How to determine when a company’s strength is correct, so you can buy

August 26, 2011

(This is post features Orlando Antonini.)

What criteria should you look for to determine if a company is a reasonable and secure investment?

There are three main evaluation issues.  It’s like a three-legged stool: if any one of the three legs is missing, it won’t stand up.  Likewise, the stock will not maintain its value.

The first criteria – Does the company have sufficient cash reserves so they can get through a down turn and/or expand when appropriate.  Even more important, for you the investor, does the company have cash funds to buy back its own stock in a down turn of its value, therefore creating more value for you?

The second criteria – Good management.  What does good management mean?  It starts with the Chairman of the Board, the Board, a CEO, a CFO, and goes beyond that to other key employees.  If the Company has a high turnover, or if people retire, it may affect the management team’s effectiveness.   Another important issue to look for, the Chairman of the Board and the Board cannot be controlled by the CEO.

The third criteria – Is the product or service the Company is offering to the public desirable?  Does the public perceive the product as reliable in quality and a necessity for personal or business use?  Will these products or services be needed in the future, as the future will be different from today?

These are the criteria you use to evaluate when to buy the stock and it is the basic bench mark to use for evaluating when to sell.

When you evaluate the stock using the above method, you also have a baseline of the cost or value of the stock.

Most important, there is the ongoing monitoring of all three criteria to see if one has changed, requiring you to sell the stock.

Stocks, on average, held for more than ten years have a return of more than 11%, dividend and growth per year.

Conversely, when you try to time the market and buy and sell, the average return is less than 4%, dividend and growth per year.

If you are repositioning stocks based on the criteria above, it is prudent and a wise decision providing there you are truly monitoring and evaluating changes based on the three criteria.

We can help you with the analysis and ongoing evaluation so you have the knowledge to make the correct choices based on your criteria.

OJA


How do you know when to buy back into the market?

August 19, 2011

(Today’s post features Orlando Antonini.)

I am only going to use Dow Jones as my example here.

The first thing you need to do is review the Dow Jones twelve-month average history. The past is easy – all of that historical information is available on the Internet.

But, what are the possibilities over the next twelve months? The future is very difficult to predict, and confusing.

The first thing you have to consider is this: What will the economic picture be over the next twelve months? Second, how will any one individual’s stock and/or the Dow Jones perform in the future environment?

You can use the information you find on the Internet, and do your best to analyze over a period of time and try to get a picture in your mind of what the future might hold. Or, you can turn to experienced advisors (like ourselves) who will help you draw conclusions that you are in peace and harmony with.

Why is it necessary to go through to all this effort when considering the right time to reinvest?

This will give you a better chance of forecasting where the Dow Jones may be at a future date.

The rule is, once you decide what your idea is of where the Dow Jones will bottom out, calculate 105% of that number, and that index value is your starting point.

Please Note: The following is not to be taken as what the Dow Jones may or may not be at some time; it is given only as an example to illustrate my point.

If your prediction is that the Dow Jones Index will bottom out at 9,800, this is what you would look at:

  1. 105% of a 9,800 index equals 10,300. Therefore, a 10,300 index is your starting point to buy/reinvest–that is 5% above bottom index.
  2. If the market continues to fall (Dow Jones Index), you must consider that you may have made an error in your idea of the Dow Jones Index bottom being 9,800. So, 95% of a 9,800 index (or a 5% difference) equals 9,300.
  3. At 9,300, you need to re-exam whether you should leave the Dow Jones or stay with your analytical conclusion.

The most crucial thing to remember is that you have to continually analyze your assumption against new information about changes in the market as it comes in.

This is an example that can help you say when to do something and when not to do it, and have a base line of facts or assumptions that you can analyze with. Or, use professionals (like us) to help you do the analytical work.

OJA