Investopedia Portfolio 9.02

The first two days of this trading week(Tue-Wed) have been fairly uneventful. Last Friday I sold a stock which accounted for nearly 50% of my portfolio. All my indicators told me to sell, and I got out before it dropped 4%. My other stocks have been flat since then, and I have not put my sales proceeds to use yet. I have a couple hours this evening, and I hope to be able to have at least two solid stock picks to buy tomorrow. Here is my chart:

Investopedia Portfolio 8.29

Today was my brother in law’s birthday, so we went to have breakfast. I was busy all day and away from my computer, and I just had a chance to review the days trading and update my blog. Well we lost a little ground today, about $2k. The frustrating thing about this is it should not have been that much. I can say for sure now that stop loss orders DO NOT WORK on Investopedia. I was concerned that my one stock that had rallied and posted gains all week was going to see some sell off, as investors took profits. I was right, but unfortunately the software did not execute my order to sell on the details I input. I should have lost only $500-$600. Oh well, its just money, right? I sent an email to the good folks at Investopedia, and I hope they can correct this issue soon. So here is my portfolio after Friday:

So the portfolio is now hoving at about 110k, a 10% increase since starting. Next week should be another good week. If you have any questions about my trading strategy, please browse around my blog or send me an email.

Investopedia Portfolio 8.28

Home run! Another great day Thursday. I was away from my computer for most of the day friday and didn’t have a chance to give you an update. Here it is:

Investopedia Portfolio 8.27

Wednesday was my largest gaining day since starting my Investopedia Portfolio. The market overall posted slight gains on the day with the DOW and Nasdaq both up less than 1%. It was the smallest volume day of 2008 so far, with only 820 million shares exchanged. Tomorrow the preliminary numbers come out for the GDP(gross domestic product) and the updated jobless claims numbers for last week. The stock market should see a gain on this news as the reports are positive. Jobless claims should come in slightly lower than last period and the GDP should show strengthening numbers over last period.

All my stocks posted modest gains except one, which posted a very nice double digit gain. My current cash position is less than 15%, so I am looking to trim some of my profits as the market dictates in anticipation of buying into another stock soon.

Part 3: Determine the “MSRP”

There will be four steps in determining the MSRP and the discount price we want. These step are simple yet very important to our selection process. Our research of financial growth rates will help us. Here are the four steps:

1) Estimate EPS ten years from now
2) Estimate PE ten years from now
3) Estimate stock price ten years from now (step 1 x step 2)
4) Calculate our discounted MSRP

Why do we look at these ten years out? This investment strategy’s main purpose is to identify companies that have good long term financial growth. To capture this growth, we need to be willing to be long term investors. Occasionally we will be buying and selling positions in the same stock frequently, sometimes in and out within one week. But most of our stock purchases will go months or years without any action. We will be invested in company’s long term, and this system is meant to provide us with stocks we can buy and hold long term. For this purpose, it is necessary to look at long term averages. Three or five years is really too short of a time frame, and anything further than ten years is hard to estimate. On most of the financial website we use, the longest historical financial information is usually ten years. So the best we can estimate into the future is ten years, without hours upon hours of research.

In step one, we take the current EPS and multiply is by our estimated EPS growth rate. We have been tracking two stocks in our lessons, and we have taken JSDA off our list for not meeting growth minimums. Lets take a look at our remaining stock, MSFT.

MSFT: $1.87 EPS

The other half of this first step is figuring the Estimated or future EPS growth rate. Most people may assume that to calculate the future EPS growth rate you may review the historical EPS growth rate. But their is another growth rate that more accurately portrays future growth, and that is Equity growth. Surplus cash is what makes the business valuable. Here is the equity chart we prepared earlier:

We will now take our ten year average, 7%, and compare that to the analysts’ growth estimates, which is 11.7% over five years(the furthest estimate available to us). There is a large difference between what the historical data provides us and what the analysts think, so who is right? The analysts usually has more information than us since they are, after all, the “professional”. But analysts are not always right, and these are both are estimates. I suggest, unless you have advanced understanding of this particular company, or the experience to determine otherwise, select the lower of the two estimates. Frequently our estimates will be within just a few points of the analysts, and then sometimes there will be a larger gap. Using the more conservative number is safer, and if we were wrong and the growth rate is high, that just means more profits for us!

Remember, when going through our key financial ratios, we were looking for company’s with growth rates of 10% or more annually. So MSFT would not have made it to our second list. But we will continue to analyze it for our examples.

Next, we will be taking a look at Step 2, estimating PE in ten years.

For help setting up your own spreadsheet , including step by step formulas, click here.

Investopedia Portfolio 8.26

After a rough start to the week, my portfolio has bounced back to a slight profit. I added the position for 25k I was looking for, and that managed a small gain on the day. There are many stocks that are very close to the purchase price I am looking for, and I plan on using the rest of my cash on them as soon as possible. Here is a snapshot of the portfolio Tuesday night.

Although I have had several setbacks with the simulator, I do like it better than the other ones that I have tried out. I have not had the opportunity to perform anything other than a buy and sell of public stocks though. You can also buy and sell options, as well as buy on margin. There is also a Forex simulator available on the website. Maybe someday when life isn’t so busy I will check that out. Good luck trading today!

Investopedia Portfolio 8.25

Wow. I messed up!

I had to travel on Monday, so I didn’t get to witness first hand the horrendous day in the market. I did tune into the radio at about 11am and heard the DOW was down more than 200 points. Ouch. I instantly regretted not logging into my Investopedia account in the morning before leaving, and making sure that I had stop-losses placed on my positions. Oops! If this had been real money, I would be beating my head against the wall. As I review my stocks, it looks like investors took the opportunity to take some gains and the share prices fell slightly in two positions and one just tanked. I made a mistake and did not foresee this, and upon review, all my selling indicators did go off. Again, bad judgment on my part for not reviewing my stocks Monday morning before leaving.

I will be the first guy to admit I make mistakes, and I wont try to hide the bad days from you to create an image that I am perfect. Thankfully my positions have gained some ground today and things are looking up. I have some more research to do today. I have some cash sitting in the portfolio waiting to be used. I will be looking to open a position this afternoon for 20-30k. Hopefully today ends better than yesterday.

Part 2: Determine the “MSRP”

Demanding a discounted “MSRP” of our stock picks gives us added security in making sure our good stocks provide us with great returns. Based on our earlier financial research of these companies, they have and should continue to grow at a pace of 10% annually or more. The stock price should go up in tandem with that growth over the long run. But to reach our 15% annual returns or better, we need more than luck, we need to buy smart. Buying undervalued companies is one of the safest and surest ways to add that extra 5% or more of return annually. And in case our calculations are wrong, we have a nice cushion to ensure we can correct the mistakes and still make a decent return.

What discount should we look for? The answer to that question lies with you. How much money do you want to make? I suggest initially you set your benchmark at a 50% discount of “MSRP”. If we determine stock A is worth $44 per share, we buy at $22 or less. As you grow in you knowledge and experience it is likely that you will adjust you discount accordingly. Your range may increase to include stocks a smaller discount. But remember, you are looking for maximum returns, right? You want every dollar you have to invest return you the most, correct? Be patient, there are many great stocks that reach this discounted price on a regular basis. Don’t sell your returns short by not waiting for a better stock price. Commit to a minimum 50% discount to start. Gain confidence in your ability and experience in the trading market.

How do we determine what the “MSRP” of a stock is? By accurately calculating the future profits of a business, we can closely calculate the effect on the future stock price. We are going to forecast out 10 years in advance, then calculate it back down to todays dollars. In my next post I will be outlining the steps to perform this calculation.

Investopedia Portfolio 8.22

Here is Friday’s ending Portfolio:

Friday was a decent trading day for me. Several of my positions made good gains on the day, and the market overall posted a large gain with a drop in oil against the strong dollar. I did however get a bit frustrated at the Investopedia Simulator. I tried selling a portion of my largest gaining position on the day two hours before market close and it never executed. I hope that this new update in the Investopedia site installed Thur night didn’t corrupt the Simulator and that Monday I will be able to execute the sale. I also had a stock that made a 180 turnaround and became a sell, and when I tried selling my position, I had the same problem. So I lost $400 worth of value as I still hold my position in that company. So not going well for the Investopedia Simulator. I have never had these sort of problems with it, as I have been using it with another group game for a few weeks now. As you can see in the rankings the portfolio value does not catch up to the actual value until the next morning at 6am, and it updates Monday for Fridays changes.

My Investopedia Portfolio

I talked briefly in an earlier post about the Investopedia Trading Simulator. Now that I have taken the time to learn the basics of how it works, I fired up my portfolio and have made a few trades. Everyone starts with $100k of virtual trading cash, so I put it to work yesterday. Here is a screen shot of my account this morning.

As you can see I gained a little, but I only had about $50k working for me during the trading day. I was waiting for a buying position for a large portion of my account, but I didn’t get my price, so I will be looking to put that capital to use today. I plan on updating you daily on the progress. If you would like to join my game on Investopedia and compete against me, send me an email (brandonhartman7@ymail.com) and I will get you set up. It is free and easy to get set up. Good luck trading!