Tips on Buying and Selling Stocks
‘SOFT’ FACTORS
The first thing to consider about investing isn’t technical at all. EPS, P/E, P/S, MA and EMA, RSI and dozens of other indicators are all important. But start at the beginning by looking not outside, but in.
What kind of investor are you? Young with a little capital to risk but a large earnings potential over several decades? Retired, or near it, with a healthy savings but living on limited income?
And, more psychologically, what’s your temperament for research and your tolerance for risk? Are you comfortable with statistics or intuitive? Are you detail oriented, or tend to look at the big picture? Not mutually exclusive categories, to be sure.
All these factors will influence your investment strategy. You do have a strategy, right? If not, go back to square one and develop that first.
‘HARD’ FACTORS
PEG - Projected Earnings Growth
Traditionally, Price to Earnings (P/E) ratio was a helpful indicator of value. Low price, relative to large earnings (per share) suggested a company’s share price would likely rise in the future. But that was before thousands of new companies entered the public markets and when investing meant buying Coca-Cola stock.
But P/E isn’t entirely useless, even today. Just supplement it with a little more information to calculate the PEG - Projected Earnings Growth.
Calculate PEG by taking the P/E and dividing it by the projected growth in earnings. For example, a stock with a P/E of 20 and projected earning growth next year of 10% would have a PEG of 2 (20/10 = 2). The lower the number the less you’re paying for a unit of future earnings growth. Therefore, a company with a high P/E may still be a value if it has a high projected earnings.
Of course, the key is getting accurate projections. While no one can predict with certainty, many Internet sites provide those numbers and over time, with diligence, you can find one you trust.
Just as deciding to buy is, in small part, finding a large PEG stock, electing a time to sell means estimating when PEG is likely to take a turn downward. So, tracking PEG over time in the form of a simple chart should be a weekly (or more often) task on your research list.
ROE - Return On Equity
Some companies can make silk purses out of pigs ears, others couldn’t make a profit if they were given Apple’s engineering and marketing teams for free. Return on Equity is one measure of how well a company uses its assets to produce earnings. (By the way, silk comes from worms, not pigs.)
Easy to calculate, simply divide Net Income by Book Value (assets minus liabilities). Both numbers needed are easy to obtain from Internet sites. Three percent is low, 15% is healthy - but be sure to compare to other companies in the same economic sector, and track the number over the long term.
Obviously, when projected ROE is high (based on historical trend) you want to buy. Timing the sell is a matter of estimating when ROE is trending downward.
Some factors to consider for the latter involve major mergers which look to be unwise (HP acquiring Compaq is one example), major technology or management changes (this can be positive or negative), lawsuits initiated or settled, and general economic factors influencing that company more than others.
Continually add to your database and your toolkit. Track the numbers and add new numbers to track. MA - moving averages and RSI - Relative Strength Indicator are two of the more common technical indicators used, for example. After you’re comfortable with those, seek out some of the methods of quantifying risk.
And don’t forget to develop that strategy. Tools are useless if you don’t know what you want to do with them.