Starting out thread, hints, tips... anything really

[Lizard]

Hi, thanks for the answer. I should've clarified, the Health sector was just used purely for example's sake. It could be any sector.

I was more interested in what approach people took once they'd decided to invest in a particular sector.

The biggest limit to investment return is not so much money as available time. We are probably all guilty of failing to recognise how key it is to focus the limited time available on finding and following the stocks with the optimum risk/return possibility.

Often "stock screening methods" don't get a lot of separate discussion, but they are implicit in what most people do and often not well thought through. For instance, for many people "stock screening" will start by following the posts of their favourite ShareTrader posters, their brokers newsletter or a magazine/newspaper article.

Within NZ, it is a pretty casual exercise to screen the 170 or so listed stocks. For starters, lots of people would cut them down to only the most liquid and largest market cap - something akin to the top 50. After that, it is not too hard to keep tabs on the lot of them and decide which most appeal. At this point, investors will have personal preferences as to what sort of investments they prefer - yield, growth, value, management, chart (price and volume history), etc.

However, get to any larger pool (e.g. ASX) and the really committed investor/trader will tend to have some larger system. This could be "bottom up" (i.e. looking for companies that meet the right criteria and then deciding whether they look interesting) or "top down" (starting with countries/sectors and looking for best prospects).

At company level, some will use scanning software to rapidly identify changes in price and volume and then buy (and sell) off the chart, perhaps knowing nothing about the company or business. Others will start by searching databases or tables for certain ratios - P/E (price/earnings ratio) has been the historical favourite for finding value.

One of the problems with investment is that a lot of investors looking at the same measures will tend to create a more efficient market in that area and the measure will stop working. For instance, if everyone looks for low P/E stocks as a screening tool, then low P/E stocks will tend to rapidly get picked up and analysed closely. Therefore P/E's are less likely to become depressed for no reason.

Another problem is that it is all very well identifying a measure you wish to use to screen stocks, but then you have to find a database or scanning tool that can find all stocks meeting that measure. So for most small investors, any first stage screening of stock databases is limited to quite commonly available data published in tables by the likes of NBR and IRG in NZ or by the AFR in Australia.

I mostly use fundamental tools for screening stocks (and use charts, badly, to time entries and exits when I have sufficient time free), but find different "tools" tend to be best for different phases of the business cycle/different markets. To get to the data I really want, I have to create it myself - something I can only keep up to date for about 100 stocks, so it is a pretty limited screening tool by that stage and relies on my limited pool having been well selected from the larger pool.

I go back to complete share tables a couple of times a year and sort by basic parameters to try and pick up any new shares I should add to my analysis, but the majority of my first stage screening still comes by reading something someone else has written or randomly checking out an interesting looking Stock Exchange announcement.

Referring back to your query again though, presuming you have decided on a "top down" screening and now want to distinguish between individual stocks in a sector, then it will depend a little how many stocks you need to cut your list down to before you look through in depth. If you need to quickly get rid of 90% of stocks, then I would suggest you could take a share table and run a ruler through the 25% that traded the lowest value over the past week. Then maybe a ruler through any with double digit % price declines in the last week (a safe move for a beginner anyway). After that, you might decide to take out lowest market cap or sort by div yield, Pr/NTA or P/E or simply race through the charts to spot ones that look most positive (obviously need to know a little about this area first).

Once you've got down to the 5-10 stocks you think you have enough time to analyse in depth, then it will come down to looking for your desired combo of value, growth and market sentiment. There are loads and loads of tools out there. There's a good thread called "PE Ratio" that covers some of the more sophisticated fundamental methods. However, once again, many of these will require so much time spent on each stock, that if you have not selected the right stocks in the first place, you will soon be mired in the slough of investor despond!

In the end, using your precious time will always come down to a compromise between number of stocks followed and depth of analysis on each stock followed. At their best, forums allow us to pool some of that analysis so as to increase both aspects. At their worst, they distract us from both....

[buns]

Great call

A lot of people like Ferrari's, and probably have the money to pay for one yet when you weigh up what a Ferrari will do for you against a Corolla, at a 10th of the price the Corolla is much more value hence most will go for that.

The equation is similar with shares. Just because you like something, dosent mean its worth buying.

And think about it more widely as well, if you like the health sector there is a good chance a lot of others do as well - hence the shares will probably be more expensive as a whole possibly at the expense of other sectors - think late 90's and IT.

However, liking something leads you to understand it and understanding is essential. If a health care stock is deemed by the market 10% over valued and you understand it to the point you think that will make returns of 25% on its equity for decades compared to the consensus saying it will produce 15%, that share is now undervalued.

Using PE's ignores this approach and accepts the markets prices are correct. This is not value investing. Price is what you pay, value is what you get. PE's value using price.

Don't just fall in love with sectors as well. Often bad sectors have some great buys in them as the market forces become exaggerated in downturns and the great companies which always looked just like another one, start to stand out. For instance retail is awful right? Right through the recession JBH made 40% ROE's and has made lots and lots of money for shareholders. All the downturn does is funnel the consumers to the company who best handles/has the key competitive advantage in that sector, for retail/JBH that is price.

[buns]

Just on Lizards comments.

Screening is really quite simple. You consider companies/industries you know about and no other. For instance Buffet has never known anything about tech stocks, he isn't saying they are bad investments overall. Just bad to him as he knows nothing about them.

About 80% of the ASX is of limits to me - I just don't understand most of those companies.

'Screening' is automatic in every facet of life except for investing. For instance, most don't know how to do there kitchen plumbing so don't do it. But if you come to the conclusion, I only need a average job done here, if I do it to a standard of 60% it will justify not paying a plumber. There is a 40% margin of saftey here...

Investing is no different, but the margins of saftey are much smaller because the market is much larger. Hence you really need to understand something to a high degree to create any margin of saftey.

[toast2success]

once again, many thanks. These answers are great. The mud gets a little clearer each day...until someone adds more dirt into my mud puddle

[shasta]

once again, many thanks. These answers are great. The mud gets a little clearer each day...until someone adds more dirt into my mud puddle

Use this site to find stocks of interest to you, in the areas of the market you are interested in.

Perhaps find a stock you like, & post questions on the relevant threads, that way those in the know will be able to direct you, to either more research or like stocks in that area.

General questions are great in this area, but when you have a stock ticker to follow, you will learn even more

[buns]

The best companies I've found are those that operate in predictable industries with moderate growth rates - they seek to grow smarter than their competitors, and do so quietly and consistently. Take a look at DTL in the IT services space, RYM in retirement, IIN in telecommunications. Unfortunately the last 4 years has dragged everyone down, but the strong companies will survive.

Unfortunately??

I thought it was a good thing? Same product, now cheaper.

[STRAT]

Yes, good idea. Those of us using fundamental methods need more chartists to push share prices to silly extremes.

And here I was all this time thinkin it was Forums like this one

Happy New year Liz.

[STRAT]

Charting? what is this

Hi Whiteny.
See Halebop's post on the previous page.
Thanks Halebop.

Whiteny.
Feel like Im butting in on an FA party here but the best advice I can give you is learn to read a chart. Not only will it help you with your entries and exits but it will help you gauge all the advice you get on sites like Share Trader. There are some clever people here but they are not the only ones with an opinion.

As you are looking for advice here on an internet site. Consider this.
If you like what you read from a poster then research the poster. Check out what the hold, held, when they bought and sold. What advice and opinions they gave. The chart will show their performance in a particular stock in black and white. There is a wealth of hind sight here worth putting to good use.

TA is a multi purpose tool for sure.

[Lizard]

Feel like Im butting in on an FA party here but the best advice I can give you is learn to read a chart. Not only will it help you with your entries and exits but it will help you gauge all the advice you get on sites like Share Trader. There are some clever people here but they are not the only ones with an opinion.

As you are looking for advice here on an internet site. Consider this.
If you like what you read from a poster then research the poster. Check out what the hold, held, when they bought and sold. What advice and opinions they gave. The chart will show their performance in a particular stock in black and white. There is a wealth of hind sight here worth putting to good use.

I second that. Despite the impression a forum may give, investing/trading ability is not linked to word length or sentence structure. Nor to self-belief and authoritativeness.

[buns]

Check out what the hold, held, when they bought and sold. What advice and opinions they gave. The chart will show their performance in a particular stock in black and white. There is a wealth of hind sight here worth putting to good use.

TA is a multi purpose tool for sure.

Yip, a great starting point. But why look around here? As no one here has managed a sprinkling on Warren Buffet's returns, so you should start with him. Buffet actually hasn't even averaged over 20% PA, but if you look around here you will probably find people advertise them selfs returning more. Double baggers (100% returns) are the norm, with 5 or 10 (1000%) baggers around as well....Yet you don't hear when people fall on the wrong side of these risky stocks, it does happen. Don't be mislead.

In your Buffet reading you won't find TA mentioned anywhere, if you dig hard you may find a quote from him on it, and he will pretty much state its a waste of his breath.

Berkshire don't use any kind of graphical information in any reporting either. I think it comes from the same thinking they invest with, in complete understanding is key. If you understand the raw data/tables the graph will make sense in your head, but sometimes that dosent work the other way as graphs can mislead.

This sounds kind of silly in a way as I endorse graphs quite a bit at work, however in the investing world why would you want to follow or do anything which those misleaders do when you have a impeccable track record? Charts being a common language in investing, much of which many have followed into poor results.

Its kind of like the different types of Animals reacting to hunters/people. Deer who have seen it all before are scared shiitless of any thing which looks like a human, knowing anything associated with them is fearful. It's engrained in them from birth that humans mislead them into death. So even when a friendly ranger tries to approach a deer, the deer runs quick fast.

I'm probably reaching, but Berkshire using graphs could be the ranger with the value investors being the deer.