Bargain Basement Investing!

How to be a Value Investor like Warren Buffett


Shopping for deals in the stock market is something for the value investor. It involves finding stocks trading below fair value. Akin to discount shopping name brand items at outlet malls, value investing involves identifying stocks of solid companies, with a history of consistently growing revenue and earnings per share (EPS).

By comparing the current stock price to the company's historical fair value it can give you a place from which to compare potential investments. Stock brokerage analysis tools such as the Recognia Inc. research kit allows you to plot price movement of stocks along the fair value line.

Choose Stocks Priced Below Fair Value

Prices that currently fall below this line represent good value stocks as they are expected to eventually rise to where they should be. Many stocks tend to trade far above fair value--typically hyped stocks with lots of investor appeal, the "next big thing" stocks and tech stocks.


What Would Warren Buffett Say?


If you follow this blog, you'll see frequent reference to the great Buffett and buffettisms of trading. Buffett is a life long value investor who has made gazillions of dollars buying and holding value and growth-worthy stocks. A $10,000 investment in Buffett's Berkshire Hathaway in 1965 would be worth 30 million according to Investopedia.

Buy and Hold Value Stocks

Buffett screens companies with respect to consistency of performance with return on investment (net income/shareholder's equity); the avoidance of excess debt (debt/equity ration); high and increasing profit margins; age of the company on the market (at least 10 years public); companies with unique products that do not rely heavily on commodities (external influence); value--is the stock selling at a discount of at least 25%? Although it's difficult to determine a company's true intrinsic value, value analysis can provide a good source of value investment direction.


Not for the Active Day Trader


Value investors are Warren Buffet fans--the buy and hold gang. As long as a company continues to grow and earnings chime in at their expected marks, the stock will remain attractive to the value invester.


Remember, when using technical analysis to chart a company's historical market performance, future performance is not a given. There are no genies in bottles locked away in the analyst programs. But we do know that the past often equals the future, and the more often an event occurred, the more likely it is to recur. And this is what stock speculation analysis counts on.


Some Stocks to Value Analyze for Yourself:


Bonterra Energy Ord Shs BNE: TSX


Computer Model Ord Shs CMG: TSX


AlarmForce Industries Ord Shs AF: TSX


Calian Tech Ord Shs CTY: TSX


Toromont Inds Ord Shs TIH: TSX


WaterFurnace Renewable Energy Ord Shs WFI: TSX


Happy Investing!

One side of Couch Potatoe and A Barrel of Crude to Go Please!

I have a connundrum. I am perplexed at what style of trader I should be. Although I enjoy the thrill of the daily chase in the markets and individual stocks, I am not sure my personality can handle the ups and downs, anxiety and panic, and momentary thrills cut short by the sudden gap downs in stocks I was certain would be winners (ie. RGEN).

Too Much Noise!

I have been listening to too much noise. "I have an awesome mutual fund, check it out." "My ETF investments weathered through 2009." "My grandfather made his fortune in penny stocks." "Diversify, don't put your eggs in one basket." What does all of this mean? Do I diversify and invest in everything?

Then I'll just order one couch potatoe portfolio to go please, with a side of gold bars and a barrel of crude!

I have some money. I want to invest it. It is currently burning a hole in my trading account. I bought some stuff. The stuff hasn't moved. I made some profits on a couple of small tech plays and one mining venture. Then I bought some ING mutual funds, some index ETF's and although I have green on my screen, there are small bits of red that bug me and plague my mind with fear of failure.

I want to automate my investing to a comfortable level of regular contributions to some basic things like mutual funds and broad market ETF's. But I also want to enjoy the ride of trends, the thrill of the venture pops and the occasional volatile day trade. Am I crazy?

Is this bipolar psychotic trading?

What I've decided to do is hedge my bets. I picked some funds with 4 to 5 star performance over three years to focus one half of my investments on a regular basis with a 33% bonds, 33% Canadian Equities, and 33% Other (mostly US Equities) split. Of the remaining 50% of my savings, I decided to allow the market and a couple of my favorite gurus drive these decisions. So half of my investing is a no-brainer process that I will try to rebalance semi annually and use cost averaging to help weather any falls in the market.

The other 50% is the fun part. I can't seem to decide if the penny stock world, the sector trend investing, or value investing is the way for me to go. I have a moderate to high risk tolerance for this 50% that I would otherwise probably spend on stupidities anyhow. So I am going to create a program for myself. Not a computer program, but a set of regular activities, analysis and predefined reactions to execute my plan.

Pick Some Pros to Do The Work

I've nailed my Gurus to 3: Tony Turner, whose club I have decided to join; Ron of the Doityourselfinvesting.com duo, whose newsletter/club I recently subscribed to; and The Motley Fools who are just plain cool and whom I want to invite to dinner!

I'd love to get in on all those penny stock millions, but honestly, I don't have time to sit and watch my screen on intraday charts, sweat bullets or cry in my soup. Kudos to those warriors with the constitution for that, but I will pass.

So, feeling confident with my decisions and plan, ING will run my RRSP and TFSA with their Streetwise Funds; I have some small bits of this and that over at TD in the e-series funds for my youngest daughter's college days which are still a far way off; and as for the rest--it's time to get cracking and figure out what to buy and when.

The Fun Part: shopping!

Stop Jumping In and Out of Success!

Why jump in and out of stocks at the wrong time and lose money? Whether you are making investment decisions based on your own analysis or using the expertise of others to guide and direct your investments, it's important to examine your past performance to see if your style and plan are actually working. Many financial "advisors" suggest buying and selling various managed funds, while other "experts" tout the snatch and sell on the run method. A common complaint in messages boards and blogs across the net is that of "missing out" on a trend, catching it on the wrong side of a peak or valley, or simply always being one step behind the action--playing the bench instead of enjoying the profits of a trend. Do it yourself investing can be a frustrating path to financial gain if your purchases are disjointed, incoherent or irrational.

Consider An Automated Plan

You've heard this before: set your goals, make a plan, stick to the plan, reassess the plan, rebalance. That's all fine--but it still requires you to do the research, analysis, make the selections and execute them. Financial advisors can do this for you. Fund managers are supposed to this for investors. And there are several online services that provide similar input into your investing activities to take the guesswork out of what to buy, sell, and when.

Single Instrument Investing

There are thousands of mutual funds--either passively managed using indexes, or more actively managed with specific equity allocations--which allow you to invest in a diverse collection of stocks and/or bonds and let your money sit and grow. The problem with many mutual funds is that over 80% of them don't tend to beat the various indexes in which they invest, and often come with significant management fees (MERs) that can chew up 2 to 3% or more of your annual profits. Other companies have designed pure index funds requiring low maintenance and thus lower MERs. ING Direct Canada, for example, offers a selection of Streetwise Funds which aim to replicate Canadian indexes in various proportions of bonds and stocks depending on your investment needs. The company suggests we "invest early, invest often and stay invested", using cost averaging to spread out the cost per unit of the fund and spread the risk of investing over the entire market with low management fees of around 1%.

A variety of exchange traded funds are also available with broad market diversity which serve to expose investors to various markets, various sectors and with optional amounts of bonds and equities, all which can be traded directly on the market like a stock. Some examples of these ETF's which can be purchased individually to replace a diversified mutual fund include these two iShares funds:
XCR: Conservative Core Portfolio Builder seeks to provide a combination of income with the potential for long-term capital growth.
XGR: Growth Core Portfolio Builder seeks to provide long-term capital growth by investing primarily in equity securities and to one or more alternative asset classes, with the balance invested in those that provide exposure to fixed income securities.
Claymore, Horizons and BMO offer similarly diversified ETF's.

Sleepy Portfolio Options

The original Couch Potato Portfolio was designed for investors who want to expend the least amount of energy into their investments by choosing a collection of index mutual or exchange traded funds and rebalancing them from time to time, but at least annually. Find the couch potato portfolio options here.

Memberships in Managed Automated Portfolios

Folio Investing is an American company that offers a portfolio of stocks, ETF's and mutual funds which can be traded in a single transaction. They offer multiple investment strategies based on collections of instruments and even allow you to customize within an strategy if you chose to exclude certain sectors or companies for personal or political reasons. For example, you can elect to delete any companies from a certain group of equities that might be involved in alcohol, tobacco, gambling, weapons, genocide or nuclear power. I really dig their website for its simplicity and attractiveness and functionality. They have a cool questionnaire tool that helps you determine what portfolio to buy based on risk, investment objective, time to retirement and sector interests. Check it out here.

Membership in Self-Directed Do It Yourself Investing Groups

One of my absolute favorite finds of the last few weeks has been doityourselfinvesting.com. The monthly membership service costs $10 at the writing of this blog which gives you a newsletter, regular portfolio updates and any alert notices that you'll need to take action on should urgent buy or sell signals present for equities or ETF's in the core portfolios suggested. They offer 4 portfolios currently: an equities portfolio for the US and one for Canada, and 2 similar ETF portfolios for the Canada and US. They publish their stats, previous holdings, performance and some back issues of newletters which are quite interesting and educational. I was most impressed with their performance during the last flash-crash which far outweighed that of any index fund, most mutual funds and the majority of single ETF's or equities. I highly recommend taking a look here.

Happy Investing!

Disclosure: the author owns shares in ING Streetwise Mutual Funds, is a new member of Do It Yourself Investing, invests in a couch potato portfolio using TD e-series funds, owns shares in XCS - S&P/TSX SmallCap Index Fund and does not own shares of XCR or XGR.

Playing The Volatility Game

Investing strategies are as diverse as the people who use them. From the long-term investors who annually buy a handful of sleepy blue chip stocks, bonds or managed funds to the adrenaline junky active day trader who plays the minute swings in market volatility, there is something for just about anyone with a few bucks to throw at the market.

My perception of a typical daytrader comes from movies like Wall Street and news clips from 1999 where images of high rolling super-traders driving Ferrari's, flying in private jets and living the American Dream ran rampant. In reality, most day or "active" traders sit buried at their desk in front of 2 or more screens running chart analyses, checking intraday technical events and watching the news all while managing their tweets, facebook entries and video games for the entire trading day pre- to post-market.

Swing traders are defined as semi-active traders who hold positions from a few days to a few weeks and ride a trend. This, to me, is the kinder, gentler form of active trading as it allows people like me who work day jobs to participate in the market in the evenings and weekends using predetermined limits and stops to buy and sell short term positions. A friend of mine refers to this kind of trading as "stealth" trading, since we seem to be invisible during market hours with our presence only felt in the automatic stops and starts we factor into our trades.

Stocks Defined as Instruments

I find it funny that certain technical programs refer to stocks as instruments. But I get the analogy. A stock is an instrument we use to gain exposure to (or play) world financial markets and hopefully reap some rewards in the process. But as with any instrument, the output is only as good as the input. A violin sounds unrecognizable in the hands of a hack. But a highly trained musician makes beautiful music.

Matching the instrument to the player is key. A well trained guitarist does not automatically excel at playing the saxophone. A sleepy portfolio annual investor does not necessarily make a successful swing trader.

Pick Your Poison

So what instrument do you choose? Ah, the one big question. We can't really expect to day-trade sideways trading sleeping giants like Coca Cola or the current version of Microsoft with any big gains over the short term unless you have thousands of dollars to invest in order to see a portion of a percentage point in profit. And we can't be purchasing options and futures and sit on them expecting any kinds of long term gain by ignoring the market and expecting growth. That would be like buying a treadmill and hoping you get fit by simply owning it.

If you have time to sit in front of multiple computer screens, study and analyze charts, read news feeds and trade on a moment's notice, perhaps active trading is for you. However, if you don't have access to this kind of study time, or the psychological constitution that goes along with this riskier kind of style, swing trading or longer term investing is more likely the way to go.

I've heard some day traders boast about not caring what the company does, how good the product is or what the industry of that company is up to. They don't scan the news since they are only interested in the technicals and charts. They trade the probability of rises and falls in instrument prices based on purely the personality of a stock, future, option or index and specific indicators that signal a buy or sell. Other traders factor in wider market trends and probabilities based on world events, financial milestones, company characteristics and the environmental impact on the market. Still others choose to incorporate a combination of multiple factors to determine their buy and sell signals for a certain type of investment and narrow their collection of instruments down from the entire orchestra of market offerings to a smaller ensemble of selections.

Volatility is the key to active trading. Enter, rise, exit....and fast--over several days, hours, or even minutes. Some stocks bounce up and down with great swings each day--highly volatile. Others trek along at a barely audible pace pulling in or letting go mere fractions of a percentage point in any given day.

Cashing in on Volatility

So if you don't want to spend weeks and months studying individual stock charts for consistent patterns of volatility, how about trading trend volatility--like the cost of gold, oil, natural gas, silver, and even the VIX (Chicago Board of Exchange Volatility Index) itself. Having chosen to add a bit of spice and adrenaline to your investing style, there are a few ways to play some of these bouncy market favorites without the confusion or chaos of entering into options and futures and all the rather complicated instruments available in that particular concert hall.

ETF's are now offered by various companies that allow you to win when the market falls, or invest in futures and even the VIX quite easily. An ETF is a basket of stocks, futures, covered calls, or whatever an ETF company can imagine to include. Learn more about ETF's here. Exchange-traded fund companies listing ETF's on the Canadian market include Horizons, Claymore, iShares and BMO.

For example, Horizons offers some ETF's that offer a bull and bear version for various things like gold, oil, natural gas and even the VIX. You can purchase a bear ETF and invest in dropping gold prices, or the bull counter part if you feel gold is on the rise. If you want to invest in crude oil futures--such as during the current oil unrest in the middle east, Horizons has a crude oil bull and the inverse bear ETF in their repetoire.

I find it somewhat less confusing to peruse the various ETF's available than to navigate through loads of managed mutual funds or try to enter into the options, futures and stock-shorting game. The advantages to ETF's are many but for me, the fact that I can trade them like stocks and the MER's are typical much lower than mutual funds, makes them attractive. Add to the mix these inverse ETF's and new plays on volatility, and you don't have to go very far to find your little band of players.

Personally, I have been enjoying my plays with HOU and am no longer scared of an advancing bear market with all of the inverse and bull ETF's available for me to play with.

Happy Trading!