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How the World’s Richest Man Picked Stocks: 10 Tips from J. Paul Getty

9/13/2015

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PictureJ. Paul Getty
If someone with a lot of money gives you money advice, you should listen. If he just so happens to be the world’s richest man, you’d better take notes.

J. Paul Getty, at one point in time, was labeled by Forbes as the richest man in America, and by others as the richest man in the world. He accumulated his massive wealth in the oil business, but he was no stranger to profiting from his stock picks.

Mr. Getty was the classic “buy low, sell high” contrarian investor who bought boatloads of shares when doomsayers were proclaiming the worst. When Getty first started investing, a successful financier told him, “Buy when stock prices are low – the lower the better – and hold onto your securities. Bank on the trends and don’t worry about the tremors. Keep your mind on the long-term cycles and ignore the sporadic ups and downs.”

On the surface, this appears to be common sense, but most people practice the opposite. They are fearful of bargains and would rather wait until a stock goes up, buying because they feel they are getting in on a sure thing. Tragically, this is usually right as a stock is reaching its peak.

Getty purchased shares of Tide Water Associated Oil Company in 1932 (during the Great Depression) at $2.12 per share. By 1937, the shares were trading at $20.83, netting him nearly ten times his original investment in just five years.

In 1932, Getty was gobbling up shares left and right because he recognized their bargain-basement prices. Another example is when he started buying Petroleum Corporation Stock in May 1932. He bought steadily until September 1933, when he owned 190,000 shares. Although his average per-share cost of the stock was only $6.54, the shares were worth nearly $15 each.

Here’s a direct quote from his book, How to Be Rich: “The big profits go to the intelligent, careful and patient investor, not to the reckless and overeager speculator. Conversely, it is the speculator who suffers the losses when the market takes a sudden downturn. The seasoned investor buys his stocks when they are priced low, holds them for the long-pull rise and takes in-between dips and slumps in his stride.”

In that book, he also gives ten questions investors should ask themselves when buying stock. They are still relevant today, perhaps now more than ever. Getty’s questions are in bold, and I’ve included my thoughts below each question.

1. Is the company solid, with efficient and seasoned leaders?
Without good leaders, a company doesn’t have much. I feel I should note that you should invest in companies where you don’t need to be an amazing manager to run. If you can teach a teenager to manage operations (think fast food chains), this is a business you should consider.

2. Will there be demand for the company’s products/services in the future?
Since a company’s stock price is a theoretical “price willing to be paid” for future earnings, you should stay away if you don’t think there will be any future earnings.

3. Is the company in a good competitive position? (I would ask, “Is it a moat-y type business?”)
You don’t want the company to be eaten alive by competition.

4. Are company policies and operations aggressive without calling for dangerous over-expansion?
The company should willing (and able) to grow naturally. Forcing unnatural growth stretches resources too thin, and is often a recipe for disaster. Watch out for what Peter Lynch called “diworsification”.

5. Will the corporate balance sheet stand up to close scrutiny? 
Are they cooking the books? Do the numbers make sense?

6. Does the company have a satisfactory earnings record?
I like to make sure that earnings have increased steadily in the past few years. If there is a blip on the record, figure out the reason for it.

7. Has the company been paying dividends?
Stocks that pay dividends, as a whole, outperform stocks that don’t pay dividends. Look at the dividend payouts over the past five or ten years. If they’ve been increasing, that’s a great sign.

8. Does the company have a manageable amount of debt, if any?
This is one of the first things I look for, essentially asking, “Will this company go out of business tomorrow?” Also, if there’s a slowdown in our economy, the company with the least amount of debt has a greater chance to survive and thrive.

9. Has the price of the stock had any violently wide and apparently inexplicable fluctuations?
You should have a strong stomach anyway, and shouldn’t worry about fluctuations in price, but if they’re too large and unexplainable, stay away.

10. Does the per-share value of net realizable assets exceed the stock exchange value of a common stock share?
Ah, value investing. Is the stock worth more “dead” than “alive”?

Finding stocks that can pass all ten questions with flying colors is like finding a needle in a haystack, but they’re well worth the find. Put Getty’s advice to good use and you’ll be well on your way to raking in the millions…! 


Getty's book, How To Be Rich, as referenced in the post.
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Why You Should Avoid Penny Stocks Like The Plague

9/4/2015

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No revenue, no operations? Stay away.
Here’s a simple but poignant truth: most penny stocks eventually find their way to zero. Penny stocks are typically small, unprofitable companies that are such long shots you shouldn’t even worry about them.

Timothy Sykes has helped make trading penny stocks more popular, and even introduces people to the idea that you can short penny stocks (especially during a pump and dump). This is a nice thought, but it’s very difficult to find stock in order to short and the fees are usually sky high. For the purposes of this post, I will be talking about going long on a penny stock.

You should avoid investing in penny stocks because….

There’s no profit. Most companies behind penny stocks have no profits at all. I’ve even seen companies with absolutely no sales! If you’re into fundamental analysis, which you should be, you want to see low debt, nice cash flow, increasing earnings, and so on. Penny stocks usually have nothing to analyze.

You lose from the start. With penny stocks, the bid/ask spread is just way too much. Let’s say a stock is offered at $0.25 and bid at $0.20. You take on a 25% loss as soon as your trade goes through. And that’s if you have no commissions or fees!

They’re easily manipulated. Commonly referred to as a “pump and dump” scam, it’s when insiders hype up a stock and sell their own shares during the price spike. Penny stock promoters rely on your gullibility, believing there’s a quick fortune to be made. Even if you catch a “pump and dump”, you might have trouble getting out of the trade.  

Napoleon Hill warned us that we shouldn’t seek something for nothing, but with penny stocks, there’s a pretty strong temptation to throw your hat in the ring. However, I would recommend staying away from penny stocks. You shouldn’t invest with money you can’t afford to lose, but when you go with penny stocks, you should almost expect to lose.

Of course, I’m speaking statistically. The majority of people simply don’t have the time and/or energy to learn proper trading strategy, protection mechanisms or asset management. In a sense, the markets simply funnel money from the uninformed to the informed.

If you want to err on the safe side, stay away from microcaps and penny stocks. They have too many problems, and for every cockroach you can spot crawling across the floor, I promise you there’s ten more in the walls. A pretty scary metaphor, but losing money is scary. 


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Why You Can’t Rely on Analysts’ Buy/Sell Ratings

8/4/2015

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If you do your own research and are considering investing in a particular stock, it’s nice when an analyst agrees with you. It can be a horrible mistake if you forgo your own independent thinking and latch on to whatever an analyst recommends.

Even though analysts are looked upon as professionals, there are still many flaws in blindly agreeing with their “buy” or “sell” ratings.

First of all, there is a huge incentive for analysts to issue “buy” recommendations instead of “sell”. The universe of stocks not owned by a customer is always much larger than the list of those currently owned. Consequently, it’s much easier to generate commissions from the “buy” recommendation.

Analysts usually work for a firm, and they have a vested interest in keeping that firm profitable. It doesn’t pay for analysts to cover stocks unless they can generate enough revenue to allow the analysts to keep their jobs. This also means that smaller cap stocks, which don’t have huge volume, are usually ignored because they can’t bring in enough trading commissions. It’s ironic because these smaller stocks are specifically the ones that hold the most profit potential for the investor.

Analysts are usually cut off from important sources of information, including company officers and investor-relations personnel. These people can hold important pieces of the puzzle when putting together a “buy” or “sell” rating. This is a major flaw, but it is a necessary evil, because it would open the door to potential insider trading.

Inside a major firm, independent thinking isn’t the norm, because it’s very difficult to go against fellow analysts. It’s much safer to be wrong in a crowd than being the only one to misinterpret a situation.

Finally, analysts typically cover only one industry group. There are chemical analysts who don’t know much about investing in other industries. If a chemical analyst says to buy a stock in the chemical industry, it’s not being compared to investment prospects of other industries.

You should do your own research and use analysts to CONFIRM your findings.


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Facebook Stock Surges: Should You Buy?

7/23/2015

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Facebook ($FB) hit a new high today, closing at $97.91, up over 3% for the day. This is putting a lot of attention on the company, drawing investors in, with high hopes of making some profit.

There’s strong reason to believe that Facebook surged because analysts at BTIG gave Facebook a buy rating and a price target of $117. Richard Greenfield, an analyst at BTIG, expects Facebook to have better-than-expected performance for the second quarter because of the potential behind video advertising.

Morgan Stanley analysts also gave a bullish outlook on the stock, increasing their price target from $94 to $110. Piper Jaffray analysts revised its target price from $92 to $120 in June.  

Even the folks over at Bloomberg polled analysts on their opinion of Facebook stock. Out of the 54 analysts, 47 rated Facebook a buy, six rated it a hold, and one lone analyst rated it as a sell.

So far this year, $FB has risen over 23%, compared to the less than 1% return of the Dow Jones.

The question is: Will the stock go higher?

The answer is: I’m not sure.

It would be easy for me to say “Of course it’ll go higher, look what all the analysts are saying!” but I’m conflicted. The tech/social media stocks look like they’re in a bubble, and my contrarian senses are tingling because everyone and their mama seems to be bullish on Facebook.

My fundamental side is screaming no, while my technical side is screaming yes. Facebook stock currently has a P/E of 98, way above my “15 or below” value-investor ideals. However, it’s in an obvious uptrend and could go much higher if investors keep pushing it.

Stock pickers and analysts alike point out Facebook’s untapped potential with Instagram, Whatsapp, etc. While it’s a valid point, I like to wait until something actually happens and then form an opinion based on investor response. For example, if positive news comes out and the stock declines, that’s a pretty bad sign.  

So, what’s my verdict? I wouldn’t get involved with Facebook stock, long OR short. I’m going against the experts with this one, but I just can’t honestly say I’d buy $FB. I can see it going a little bit higher, but it’s too far into the uptrend and I’m pretty cautious about buying at the peak.


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Does Trend Following Work? A Short Answer. [VIDEO]

7/11/2015

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10% of My Personal Stock Portfolio Is Invested In This Teen Retailer

6/25/2015

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50% off signs are seen at an Aeropostale store in Paramus, N.J. (AP Photo/ Mel Evans)
Have you been to your local mall lately? Teen retailers are a dying breed. I’m talking about American Eagle, Aeropostale and American Eagle. These are the big three teen retailers that dominated their industry.

A multitude of factors have contributed to this retail decay, including fierce competition from other retailers like H&M and Forever 21. According to Business Insider, teens are spending less money, and when they do spend money they are more likely to spend it on technology and fast food.

On top of all that, the times are a-changin’. Nobody wants to buy a shirt with an obnoxious logo on it anymore. Part of Abercrombie and Fitch’s business model was that people would pay more for the brand. As clothes become more nondescript, these big three have been feeling the squeeze.

American Eagle ($AEO) reached its peak, around $34 per share, in 2007 and hasn’t gotten close since.

Aeropostale ($ARO) stock reached its peak in 2010. It got to over $31 per share, but has lost over 90% of its value since then. At the time of this writing, it is trading at $1.85.

Abercrombie and Fitch ($ANF) stock peaked in 2007 at $84 per share, lost 80%, then came back up near previous highs again in 2011. Since then, four years considered, it has been in a downtrend.

However, Abercrombie and Fitch stock is one of my buys right now.

One of my biggest investing rules, inspired by Stan Weinstein, is never ever invest (go long) in a stock in a downtrend. Don’t get me wrong, this is good advice, but there are exceptions to every rule.

I won’t buy a stock that’s in a downtrend unless it has a certain quality. It MUST have this one thing or else I won’t ever consider it.

What is it?? Insider buying.

You see, $ANF has had a large amount of insider buying this month. My screening service allows me to see insider buying taking place. On June 5th, Fran Horowitz, President of the Hollister brand, purchased 10,000 shares of $ANF. Before this point, she owned NO shares. Interesting…

Then on June 9th, Christos Angelides, President of Abercrombie and Fitch, bought a whopping 45,200 shares. Before this, he didn’t own any $ANF shares either!

If two company presidents are gobbling up shares, it sends all types of buying signals. Both joined the company in 2014, so perhaps their heavy buying is a vote of confidence in their own ability to enhance the bottom line.

Only time will tell. Until then, I’m invested in $ANF. I bought June 9th at $22.20 and plan to hold for a few months.  

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Don't Get Burned: Spotting a "Pump and Dump" Stock

6/20/2015

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In the first week of June, I got back to find a report in my mailbox. “High-yield winner” and “make you a fortune” were plastered all over the front of this report. It was hyping a stock I have never heard of called EMS Find ($EMSF). Apparently it is a company poised to make a stake in the private ambulance industry, and it was being pushed pretty hard in my mailbox.

I’m not saying that this particular company is trying to scam investors and I by no means am indicating that they’re doing anything illegal. I just want to educate investors on pump and dump scams and why this seems like one.

A pump and dump scam essentially involves an investor (or sometimes a group) promoting a stock like crazy and then selling it once it soars. That’s pretty much it.

If you ever get a hot stock tip or hear that something will be “the next big thing”, stay away! Yes, it’s possible to get some nice short-term gains, but you never know where the peak will be and when the bubble will burst.

Here are some of the things the report said about EMSF, in exact words.

“Get some money on the table now because this could be big!”

“Ride EMSF’s unlimited upside to what could be staggering gains!”

“2015 is a big year for EMSF… grab your position now!”

Here’s what actually happened…

I’m assuming that the report got to my house either June 3rd or 4th, during which time EMSF stock was hovering around $1.20. Then from June 5th to June 9th, the stock soared to over $2.50 – DOUBLING in value. Surely, EMSF was the next big thing!

Not so much. Since the $2.50 mark, the stock lost 25%, and the stock has been seeing pretty violent volatility swings, usually 20% or more in one day.

EMSF is now $1.91.

Moral of the story: if you receive a “hot stock tip” and have some money to blow, go ahead and invest, but be SURE to lock in your profits with a trailing stop. 

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Which Mutual Fund Is Right For You? A Quick Guide to Seven Types of Funds

5/27/2015

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If you’re looking to invest and grow your wealth, one of the best tools you can have in your arsenal is a good mutual fund. However, when you’re out looking at different products, it’s easy to become overwhelmed with the amount of choices available.

This isn’t something where you just pick one, because the fund you choose may not align with your style or personal goals. It’s important for you to understand the different types of mutual funds out there to make a better choice.

Here’s a quick guide to the types of funds available:

Blue chip – these funds invest in large, mature companies with high consumer recognition. These companies have high brand loyalty and are considered very safe. Blue chip companies include those such as General Mills, DuPont, and Coca-Cola. If an investor is looking for stability, this has it, but the returns might not be as good. Less risk usually means less reward.

Income - these funds hold stocks for their dividend yields. Income stocks typically have below-average growth potential. If you’re an investor looking to get a regular check (from the dividends, of course), you might want to consider an income fund. Income funds are usually geared towards retirees.

Growth – these funds hold stock in companies believed to have significant growth potential. Dividends won’t matter as much in this type of fund, because the focus is on appreciation. Market risk is the most prevalent risk factor for growth funds, but if you’re a younger investor who can ride out the volatility, it’s a pretty good portfolio to have. If you are interested in growth funds, you should also check out aggressive growth funds. Aggressive growth funds tend to be more volatile, but they can give more rewards if an investor holds them long-term.

Asset Allocation ­­- if the market risk from growth/aggressive growth funds worries you, you should consider investing in an asset allocation fund. It works to reduce overall market risk by making sure you’re not overexposed in any one area. Here’s an example: let’s say you’re 50% stocks and 50% bonds, and stocks have huge gains this year, making them take up 60% of your portfolio. The fund would automatically re-allocate the gains from your stocks into your bonds, making the portfolio 50/50 again.

High-Yield Fixed Income – another fund for aggressive, long-term investors, this one holds corporate debt with low credit ratings, referred to as “junk bonds”. This is a good portfolio to have if you’re interested in income, but it focuses primarily on yield rather than safety.

Value – these funds invest in stock that’s deemed to be undervalued. They usually employ a “buy and hold” strategy, which means you have to stick with the fund to reap the big rewards. As a whole, these funds tend to under-perform during a general market advance, but they outperform in a decline. In other words, you might not make a killing, but you won’t get killed.  

Tax exempt – these funds hold only municipal bonds and offer advantages for those in high tax brackets. If you’re a high income earner and want to ease some of your tax burden while still getting some appreciation, municipal bonds should be a part of your portfolio.

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My No B.S. Stock Portfolio That Earned 36% In Less Than Six Months

4/19/2015

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I love creating and testing investment strategies because I actually use this stuff in my own life. To become a skilled investor, I’ve got to learn experiment and re-adjust my methods. In this article, I’m going to share with you my WORST performing portfolio. Then, I’m going to share my 39% gainer with you.

Disclaimer: proper diversification is critical. With this investment strategy, a few stocks may experience big losses. I lost over 77% from one stock in the portfolio, but still managed to get a 39% return. Also, if you don’t have the stomach to stay invested, this is not for you.

I started both portfolios at the beginning of November. My goal was to have at least ten stocks that met certain criteria to test.

Now, my worst performing portfolio was basically a jambalaya of 14 low P/E, P/B, P/S and PEG stocks. Very fundamentals focused… adding any more specifications would’ve yielded no stocks at all. This portfolio returned a whopping 2.17%. Wow!!! What a stinker. The S&P returned 4.39% in the same time period, so I didn’t even get half of what the market returned.  A few bad performing stocks can sour your whole portfolio, which is the inherent risk with investing, unless you have a system to cut your losses. These two portfolios were just buying and holding, no matter what happened.

My best performing portfolio ended the trial period with a near-37% gain. Not too shabby. The crazy part is that I only used two rules to make this portfolio.

Rule number one: the stock had to be down 50% from its all-time high

I know, I know, don’t try to catch a falling knife… I figured that rule number two would compensate a little bit.

Rule number two: there had to be a large amount of recent insider buying

I basically looked for large amounts of stock being purchased by company insiders.

I threw these two rules together and found 11 stocks. I wish there could’ve been more but I stuck with my qualifications and made a portfolio of them. I was actually pretty shocked with the results. I thought that either A) the stocks would keep plummeting (like a falling knife) or B) there would be some gain but it either wouldn’t make up for the losers or the overall return wouldn’t be spectacular.

Instead, I got a big return for six months. Pretty cool!

I just wanted to take a few minutes and share my findings. However, in the investing world, there are not many rules set in stone. You have to continually adapt and change with your circumstances. Remember to test and test again!  


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The Top Five Books Every Investor Should Own

3/13/2015

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While the average American will outsource his or her financial management to an advisor or outside party, he or she should still be knowledgeable about how investing works. By becoming an informed investor, one will have a higher level of confidence when dealing with finances and be less likely to encounter trouble in the future.

The books listed below are not terribly complicated and lay the framework for investor education. They are not too specific and will not discuss things such as heavy balance sheet reading (such as Security Analysis by Benjamin Graham) or advanced charting patterns. Without further ado, here are the top ten books every investor should own. Click on the book’s cover to take you directly to its Amazon page. 

1. The Intelligent Investor by Benjamin Graham

Was there ever any doubt that this book would be #1? Called “the definitive book on value investing” it has laid the foundation for many investors, including Warren Buffet, for decades. Chapter 8 and 20 have been life-changing for Mr. Buffett and he suggests that all investors reread them every time the market has been especially strong or weak.

I would rate this book: 10/10




2. The Most Important Thing by Howard Marks

This book has influenced my thinking about value investing. It explains several keys, including second-level thinking, which will give you an edge over other investors. It focuses on several “most important things” that will allow you to extract value from the marketplace.

I would rate this book: 9.5/10



3. Common Stocks and Uncommon Profits by Philip Fisher

Here is yet another book I’ve discussed on the blog, but it deserves mention on this list because it expanded my mind to think more about company management and how stocks are based on future earnings expectations. Warren Buffett used to say that he was 85% Ben Graham and 15% Phil Fisher, but today he resembles Fisher more than Graham. This is a short read and well worth it, because it will give you more skill when it comes to buying and holding great companies.

I would rate this book: 9.5/10 

4. The Only Investment Guide You’ll Ever Need by Andrew Tobias

While the specific dollar amounts of the original version may be a little outdated (the amount you can contribute to an IRA is higher than it was in 1978) the ideas contained in this book are life-changing. It outlines specific strategies for wealth creation and preservation. Tobias talks about indexing, dollar cost averaging and how to set up savings for your children. This book is a great gift for anyone, but it’s essential for those such as young graduates beginning their careers. If you are young, be sure to read this book now and get your life on the right track. It’ll be the best investment you ever make.

I would rate this book: 9/10 

5. One Up On Wall Street by Peter Lynch

I’ll be completely honest – the first Peter Lynch book I read was Beating the Street and I thought it was horrible! Lynch constantly tooted his own horn and talked about going to the mall with his daughters to evaluate companies. I had to stop reading Beating the Street halfway through. That’s why I was so shocked when I read One Up On Wall Street and discovered that it was one of the best books I’ve ever read. Lynch chronicles his career and gives so many precious gems that the average investor can use. I’ll never forget one thing that has stuck with me from this book, and that is that you need a strong stomach to be a successful investor.

I would rate this book: 8.5/10 

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