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.

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.

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.

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!

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.

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.

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.

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!