The Investment Secrets in Common Stocks and Uncommon Profits

In his book, Fisher laid out fifteen things that a successful investor should look for in his or her common stock investments. Here’s a rundown of what they are. (Do yourself a favor. Run out to your local store or navigate to your favorite online book retailer and pick up a copy of Common Stocks and Uncommon Profits – this basic summary of the book can’t possibly do justice to all of the excellent information in its pages.)

1. Does the company have products or services with sufficient market potential to make possible a sizeable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potential when the growth potential of currently attractive product lines have largely been exploited?
3. How effective are the company’s research and development efforts in relation to its size?
4. Does the company have an above-average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labor and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10. How good are the company’s cost analysis and accounting controls?
11. Are there other aspects of the business somewhat peculiar to the industry involved that will give the investor important clues as to how the company will be in relation to its competition?
12. Does the company have a short-range or long-range outlook in regard to profits?
13. In the foreseeable future, will the growth of the company require sufficient financing so that the large number of shares then outstanding will largely cancel existing shareholders’ benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well and “clam up” when troubles or disappointments occur?
15. Does the company have a management of unquestioned integrity?

Fisher also had five “don’t” rules for investors, which were:

1. Don’t buy into promotional companies
2. Don’t ignore a good stock just because it is traded over-the-counter
3. Don’t buy a stock just because you like the tone of its annual report.
4. Don’t assume that the high price at which a stock may be selling in relation to its earnings is necessarily an indication that further growth in those earnings has largely been already discounted in the price?
5. Don’t quibble over eighths and quarters

Finding Good Stocks to Buy

Compare Stocks to Peers, Industry Sector to Measure Performance

By Ken Little, About.com

It is never easy picking good stocks, however during very difficult economic times it becomes more important than ever.

When the economy and the market are racing for the bottom, they can drag down good companies along with the bad.

A troubled economy tends to strip away any growth weak companies enjoyed in previous growth cycles.

However, because good companies may suffer also, investors need a way to judge a company’s performance.

One way investors can take the pulse of a potential investment is to compare how the company is performing relative to its peers.

Yahoo! Finance offers a way you can compare how a company is doing relative to its industry sector and its peers.

Click on the “Investing” tab and choose “Stocks.” On this page, look for the link to “Sector/Industry Analysis.”

This link takes you to a page that compares the various industry sectors. Other online providers may have a different way of identifying sectors.

Here’s how you can use this information.

Let’s say you are interested in IBM. Click on the “Technology” tab. IBM is in the Diversified Computer Systems sub-group.

If you don’t know where a company is classified, look up its quote and go to the Profile page. How Yahoo! classifies a company is listed in its profile.

Click on the Diversified Computer Systems and you will find a list of the companies in that sub-group. Each company will have a number of financial ratios listed.

At the top of the list are the corresponding numbers for the whole Technology sector as well as numbers for the Diversified Computer Systems group.

You can compare IBM or any other company with the sector and sub-group as well as comparing the company with its peers – such as comparing IBM and Hewlett-Packard.

If you want, you can download this information to a spreadsheet such as Microsoft’s Excel.

This is not a recommendation for IBM or Hewlett-Packard and other online providers of financial information offer similar capabilities as Yahoo!.

Always check current news about a potential investment for any late-breaking announcements and so on that may impact your decision.

Investors have a tremendous amount of information at their fingertips. There is no excuse for making investment decisions in the dark.

Know the Difference Between Value Stocks and Cheap Stocks

Investing in Value Stocks Is a Proven Strategy

By Ken Little, About.com

There is a difference between a value stock and a cheap stock. If you don’t know the difference, you may end up owning a stock that will not respond when the market and economy rebound.

A value stock trades below what analysts think it’s worth. Of course, in the middle of a raging bear market it seems like almost every stock fits that definition.

What distinguishes a value stock from a cheap stock is the quality of the company.

Even good companies get beat up when the market is free styling down the price slope. And here is where problems come in for investors.

It is easy to become overwhelmed by the low prices on a large number of stocks.

Those low prices seem to suggest that these are bargains too good to pass up.

However, a cheap stock may not have any bounce left if the company has been severely injured by the economy.

The brutal truth is a number of companies are lost every time the economy takes a strong dip.

These companies suffer a large loss in revenue and customers. Compounding their problems, larger and stronger competitors may take market share.

When the economy recovers and customers begin buying again, these weak companies are so financially decimated they cannot recover.

While both value and cheap stocks may be trading at historic lows during an economic crisis, only the strong companies have a chance to recover.

How do you tell a value stock from a cheap stock?

There is no single magic answer, but here are some indicators that may help:

• Debt is below its sector’s average
• The company is generating enough cash to avoid refinancing
• The company has a successful brand that will survive economic slowdowns
• It should trade at a P/E below industry averages, but not at rock bottom

This article can help you find this comparative information.

Being a good value investor is a proven strategy that has worked in good times and bad, however it takes about the same amount of work no matter what the market and economy are doing.