Last fall, I had a Lt come up to my desk and ask how to "invest". He didn't mean bonds or mutual funds or CD's. He wanted a simple story to stock investing.
Ten years ago, if you had said that I'd know much about investing of any kind....I would have laughed. A guy from Bama? Back around 2005, I sat down and looked at my mutual fund investments, and I realized that I wasn't getting the 'bang-to-the-buck' that I thought I was. So I sat down and read up on stocks.
Eventually, using my famous farm mentality from Bama....I came down to ten things that a guy has to know and understand to invest in stocks. The Lt knew I'm famous for taking alot of things and using my farm mentality....turning them into ten simple things to remember.
So I sat there for thirty minutes and laid out these ten simple things.....and I've decided to publish it via the blog. Remember....I'm not a Donald Trump, but I doing my own investing and not relying on some idiot hired at some company to do it for me. I don't lose money....and I tend to make at least eight to ten percent a year on average.....which is better than CD's or bonds.
So number one, buy stocks you can grasp and understand. Don't buy hyped-up technology or new-fangled energy stocks that require intense knowledge. Buy stocks that you see on a daily basis (Texaco, Wal-Mart, & Cisco). Buy stocks that have been around and have a good reputation.
Number two, never buy stocks related to ships, aircraft, drugs in test phase, or anything of a chaotic nature. The first time you have a boat to sink....you lose twenty percent of the investment overnight. The first time you buy into American Airlines and a crash occurs....you lose money overnight. Chaos is not worth the effort.
Number three, treat your investment plan like a mutual fund. Call it a name (Bob's Best Funds is a fine name). Act like a mutual fund director. Write down some basic rules and establish a foundation for your plan. Your goal is to act like a real director of some Vanguard fund....and treat yourself richly when possible.
Number four, P/E, dividends, and the "line" are important. P/E is a term that you see when you look up a stock. Basically, it's the stock priced divided by it's earnings per share. You want a P/E thats less than 20 when possible.....and never over 30. P/E is a good indicator that the company is headed in a positive direction.
Dividends? Well.....most stocks pay them and some don't. I made the rule that my stocks had to pay a dividend of some type (even 1 percent) so I could tell it was actually making profit. A good company that doesn't pay dividends? Sonic (you know, your burger joint in the South). Sonic has never paid a dividend but still does well on gains. Can you find huge dividend players? Yes, there are stocks which pay six to eight percent of the stock price.....and really help your profit line. So a dividend matters, in my book.
The "Line"? Well, when you pull up a stock in Yahoo financial....and examine the whole picture of the stock, there's this graphic chart with a line. You prefer to have a line over the past twelve months where it's a upward trend. Up and down lines means heavy trading and losses that occur on a frequent basis. A flat line is ok, but you won't get gains out of such a deal.
Number five, foreign stocks. Here's where you think about things. Some Canadian banks and railway companies have done great over the past year......but you have to pay foreign taxes. Some ore and natural gas companies out of Chile have done great over the past year. There are a number of really great companies in Australia that are worth investing in. The issue comes back to following foreign countries and their own issues in business. If you have time to watch Australian bank stocks, then go for it.....if you don't, then stay out. It simply adds more homework onto you.
Number six, the ups and downs of Cramer. Every day on CNBC, around 6PM, there's Cramer. There are lots of good bits of advice that he pumps out each week, and you can learn about individual stocks here with ease. Cramer isn't always right, but he explains things. The intensity of the show is what bothers me.....and I usually limit myself to fifteen minutes per night.
Number seven, A $20 stock has lots of potential gain. First, you could easily get a dividend of 4 percent a year ($1.60), then add in ten percent in growth ($2), so your $20 stock after twelve months is $23.60. That's better than most mutual funds, and way better than CDs or bonds.
Number eight, you select your "dealer" carefully. A number of stock traders offer $6 trades and you simply run a balance with them. Even if you've only got $4k.....that's enough to get a taste of the business and play the game. By kicking out the mutual fund guys....you cut out the middle guy and the charge that they put on handling your mutual funds. This charge typically isn't huge, but if you get up to $100k....they are simply taking your money away from you for something you could do yourself.
Number nine, profits mean taxes. So if you clear $2k after a year of wheeling and dealing....anticipate losing $400 from that. Never lose sight of this tax game. Keep records, because it just might help avoid issues later with the IRS folks.
Number ten, NEVER anchor yourself with stocks. If you feel that this stock is a loser.....dump it and move on.
So the stocks I would suggest? Samuel Adams Beer (SAM), Toro Company (TTC), and Baytex Energy Trust (BTE). All three have a spiraling line going upward and positive growth. The beer guys know how to market great beer.....Toro makes lawn equipment which sells each spring....and Baytex is a oil and natural gas company that makes profit each and every month.
Plains All American Pipeline (PAA)? A natural gas company that pays a 6.4 yearly dividend (that's a four-star deal). It's trend has been pointing upward for almost an entire year and looks to rise another $10 in value this....so adding that to your dividend only makes it a great deal.
A guy can screw up.....by simply aiming for too high of goals and expecting to make twenty percent growth a year (way past the norm). A guy can fall into the trap of buying a quick riser and then watch his stock fall apart over a seven-day period. So you have to think ahead of time and get a simple strategy. Don't expect to be a millionaire. But you should expect to make more than cash lying in a simple four percent CD account.
