A lot of info was given on fundamental analysis. The three financial documents needed for analysis are:
• The income statement – the amount a company made or lost throughout the year or quarter, this includes revenue, net income and earnings per share
• The balance sheet- how much money a company has or how much it owes to others
• The statement of cash flow- discloses how much cash a company made from primary business operations
It is mandatory for publicly traded companies to give quarterly and annual updates of their financial progress.
(However it is not mandatory for blogs to give updates of their financial progress. 😉 Obviously, it is completely up to them to decide how transparent they want to be with their finances. For many, it helps keep them accountable).
Annual and quarterly reports for U.S. stocks can be found on the Edgar database. While reports for Canadian stocks and mutual funds can be found on SEDAR.
Listening in on conference calls can tell you things that can’t found via financial statements. For example, does the company provide expectations for future results? Do executives try to deflect questions or provide vague or incomplete responses?
Benjamin Graham- A Trailblazing Pioneer of Stock Analysis
He was a man who believed in preserving capital. And he had every right to do so. His father passed in 1903 when he as just 9 years old. His mother invested in the stock market and was cleaned out during the Bank Panic of 1907. He opened his own firm three years before the stock market crash in 1929. During the crash, he lost his clients’ money. However, he was able to recoup the portfolio and managed to never again lose money.
His view was that protecting your capital was just as important as being able to make a profit off it. He preferred to focus on large, well-known companies. A couple of his rules for finding stocks include-Looking for a low P/E ratio- no greater than 15 and looking for long-term earnings growth over 10 years
Warren Buffett- The Oracle of Omaha
We’re all familiar with Warren Buffett. Despite his incredible success with investing, he surprisingly NEVER wrote a book or paper that talks about his investing strategy. However, his former daughter –in-law, who worked closely with him, wrote a book called Buffettology (This was updated in 2002 as the New Buffettology).
(That’s another investing book I’ll have to add to my list)
A couple of things he looks for are if the company has consistent earning power and that it’s a simple business. A critical quality that a company should have is an enduring moat. Think of an enduring moat as the same way a moat is used for a castle. It’s a strong barrier against the competition. Moats can include being a powerful worldwide brand or having a low production cost.
This is defined as a strategy where the investor looks for stocks that seem to have good growth potential. Peter Lynch wrote the book One Up on Wall Street (another book I’ll have to check out). His approach was through growth at a reasonable price (GARP). His investment theory was, ‘”Invest in what you know.” He placed companies into one of the following three growth categories:
1. Fast Growers
There were companies that were able to increase their earnings at a rate of 20% or more every year, and at the same time, maintain a low debt level
Large, established companies that possessed 10%to 19% annual earnings growth
3. Slow growers
Large, mature companies that give out dividends to the shareholders (i.e. Utilities) and possess single-digit earnings growth
His perspective on growth was that there were five ways a company could increase earnings:
• Reduce costs
• Raise prices (Apple products. Enough said.)
• Expand into new markets
• Sell more products in old markets (Starbucks shifts its focus to tea in countries where tea drinking is more prevalent)
• Revitalize, close or dispose of a losing operation (General Motors cut their losses by discontinuing the Saturn after 24 years)
Side note: Fellow Canadian PF blogger, Steve @Kapitalust created a great collaboration posts of fellow bloggers and their investing styles, featuring yours truly.
Comparing Index Funds to ETFs
One of the reasons why many people are attracted to ETFs is due to their lower management expense ratios (MERs), compared to index mutual funds in Canada. However, just like stocks, ETFs have trading commissions (a small fee to buy or sell), while index mutual funds can be traded for free. I am aware that on Questrade (I don’t have a trading account with them, I’m with TD Canada Trust), that you can buy ETFs for free. You only pay the standard commission fee when you’re ready to sell.
Index mutual funds are seen as being more cost-effective for those with smaller sized accounts and contribute to them on a monthly or quarterly basis.
Some reasons to use ETFs:
- Larger sized portfolio (According to the Canadian Couch Potato blog, July 30/12 the rough minimum amount to use ETFs is $50,000)
- Contributions are lump-sum and not made at regular intervals
- Inclusion of asset classes not available through index funds such as real estate and emerging markets
- Don’t mind using a discount brokerage to place trades and this discount brokerage has no annual fee, with a fee of $10 or less to trade.
My comments to the reasons above:
Currently the size of my own personal portfolio is about $10k away from $50,000- so I am almost at this rough minimum guideline (this does not include money in my chequing account or money in our joint chequing account). I do make regular monthly contributions to my RRSP and TFSA to buy investments, but I am not an active trader. I purchased an REIT (real-estate investment trust) ETF to include some real estate in my portfolio. I personally don’t feel I have the chops nor do I have the extra capital alone to own a rental property, so I figure having an REIT may be the next best thing? My fiancé and I are hoping somewhere down the road to have our own rental property.
Editor’s note: All in all, I enjoyed this course just as much as I enjoyed the first one. A bit of the content was review from the previous class, but I felt I learned a lot about how a company works financially. As much as I love reading about investing and discussing it with other bloggers, it was really nice to have the classroom interaction. I liked being around people who had the same enthusiasm/passion, if not more, for investing.
the investment market in stocks is very unpredictable, the right is always plan well before, and never forget that all businesses involve risk, some low and others high, thanks for sharing!