

Knowing when to sell is one of my biggest challenges. In a previous article on knowing when to sell, I mentioned the basics of selling.

• You made a mistake in judging the company
• The company fundamentals have changed
• A better value or opportunity comes along
• The need for emergency cash
• Too far above intrinsic value

What I should also include now is that when buying a company, an exit strategy must also exist. When you put in that trade order, someone is selling it to you. Why is that person selling? Only one person is right in the transaction.

I still have trouble selling some ideas which is all pschylogical and something that I am still working on.

Coming Up

The next post will feature a list of resources to help improve your investing acumen.

This is part 2 of the How to Invest in the Stock Market series.

How to Invest in the Stock Market: Part 1 | Part 2 | Part 3 | Part 4

How to Get Started

I found that getting started was the hardest part simply because I just didn’t know where to begin. But I soon found out that learning how to invest is the same as learning anything else. i.e. you have to crawl before you walk and run. There was no shortcut if I wanted to do it properly.

After reading many news and stock tip articles off the internet, everything still made no sense and I remained clueless after spending so much time reading. So I did what we all do when we start learning about a new topic. Identify the basics work up towards the intermediate level followed by advanced techniques.

Basic Level Investing

The following sites will guide you in why you should invest, what should you invest in, how to invest, the different types of stocks, what causes price changes etc etc.

• The Fool.com Investing basics
• Investopedia Basic Investing Tutorial

These two sites alone will provide you with more than enough information on the basics. I spent a considerable amount of time trying to read everything. I still consult Investopedia to this day.

Once the basics were down, I had a strong desire to understand the financial statements and what each line and term meant. I knew by this point that a thorough understanding of the accounting terms and financial ratios was required. With no prior education in accounting or finance, it went over my head at first, but as I kept referring back to it over and over again, it slowly started to make sense.

• Introduction to financial statements
• Beginners guide to financial statements
• Understanding financial ratios

However, you can get a all this information in a clear and concise format in the book Financial Statements: A Step-By-Step Guide to Understanding and Creating Financial Reports. I also wrote a review of the book.

Intermediate Level Investing

After coming to grips with the basics and finally understanding what stocks and investing was all about, it was natural to try and figure out what companies I should buy.

It was at this point I stumbled upon a forum post by Joe Ponzio of F Wall Street and was introduced to the concept of owning a business. Although I had read about a stock being a business in The Intelligent Investor, Joe has to ability to explain it in a clear manner that helps us to visualize the whole process.

It was mind blowing and it completely flipped everything else I was reading on its head. I truly believed that I had to know the technicals and tricks like selling in December and buying in January would produce greater returns.

I came to understand that;

1. buying a stock was owning a tiny piece of the business
2. I had to think like a business owner
   • If you owned your own corner grocery what would you consider important? Is it your EPS is for the quarter or how much cash you have generated for each day? Would you splurge on jets, cruises or pay your cashier $100 an hour? Or would you rather cut useless costs and seek to grow the company?
   • Since we own parts of the business, it is important to identify whether the company you own follows your own ideas of business. e.g. I don’t invest in biotech because I have no knowledge about the industry or business and therefore would be a clueless owner. I also have yet to put my money in financials because I do not understand how one operates.
   • A business owner is also passionate about their business. Are you passionate about your companies?
3. I wanted to be an owner of high quality cash generating businesses
4. there is a price for everything and came to understand fair value or intrinsic value

F Wall Street has an outstanding series of valuing the business which really puts everything in perspective. I have read every single article ever written on F Wall Street which is over 100 and it has been better than any book. (Note that I pre-ordered Joe’s book from Amazon). Visit his How to Value a Business series.

The book I most highly recommend at this stage: Pat Dorsey’s The Five Rules for Successful Stock Investing.

Both F Wall Street and The Fives Rules book introduce the concept of Discounted Cash Flow which was also the starting point of the ongoing investing spreadsheet project available for purchase or free download on this site. I spent hours going through calculations, ratios and formulas and this hands on experience is what I believed to have helped the most.

Then came this blog. I had to force myself to write clear and organized content since it would be scrutinized by all. If I was going to write about something, I had better know what I was writing about. The best thing is, I received constructive criticism which I took to heart and the discussions with fellow like minded readers have helped immensely.

The point is to get involved wherever you can, except Google and Yahoo Finance since it is so abused. Comment and ask questions on high quality content blogs. Discuss with other readers. Start your own blog. The best students were always the ones actively involved.

Coming Up

We’ll be looking at what is involved in advanced investing topics in the next post. Don’t worry it isn’t really advanced.

This is part 1 of the How to Invest in the Stock Market series.

How to Invest in the Stock Market: Part 1 | Part 2 | Part 3 | Part 4

As I’ve been receiving emails from people wanting to learn how to invest, I wanted to get a post out to share my experiences in order to help new visitors be confident that they too can invest in the stock market and manage their own money. I’ll be breaking the article into a couple of posts over the next few days due to the length.

My Background

In case you haven’t read the about me page, let me sum up my previous investing experience in one word. None.

To be totally honest, at the sake or ruining my credibility, if I had any to begin with :), I read my FIRST how to invest article on Fool.com in August 2007 and I bought my first company, Genlyte, on September 28, 2007 by subscribing to a 30 day trial Fool.com service. The DOW was at 13,895 on this day of purchase. Note that the DOW’s highest peak of all time was at 14,093 on Oct 12, 2007, just a couple of weeks after I invested in my first stock. Eventually Genlyte was bought out a couple of months later by Philips.

I started to invest at the worst possible time but had no idea. I knew nothing. No one informed me that bargains were hard to come by. Everyone I knew was just euphoric about AAPL and GOOG. Truth be told, I had no idea why a bull and bear were even mentioned in investments.

Seriously, I had never taken a finance, economics or accounting course in my life. I still haven’t. So for those just starting out or trying to, hold your head up high and keep your shoulders back. You can learn how to invest the stock market.

Fast forward 1.5 years and people are now actually interested in my opinions.

Why You Can Manage Your Own Money

More than 90% of mutual funds underperform the market and a majority of the mutual funds have very similar holdings as other mutual funds.

When brokers issue buy and sell recommendations, most of the recommended companies have already moved up and probably beyond a good buying price. Brokers also tend to issue sell recommendations when the stock is already down. Therefore, they are masters at the buy high and sell low game.

Financial advisors are paid on how well they sell you high commission funds, regardless of performance, and most mutual funds offered by your company are rubbish as the person in charge at HR or benefits, only look at the past return numbers.

The point is, never believe you cannot do it yourself. That’s what I first believed and that is what Wall Street and your 401k company want you to believe. “Smart money” is not as smart as you think. They are tightly constrained to operate within rules of their company and clients.

Don’t worry about the “invest early” cliche. It’s never to late.

Before You Get Started

Do you agree with me that the purpose of investing is to increase your assets? Then the most basic of all steps to investing is to ensure your financial status is organized. This means you are not living paycheck to paycheck, your debt level is easily manageable, credit card balances are low, you have an emergency cash account which can support you and your family for at least 3 months. Money to be used within 2 years is in a liquid CD or high yield savings account.

Some other points to keep in mind and fully understand is that the stock market is not a high yield bank account. Also, now that I have a family, it is also my wife’s money that I am responsible for. If I had to suddenly realize a 50% total loss by investing recklessly, I would be sick to the stomach when it’s time to tell the wife. It’s this type of irresponsibility that creates negative views of the stock market by family members.

My brother, mother and I went through the same thing. I considered the stock  market to be a gamble because I witnessed my dad go pale in the face some days and I knew he lost a lot.

Stay Tuned

This concludes the initial background and why you should and can manage your own money. I hope that after reading my story, you can all find confidence in your abilities.

Insider trading is a term that most of us have heard and we usually associate insider trading with the illegal act of executive insiders trading securities based on significant non public information or manipulating information in order to profit from the market. In order to prevent such acts, insider trading laws and rules were created by the SEC. We’ll be taking a look at the different forms required to be submitted in order to prevent insider stock trading.

Definition of SEC Form 3, 4, 5

The SEC requires all corporate insiders and any owner of 10% or more of a company’s stocks to be registered and file Forms 3, 4 and 5. There are sites that automatically track insider trades such as Inside Monitor but the best way, as always, is to get the information directly from the source, i.e. the SEC website.

The initial filing is on Form 3. An insider of an issuer that is registering equity securities for the first time under Section 12 of the Exchange Act must file this Form no later than the effective date of the registration statement. If the issuer is already registered under Section 12, the insider must file a Form 3 within ten days of becoming an officer, director, or beneficial owner.

Changes in ownership are reported on Form 4 and must be reported to the SEC within two business days. You can find the limited categories of transactions not subject to the two-day reporting requirement in the new rule.

Insiders must file a Form 5 to report any transactions that should have been reported earlier on a Form 4 or were eligible for deferred reporting. If a Form must be filed, it is due 45 days after the end of the company’s fiscal year.  — SEC

How to Read the SEC Form 4

Assuming you know how to get to the SEC Edgar page and enter the company ticker, a list of filed submissions is displayed.

I am using (ValueVision) VVTV as an example of insider trading because of the recent heavy, albeit good, activity. Click on the HTML format for the form you wish to view and select the HTML format again on the next page to bring up the following Form 4.

There are a lot of boxes but I’ve circled what I feel to be the important parts. Form 4 shows the reader which insider is trading, whether their trade was a buy or sell and whether it was an option or open market purchase. Insider buying on the open market is a very good sign that the insiders believe the company is trading at a cheap price compared to its prospects.

From the latest Form 4 filed by Keith Stewart of VVTV, we can see that he made an open market purchase of 50,000 shares at a price of $0.66. He now holds over 860,000 directly. A good tip is to grab the RSS of the companies you follow and add it to your reader to receive the notification as soon as it happens.

Good Insider Trading

The truth is that insiders are just like you and me. We sell our stocks for many reasons but buy for only one. Insiders are the same. They may need the money for a downpayment on their private jet or vacation homes but they buy for one reason and one reason only. The shares of their company is cheap. If we look at VVTV again, their recent insider trading activity has been heavy. The CEO of VVTV has been snapping up shares in the 60c range. This also helps to build investor confidence that insiders are putting their money where their mouth is.

The insider trading rules to submit Forms 3,4,5 not only helps illegal insider trading, but also offers a glimpse of how management think of their company.

Diclosure

I hold VVTV at time of writing

(This post first appeared on The Div-Net)

For those that do not know, I’m no accountant and I’ve never taken a finance or accounting course in my life. Like many people, I felt overwhelmed and lost once I opened the financial statements. Google, Yahoo and Morningstar were my go to guys to get the information. Thankfully, I’ve overcome this and now immediately go to Edgar to find the information I require. This process has saved me from losing more than what I have already lost.

As the internet continues to evolve, so do the applications and services. This includes the SEC. Reading the financial statements from Edgar is a severe pain but companies can now voluntary submit filings in XBRL format.

Check out the interactive format here. Currently, only the blue chips have been submitting, but as time goes by, I hope the SEC will make it compulsory for every company.

Here is a screenshot of 3M’s statements. For new readers, you can first read about my analysis of AeroGrow’s Statement of Cash Flows here.