Wednesday, March 24, 2010

Legal Gambling

Previously I discussed the subject of investing for the first time at my old blog, it can be found here. Think of it as your starter kit.
Bill Capece is recent graduate of La Salle University in Philadelphia. After receiving a BS with the dual majors of Accounting and Finance. He loves stocks like some of us like sports. He has started a new website called Stocks Simplified. Bill answered a few questions to aid young investors.

What type of stocks do you recommend for first time investors (college and newly employed)? Price Range? Diversification?
It obviously depends on the situation. However, my rule of thumb is that if the investors need the money further down the road and want to invest, stick to blue chip stocks. This will allow for growth and a general understanding of investments. These should have market caps of upwards of $20 billion. Also, choose between 7-10 companies and spread those out over different industries with no more than one company in each industry. If the purpose of your investments is more liberal and the funds can be risked, stick to market caps between 500 million and 10 billion and buy about three to five stocks. Price range really isnt important because a good deal could be a stock worth $1 or $100. This will allow the investor to see fluctuations and really "experience" the market. Also, diversification is not necessarily a must. Keep a close eye on the investments and that should be enough.

What do you typically research when looking at a stock?
In looking for a worthy investment, I use stock screeners. I input parameters worthy of the specific sector and look at the results. Each company has three basic financial statements: Balance Sheet, Cash Flow and Income Statement. I listed these in order of importance. When anaylzing these remember that "cash is still king". Cash got Ford out of trouble when the others automakers declared bankruptcy; Cash held Genworth's (GNW) hand when it was trading below $1; and cash kept the banks/ financial system liquid. Net worth and working capital are very important items on the balance sheet and usually determine my initial interest in a company. To find net worth, take total assets and subtract all liabilities and goodwill. This will normally give a conservative estimate of corporate worth. To calculate working capital, subtract all current liabilities from all current assets. If both numbers are positive, move onto the cash flow and income statements. Combined with the number of shares outstanding, this quick glimpse allows me to determine whether further research is warranted. If so, pull their past 10k's and start reading! If not, disregard and move on.

What Analysts can be trusted?
All analysts can be trusted!- do the exact OPPOSITE of what they say! You'll be right every time. Investors tend to follow the pack. When an analyst issues a recommendation, it's too late to make your move. A "buy" recommendation says that the analyst should have recommended it before and is now making up for his/her mistake. A "sell" recommendation says the same, except the stock will be moving in the opposite diection. Think for yourself. Read what they have to say in order to keep your mind fresh, but generally dont listen to their advice. Buy when the stock is hated and sell when it's loved.

Websites to follow? to Avoid?
The only straight financial websites i recommend following are;; They're the only ones I trust.
Avoid any website that promises to sell you a fool-proof product. One I recently saw promised returns of 1000%. Think about it...if their system was so great, why are they selling the secret? Shouldn't they be sipping martinis on their yatch parked off the cape of their private island?? Get the picture...

Would you recommend taking on a Car Loan for under 4% APR and investment in stocks or buying straight up?
I don't know why, but this made me laugh. Normally, i would say buy that car striaight up. However, I trully believe our generation will never see a market like this again for the rest of our lives. There are so many undervalued investments in the market that I'd be foolish to advise anyone to use their investment funds to buy a depreciating item. For the time being, take the loan and keep investing.

Summary: Stick to the fundamentals- they don't lie. Good Luck and Happy Investing

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