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Investment Analysis Clubs / The BMW Method
|Subject: Re: Where is BMW||Date: 12/13/2012 11:55 AM|
|Author: kelbon||Number: 40854 of 41980|
please post your method of picking stocks
This may seem like a simple question, but being on the receiving end of it, it isn't. It's true to say that I don't have a "method" as such, I have proclivities which sometimes prove profitable and sometimes lead me astray.
The ramble that follows for the next several paragraphs amounts to "know thyself" and do something about it! This may not be helpful to anyone else, but perhaps, putting it down in writing might just be a little nudge in the right direction for me.
I'm sometimes too cheap and sometimes too passive. Note the use of the word "too" —twice no-less. Being cheap and passive, in most arenas of life, doesn't usually lead to satisfactory outcomes, in investing however these traits can be successful and profitable strategies. A goal of mine is to eliminate those two "toos."
More specifically, how am I too cheap? A good stock will sometimes fall to a price that I know, in all probability, is a good price. My problem sometime is that I'll wait, hope against hope, that the price will drop into ridiculously cheap territory; it almost never does, quite the opposite, usually and the price rises to a point where I'm ambivalent, and then not interested, and then the bird has flown.
How am I too passive? Greed, and ironically, lack of fear. Greed first: when a stock I own hits a new high and logic dictates that here is an opportunity to take profits and move on, I usually don't. I suppose what is going on in my pea brain is the thought that if it's spiked out of its range then it can still go higher and then I'll take my profits. It usually doesn't and I don't. I usually goes down again. To add clarity to this observation I have different flavors of stocks, though when I buy them, with a few exceptions, I hope that they're all going to be the same flavor: the very long-term or forever flavor. If a stock that has been a winner over the years has a modest price spike I'm usually not tempted to sell. When a stock that has had a set-back and is digging itself out of a hole and has a price spike, then is the time for serious due diligence because in all probability it is the time to sell. Often I'll just sit there with my mouth open and a silly look on my face and wait for its renewed death-rattle.
Lack of fear: unfortunately my cavalier attitude doesn't serve me as it might. What I tend to do is watch the stock price of a company I own head downwards, a lot, often with good reason. I'm not worried, even when I should be. I'll tell myself that this is temporary and things will right themselves and sometimes this is true. Other times it isn't. I'm too slow in cutting bait and taking a relatively modest loss. I'm not so bad at watering the flowers, or at least letting them grow in peace, but I'm bad at yanking out the weeds. I'll look at my brokerage statement and think I really should weed this garden, but hey, those weeds just might turn back into flowers. Note to self: they almost never do. However, you do have to take all this in context. If the whole market is seriously crashing a lot of flowers look an awful lot like weeds. They are not; they are roses on sale.
A little history…
OK, enough of this self indulgence. When I first had more money than I could reasonably justify sticking in a savings account and forgetting about (though given the last 12 years, I wonder if it wouldn't have been a good idea) I had no clue whatsoever about investing, why would I? I'd not had money to invest. Long story short after blindly flailing helplessly in the dark room of "The Mystery of Money Management" and hitting my head against one wall after another I took myself to the library and sat myself down with a copy of Value Line. I'd read that Warren Buffett, when he was young, religiously scoured through every page. Not a bad example to follow I thought. All the numbers made very little sense to me. In school math was absolutely my worst subject. Anything to do with numbers sent me into a cloud of confusion and indifference. What use is this to me, I'd ask my teacher, I'm never going to need to know any of this stuff once I'm grown up. Hello, reality check! 'Truth be told you don't need complicated math to invest, in fact doing complicated math with an investing goal in mind can, I've decided, be self defeating.
If math was my worst subject in school my best was the visual arts. I'm a very visual person (how can you people live with those curtains? Yuk!) So, after hopelessly struggling with the mysteries of Value Line visual patterns started to emerge. This might seem strange coming from me because I've repeatedly said I'm not a big fan of charts because how you draw them can lead to erroneous conclusions just as you pose a question in a survey can too.
What I did pay attention to was the visual representation of the progress, or lack of, a stock's price over the years and how that seemed to relate to the impressive array of sequential numbers presented underneath. Hmm, low P/E coupled with low debt and good returns on equity often led to a rising stock price, etc. Things finally started to make some sense. Once things started to get interesting, rather than mystifyingly confusing, I was motivated to start digging deeper, though I'm a very slow digger and sometimes change my mind about what it is I've dug up.
And there you have it. I subscribe to Value Line and when the printed addition arrives once a week I sit down with my cup of coffee and pour over it (I try not to pour the coffee over it.) Over the years its become easier to identify the good companies that doggedly persist through thick and thin. Unfortunately, a lot of those companies' stocks are far from cheap, and, remember being too cheap is one of my problems. In addition to subscribing to Value Line I subscribe to one Morningstar newsletter: StockInvestor. This I take with a pinch of salt because I sometimes consider the editor and equities strategist out of his mind. Loading up on Facebook shares? You nut-case.
Balance sheets, income statements, and cash-flow statements were a stumbling block to me for years, but eventually the mists started to clear and although I'm far from adept at navigating their nuances I usually get the general idea. I'll look at these statements along with Value Line data on companies that peek my interest or I am following. Sometimes, I'll also quickly eliminate a prospect with a quick look if one comes to my attention via a posting on TMF, however convoluted and extensive the post might be. (For instance yes, all very interesting, but this company carries so much debt that it's financial position, if not now, could quickly become tenuous and this debt explains the supposedly high returns on equity the company reports —or some such.)
So what I need to remind myself of is:
Keep it simple
Be attracted to good companies, not cheap junk,
Don't be cheap: pay a good price, you don't need to pay the lowest price.
Be fearful, when you should be! which leads to:
Pull the weeds; water the flowers.
Don't panic, carry on…
I don't know if this is any help whatsoever, but it was fun writing it.
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