Charles Rotblut will speak at the 2015 AAII Investor Conference this fall; go to www.aaii.com/conference for more details.
Investors constantly hear that they should analyze a stock by its fundamentals. This guidance means looking at the financial statements and the valuation to ensure the stock is attractive.
It is good, and valid, advice. Unfortunately, it can also be vague. What exactly should you look at? How do you analyze the numbers? Are there ratios you should consider?
In this month’s issue, Michael Thomsett, author of several financial books and a presenter at AAII’s Investor Conference this November in Las Vegas, is going to give you some specific advice. He has four indicators that he considers useful for analyzing a stock. They focus on a company’s performance, valuation, dividend policy and fiscal strength.
A key point made by Michael is that comparisons play a important role. It’s not good enough to simply look at what an indicator currently says about a company. An investor needs to see how the indicator has changed over time. It is also important to compare a company against its peers. A company might look like an attractive candidate for investment, but relative to its peers or its past, it could turn out to be an ugly duckling. Michael presents his fundamental tests and his rationale for them on page 7.
AAII President John Bajkowski uses Michael’s fundamental tests as the basis for this month’s First Cut. A list of the passing companies is published on page 11.
Stock analysis and spreadsheets go together like peanut butter and jelly for many people. If you use spreadsheets, you should read this month’s CI in the Journal column. Computerized Investing editor Wayne Thorp discusses an online spreadsheet accessible from any computer called Zoho on page 12.
Stock selection is only one part of the portfolio management process. To be successful, it is also very important to rebalance annually and maintain diversification. Just following these two simple rules will increase your portfolio’s returns and lower its volatility. On page 13, I show you the numbers that prove this and explain why it holds true even after the last bear market.
Speaking of allocation, Jerome Clark of T. Rowe Price calculated that stocks have outperformed bonds in more of 80% of all rolling 10-year periods since 1950. He shows the impact that using a substantial allocation to equities would have over various time periods on page 19.
(If you have children or grandchildren in their 20s, please talk to them about Jerome’s article. Some surveys suggest 20-somethings have become among the most skittish about equities, even though they have the highest tolerance for financial risk.)
Those of you who follow value-oriented strategies will want to read this month’s AAII Stock Screens article. Wayne Thorp created a screen based on Tweedy, Browne’s paper, “What Has Worked in Investing.” The firm is revered for putting Benjamin Graham’s philosophy into practice. You learn about the strategy and see the exact criteria used in our screen on page 23.
One of the questions members ask is how they can find a trustworthy financial advisor. I always respond by stressing the importance of conducting a thorough background check before working with any advisor. Chuck Jaffe, a columnist at MarketWatch and another presenter at this year’s AAII Investor Conference, provides specific instructions on how to do this starting on page 27.
I’m also asked for advice on where to open a brokerage account. No universal answer exists to this question, since each individual’s needs and preferences vary. However, there are guidelines that can help you with the decision process. I discuss them in my Beginning Investor column on page 32.
Finally, the performance of our Model Shadow Stock Portfolio shows that those investors who did not panic during the last bear market were rewarded. The portfolio ended February above its 2007, pre-bear market highs. AAII Founder James Cloonan expounds on the need for discipline and reveals the two new stocks added to the portfolio on page 33.
Wishing you prosperity,
Charles Rotblut, CFA
Editor, AAII Journal