Picking Stocks for Long-Term Growth


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As I’ve said before, it is very difficult to predict the near-term future.  It is much easier to predict the long-term future, at least in the investment world.  This is not to say that it is difficult to predict if a given stock will go up or down the next day when some news is heard.  If a scandal breaks out, obviously the stock will fall in price.  Likewise, if a large drug company gets a new wonder drug approved, the stock will go up.  Sometimes a stock will still trade in an unpredictable way, such as when the price of the stock has already gone up so much on the expectation that the drug would be approved that it falls a bit after the actual announcement comes.  (This behavior is the reason for the old axiom, “buy on the rumor, sell on the news”.)  But in general the reaction of a stock’s price to news is fairly predictable.

The issue is that just as you can predict the direction of the stock due to the news, so can everyone else.  You will therefore never be able to profit off of the news since you’ll be in a long line to buy or sell the shares, and the people on the other side of the trade will have heard the same news and adjusted their prices accordingly.

The long-term side, on the other hand, does not seem to suffer the same fate.  While everyone has the same information and is able to do the same analyses, there still tend to be differences in price between what a company trades at and what it should be trading at given its future earnings.  Probably the reasons for this are that 1)it is more difficult to predict with certainty future earnings, so there is a “risk premium” included in the price and 2)people tend to get bored and therefore don’t have the patience to wait long enough for the mis-pricing to be resolved.  Whatever the cause, the behaviour of the markets works in the favor of the long-term investor.  It is normally fairly easy to pick stocks that will probably be worth more in the future (due to future earnings and dividends) and yet the price of the stock will not always fully take in these future earnings into account.  Buy buying a set of good prospects, the chances are good that one will outperform the markets, which are made of both good and not-so-good prospects.

So what are the traits for which to look?  I always look for as many of the following traits as possible:

1)A steadily growing stock price (a nice, steady increase over several years),

2) Earnings that have been growing steadily (which tends to cause the steadily growing stock price),

3)A respectable Return on Equity (15% or more),

4)Room for the company to continue to grow — the market is not yet saturated,

5) Consistency in the management team (don’t buy a stock when the people who made the business successful are moving on).

6) A strong cash position (low or no debt and a low debt/equity ratio).

7) A P/E ratio that is not high compared to historic values for the company.

Basically the idea is to find stocks that have been growing, have a management team that knows what they are doing, are well-functioning businesses that invest capital well, and whose share prices have not gotten out of line with future prospects.  In future posts, I’ll go into more detail on each of these traits.

 

 Your investing questions are wanted. Please leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Obamacare is failing. Here’s a better way.


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For years the Affordable Care Act was being rolled out in drips and drabs, and having portions delayed to avoid angering voters right before critical elections.  Now it is fully implemented and health insurers are falling out of the Obamacare marketplace left and right.  It is becoming clear that the predictions made by pundits as the law was being passed are coming true.  Healthcare premiums are rising way up due to the requirement that insurance have no limits and cover preexisting conditions (the money to pay for these things needs to come from premiums).  People are losing jobs as employers are cutting workers – both to stay below the 50 person threshold where health insurance is mandatory and to offset costs from increases in healthcare premiums.  Other employers are cutting fulltime employees and shifting them to part-time shifts (less than 30 hours per week) to reduce the number of full-time employees below the threshold.  Not only are people not getting insured – they are losing wages as well!

Predictions on the supply side are also coming to pass.  Doctors are quitting the practice to avoid having their payments dictated and face a mountain of paperwork.  Others are shifting to concierge practices and not seeing patients with insurance at all.   Networks are being shrunk to reduce costs, resulting in long drives to see specialists or even primary care doctors.  Copays are also going up as insurers try to cover costs.

Costs are also not decreasing  – they are increasing.  This is partly because individual who originally bought minimal plans, because this was what they could afford, lost those plans and had to pay for plans with a lot more services they may or may not use.  (This is like wanting to buy regular gas but being forced to buy premium.  Sure, it is better gas, but not worth the cost to many people.)  In addition, younger individuals are needing to subsidize the healthcare costs of older, sicker individuals.  Even with these increases in premiums, insurance companies are not covering costs.  Healthy individuals are deciding to go uninsured because the price is not worth the perceived value (if you are healthy), some individuals simply cannot afford the higher premiums, and the penalties for not signing up were delayed another year.  As a result, only the sicker individuals who are using far more healthcare than they are paying for are enrolling.  Because of this, premiums are not covering costs and it is expected that the government will need to bail out these insurers.

The Affordable Care Act actually exacerbates the issues that existed with traditional health insurance.  These are:

1) Everyone pays essentially the same cost whether they use healthcare or not, so there is an inclination to go to the doctor for every little thing and there is no reason to choose lower-cost treatment options.  Increased demand results in higher costs, and higher payouts result in higher premiums.

2) Pricing is greatly distorted by insurance.  Just try asking the front desk in your doctor’s office what a procedure will cost with your insurance (your portion and what the insurance will pay) and it is unlikely anyone in the office will know.

3) A lot of people aren’t paying, or paying very little, so those that do pay are paying for ten or twelve other people besides themselves.  (Imagine what eating out would cost if you had to pay for the meals of five tables sitting next to you.)  This makes fewer people willing to save up and pay because the costs are so much higher than the value received (for example, $10 aspirin in hospitals), so people would rather not save and then rely on charity when they need healthcare.

Realize that there is no magic that allows people to pay less than the cost of their care, on average.  If someone gets care for free, someone else must pay twice.  This is true of anything – someone needs to create the value that is used.  Everyone cannot have free cupcakes.  Someone needs to put in the effort to make the cupcakes and must buy the ingredients, and few people will make free cupcakes indefinitely if they are not compensated for their efforts.

The secret to reducing the price of healthcare, and making getting it a non-issue for virtually everyone just as buying food is a non-issue for anyone with a job, is to get most people to actually pay for it.  This means that they need to save up money for the inevitable times where they will need healthcare.  It also means having them pay for the services they receive to give them an incentive to use less or choose lower cost options when it really isn’t important.  The solution is therefore the following:

1.  Require that everyone sets up a Health Savings Account (HSA) and contributes a required portion of their income to the account, up to a certain dollar value of income.  The contribution percentage would decline after a certain amount is saved in the HSA, meaning that those who used little healthcare would have a higher take-home pay, providing an incentive to maintain high account balances and not spend money unless needed.  Those who cannot contribute enough to cover reasonable costs would have their contributions subsidized.  Any money left at death would be passed to heirs.

2.  Require that everyone also buy major medical insurance – insurance that pays for costs above a certain, large threshold, like $20,000.  Ensure that there are enough insurance companies competing that the price of this coverage is as low as possible and the service is as good as possible.   These policies must be clear on what is covered and government should fine any company that does not immediately pay for a covered service (no denying payments for sick people, hoping they won’t dispute the mistake and just pay the cost themselves).  The threshold could also be raised as an individual increased the amount in his HSA, thereby lowering the premiums.  For example, an individual with $40,000 in an HSA could have a major medical plan with a $40,000 deductible, which would cost less than one with a $20,000 deductible.

3.  Develop a high risk pool, subsidized by taxes, that covers those with really bad medical luck (like a major disease at 18 years old before starting a job and getting major medical insurance).  These individuals are rare so most people would be able to cover themselves with everyone saving up a portion of their income in an HSA, so spreading the risk out over the whole population won’t cost much.

4.  Require that all medical providers post costs and stick to those costs (no preference for one patient over another).  This would allow individuals to shop around for the best deal and eliminate price disparities as currently exist.

What would things be like after this plan is implemented?   Most people would just pay for their medical treatments out of their HSA when needed because they would have the cash saved up.  There would be no need for the doctor’s office to file insurance, reducing costs.  In addition, because most people were paying their bills and you wouldn’t need to pay for other people, costs would drop dramatically.  Imagine $20 office visits, $15 X-Rays, etc….  Hospital stays would be maybe $150 a day instead of the thousands they now cost per day.

There would also be incentive to save money, and therefore people would pick the cheaper option when it really didn’t matter and not use healthcare when not really needed.  This would cause less demand, and therefore lower prices.  Doctors could also provide a discount for procedures that really reduce costs like certain exams.  Prices would decline to the point where getting healthcare is no big deal for most people.  With most everyone paying for their own healthcare, the cost to cover those who could not would be easily obtained through charity or taxes.  Now that’s health insurance reform.

Contact me at vtsioriginal@yahoo.com, or leave a comment.

Disclaimer: This blog is not meant to give financial planning advice, it gives information on a specific investment strategy and picking stocks. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Cash Flow Your Way To Wealth


 

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Those of you out there who have the first book of The SmallIvy Book of Investing series, Investing to Grow Wealthy, know that the first book covers most everything about how to use investing to grow wealth except for one critical area: How to pick the right stocks.  That is going to be covered in a second book devoted specifically to stock picking since that is an expansive topic on its own.  You probably also know that I’ve been promising that book for some time now.

You’ll be happy to know that I have been working on it and have the first couple of chapters done.  What I generally try to do is to use parts of the books I’m writing as blog entries since it is difficult to both write a book and keep the blog going (along with perform my day job and take part in family activities).  Of course, this means that you can get a lot of the material in the book for free just my reading the blog.  Hopefully, though, having it all in one place with the supplementary material that is only in the blog will be worth the $11 you spend on the book (or $5 for the e-book).  Realize also that it gives me an incentive to keep writing the blog if I have a financial interest (and also if I get comments and feedback since sometimes it seems like I’m talking to myself).  The publishers also don’t like having material on the web and sometimes fuss when they check and see the material on my blog that I have in the book, so you may see some of the material in the archives of the blog disappear with time.

At this time there has also been another diversion.  In looking at the first book, I realized a lot more needed to be said about the topic of managing your cash flow, since that is really the key to it all.  I’ve therefore started a new book specifically devoted to handling cash flow that will be released before the book on stock picking.  This one is coming along really well and should be out in a few months if not sooner.

So what is cash flow and why should you be interested?  Cash flow is how your money comes into your household and then how it either stays or flows out.  People who become wealthy find ways to make more of the cash they earn stay in their household and even use their cash flow to create more income.  The average family has a straight cash flow where every dollar that comes into their bank account flows right back out again.  Not only do they not build wealth, meaning that they are looking at a retirement in poverty, but they also face the risk of racking up debt when there is an event that causes their expenses to spike in a given month, causing them to take on debt.  This then adds to their expenses and they start to sink into the abyss.

So, I’m working my way through the cash flow book, going  deep into everything from income (how to increase yours) to managing expenses (where you find the money to invest) and even investments you really need to be making that few people do.  Hopefully, it will be out before Christmas because it would be a great book to read with your graduating senior this spring.  While it has some powerful material for those already working, someone who is just starting out and who gets his cash flow right from the start could really do things with financial security and wealth building.  Please forgive me for this diversion.

Have a question about investing?  Please send to vtsioriginal@yahoo.com or leave a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.