My Investment Primer!

Posted by timotheus on October 12th, 2007 filed in editorial

Picking companies to invest in is a tricky thing. Assuming you don’t just pick stocks randomly, choosing a company that will take your money and turn it into more is hard. Back in my folly-filled youth, I thought it was easy. This was because it was the dot com era, and basically everything went up. It was the way people thought about real estate now. (or now() - 180 days) Unfortunately, that is not the case when things go bad.

But I digress. I’ve been saving up my hard earned moola for a while now, and I decided to invest some of it. Now, investing your money is something that holds a special place in my heart. I’ve always been fascinated by it. When I took a finance course at CSUS, I changed my major to finance, to better understand this magical ideal. I mean, it’s earning money for doing nothing. Who wouldn’t like that??

I graduated with my B.S. in Business Administration, with a Finance concentration. I say this not to make you all bow in submission to my investment powers, but to let you know I at least was PRESENT in lectures on investments. (Minus the four classes I could miss without losing points.)

I can reduce my cornucopia of investment knowledge into several bullet points.

• Pick a company that isn’t wallowing in debt. Makes sense right? It’s a personal thing; I don’t want the company being too agressive and risky in trying to make the company grow. The quick way to check it to look at the Debt-to-Equity ratio. The Debt-to-Equity ratio gives you the total debt of the company divided by the shareholders equity (what all the shares are worth). For example, Bobs Bean World owes $500 in loans, but all the shares in Bobs Bean World are worth $1000, then the ratio is 0.5. I don’t like the Debt-to-Equity ratio to be much more than 1.0 in a company I look to invest in.
• Pick a company that makes money with the money it has. I want to know that the managers of a company are making good use of the money they already have. For that, I look at the Return On Equity ratio. The ROE (as we savvy investors call it, hah) is the net income of the company, divided by the shareholders equity. I like to see over a 15% ROE every year for the last 10 years at least.
• See that it’s doing better than other companies in the same industry. So if there’s two clay making companies you are interested in, which one consistently makes more profit? Initial scan says to pick that one.
• Day-trading is stressful. I’m picking stocks I will hold onto for a long, long time. They are companies I believe in, and who I think will continue to be profitable and make the world a better place. I’m not looking for a quick 10% growth then sell. I don’t have the time for it, plus I already have grey hair.
• Don’t put all your eggs in one basket, AKA diversify. Putting all your money in different companies that are all in the computer hardware industry can be a bad thing. Putting all your money in just one company is a risky move. I like to have at least nine stocks in my portfolio, touching at least four different industries.

How do I start looking for companies to invest in? I start by using a stock screener. It lets me make some simple guidelines to start out with, like “find me stocks that are in the medical equipment industry, that have an average ROE of 15% or greater, Debt/Equity ratio of 1.0 or less, etc”. It returns all the stocks that fit the criteria. Here is an image of the settings I use in my stock screener of choice. (Which is MSN Deluxe Stock Screener. It only runs in IE, which is evil I know, but it’s the best one I’ve found.)

It is a handy way to quickly find companies that fit your criteria.

Once I have a company that I like the look of, I get financial reports on them, to look at their ROE and other items in detail. These are not free. I do my trading on scottrade.com, which gives access to reports to their users. 90% of my info I can find on different investment sites, but I haven’t found any place that shows you ROE’s broken down by year, except for financial reports.

Anyway, here are the different companies I chose to invest in. All of them meet my criteria, for the most part.

• STX - Seagate Technology
  • Seagate has been making Hard Drives and Storage options for forever. They’re darn good at it.
• GRMN - Garmin Ltd.
  • Garmin deals in GPS technology. All the ‘good’ GPS goodies is made by Garmin
• FLIR - FLIR Systems Inc.
  • FLIR Systems is “engaged in the design, manufacture and marketing of thermal imaging and infrared camera systems.” It’s my guilty pleasure. Yes, they do some military application, but honestly being able to see in the dark is just too cool.
• DNEX - Dionex Corp.
  • Dionex “designs, manufactures, markets and services range of liquid chromatography systems, sample preparation devices and related products that are used by chemists to separate and quantify the individual components of complex chemical mixtures in many major industrial, research and laboratory markets.” They’re one of my Biotech/Science helper companies I picked.
• SIAL - Sigma-Aldrich Corp.
  • “Sigma-Aldrich Corporation develops, manufactures, purchases and distributes a range of biochemicals and organic chemicals. These chemical products and kits are used in scientific and genomic research, biotechnology, pharmaceutical development, the diagnosis of disease and as key components in pharmaceutical and other high-technology manufacturing.”
• CSCO - Cisco Systems Inc.
  • Cisco is the King of Routers, and other Internet related hardware.
• SYK - Stryker Corp.
  • “Stryker Corporation (Stryker) is a medical technology company with a range of products in orthopedics and a presence in other medical specialties. The Company’s products include implants used in joint replacement, trauma, craniomaxillofacial and spinal surgeries; biologics; surgical, neurologic, ear, nose and throat (ENT) and interventional pain equipment; endoscopic, surgical navigation, communications and digital imaging systems, as well as patient handling and emergency medical equipment.” People are always going to be breaking bones.. Plus the name sounds so impressive.
• DCI - Donaldson Company, Inc.
  • Donaldson Company makes air filtration systems and filters, on an industrial scale. As emissions gets more and more regulated, these guys will just have more business.
• SOPW - Solar Power Inc.
  • Solar Power Inc is a local solar panel company. They’re putting up retail stores, which is a really good thing, and will be putting them all over the world. This is a little bit of a gamble, the stock just came on the market in September. It has the potential to be massive though.
• NALFX - New Alternatives Fund
  • New Alternatives “invests most of assets in companies that provide a contribution to a clean and sustainable environment. It usually invests at least 25% of assets in common shares of companies which have an interest in alternative energy. The fund invests in U.S. companies as well as foreign ones without limitation on the assets allocation. It is a social responsible fund.” This is my only fund in my portfolio, but I think it’s a fairly stable, responsible fund to own.

Invest at your own risk, I am just giving you this info to maybe introduce some people to the exciting and dangerous world of investments..