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October 1st, 2009

Selecting stocks...

Here's some information on my stock acquisition process.  It's not new info, but it's consolidated from several sources...

On selecting companies:
  • Select companies that make products you believe in, i.e. you would sorely miss if the company folded.
    • Many companies are conglomerates and produce a wide variety of products.  If you select a company based on a product, try to find out what percentage of that company's revenues come from the sales of that product.  If it's a small percentage, consider how you feel about the other products and their risks.
  • Do not invest in your employer.  If bad things happen to the company, you may lose your source of income _and_ your investments.
  • Try to keep diversified such that no more than 25% (an arbitrary number) of the value of your investments is invested in a particular industry or geographic location.  The geographic location is often overlooked: what would happen to your California investments after an earthquake?
  • Occasionally, select random companies that you've never heard of for further research.
On researching a company:
  • Read the company's financials.  What is their profit margin?  What is their return on assets?  How fast has their revenue been growing, and is that rate sustainable?  Are their current assets larger than their current liabilities?  Do they pay dividends?  Does anything odd jump out at you, like a particularly bad or good quarter?
  • Read the company's last few quarterly and annual reports.  Does management sound sane?  Have they identified anything that warrants special consideration?
  • Once you've found companies you like, do not buy the stocks.  Watch the stocks for a while.  Read their press releases and any news about them.  Get a feel for how the stock price fluctuates over time.
  • DO NOT follow your instincts.  Instead, let your instincts guide your research.
On buying stock:
  • Have a plan.  Know what price you want to buy the stock for and what price you want to sell the stock for (based on your research).
  • Figure out a total dollar amount you're willing to invest on the company.  Set aside that cash, but don't necessarily buy all your stock at once.  Do some staged buying, if the price drops a little.
  • At your target price, sell enough shares of stock to make up for your initial investment, transaction cost, and taxes, even if you think the stock is going to go up further.  Once you do this, the shares that remain invested are pure profit, and you can sell them later.  Even if they take a huge bath, you've made money.
  • Continue researching the stock, now that you own it.  If fundamentals start to change, systematically reconsider your target price.  Again, do not follow your instincts, but let your instincts guide your research.

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XSG - 1 G 2 Many
miscreants 3.0

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