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| UCWFP Rules of Investing in Individual Stocks |
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Rule #1 Buy What You Know, Know What You Buy
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The first rule in stocks is to buy what you know or understand.
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an industry you work in or with
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a hobby, skill or interest you know a lot about
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areas of interest or passion you read and follow
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If you travel, read local news that you piece together with national and international news. Here in the Bay Area we read about many technology trends before they reach the rest of the nation. International travel opens your vistas on world trends
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The best news is straight from the horses mouth. Many of my conversations with colleagues, friends, family and complete strangers have nuggets from stocks I own or follow. I listen closely to what people say about industries and companies that they...
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are in
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purchase from
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deal with
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Listen and learn about quality of product, management philosophy, efficiency of the business, how consumers like the product, treatment of employees, subcontractors and vendors
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Read newspapers, all kinds of magazines, web articles, etc. to learn about
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lawsuits, regulatory actions and
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financial health of a businessÂ? large customers
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If you seriously consider buying a stock, read the Annual Report. The SEC and Accounting Standards require that much be disclosed in an annual report but youÂ?ll find the details in the financial notes at the back of the report
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News releases from the company itself, probably holds the least value because they have vested interest in touting the positive about the company. The releases do give you a good idea of what their new products are and who their new customers and business partners are but do not usually reveal if they have lost a large customer or alliance
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#2 Diversify, Diversify, Diversify
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Diversify the size of companies from giant conglomerates with small price variations and increases, but regular dividends, to small or micro-caps with potential for amazing growth. How small you go will have a strong relationship to your tolerance for risk
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Diversify the types of industries in your portfolio so industries going through rough economic times are balanced with those currently benefitting from the economy
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Diversify geographically. From local companies filling specific business niches to companies that serve the dynamic, growing international economy
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That being said, a portfolio with well planned diversification can have as few as a dozen carefully chosen stocks. I own about 30 stocks at any one time and track about 30 more for for potential future buys. Let your comfort level be your guide; if you canÂ?t do thorough research on the stocks you follow, cut back
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#3 Value Investing: Invest for the Long Term in Companies Poised for Growth
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Choose companies with track record of steady consistent revenue, net profit and stock price growth with good prospects for future growth
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Look for companies whose stock price is close to the inherent value of the company.The parameters you might look at are :
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PE below 20 and low or even compared to competitors
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PEG (price/earnings/growth) below 1.5 and decreasing
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Find companies with low long term debt or well managed debt
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Does the company have enough cash and current assets to weather temporary downturns?
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Do their unsold inventory levels stay even or decrease?
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Choose companies with management
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that does not overcompensate themselves relative to net income
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whose personal worth is strongly tied to the health of the company through stock ownership (Insider ratio, insider trading)
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that values all employees, vendors and customers by establishing loyal long term relationships
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That being said, most of us want the excitement of that next, new diamond-in-the-rough tech or biotech stock with no track record but untold potential for growth
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Most of the other advice applies but youÂ?ll look for...
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constantly decreasing losses
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constantly decreasing negative or positive P/EÂ?s
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very strong information resources
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Set a limit on the portion of your portfolio invested in these. Write it down. Stick to it. You can make more buys if the stock continues to prove itself as it moves out of the high risk category
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#4 Tolerance for Risk & Investing Values: Forming Your Investing Parameters
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Stock portfolios can be low, medium or high risk depending on your tolerance. High risk opens you to larger gains but also larger losses
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Though it seems counterintuitive, keeping all your money in CDÂ?s and bank accounts is MORE risky, over the long term, than investing in an appropriate balanced portfolio or stock mutual funds
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Though studies have established that people who invest based on personal values do not have any impact on the stock market, as a whole, values can form a good parameter for limiting your universe of stocks to choose from. With over 6,000 stocks on exchanges it is sometimes difficult to know where to start. Common parameters for exclusion might be companies ...
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that make alcohol or tobacco or promote gambling
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with poor human rights & employee standards
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that highly pollute or disparage the environment
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that pay what you consider excessive salaries & benefits to top management
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that engage in entertainment or scientific research that violates your personal beliefs
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whose management does not adhere to the the spirit of regulatory law and ethics
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that move offshore primarily to avoid taxation
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#5 DonÂ?t buy what others recommend unless....
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They give you a recommended buy price and time frame to purchase within
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They share your risk tolerance philosophy
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You understand and value their research methods
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You share their underlying investment values
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You know the friendship will survive if the stock doesnÂ?t work
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YouÂ?ve taken at least some time to research it yourself
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Stock clubs and like-minded online discussion groups are good forums for discussion after research
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#6 Set Â?When to SellÂ? Criteria , Monitor the stock regularly
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Set price goals for each stock at the time you purchase it ...
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I recommend setting yearly price goals to evaluate in the same month as the stock was purchased
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Write goals in individual stock tracking sheets or in one spreadsheet
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Monitor prices and trends monthly or bi-annually. Long term investors donÂ?t do daily or hourly price checks except perhaps on the few high risk stocks in their portfolio.
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For low risk stocks, give the stock a 3-6 month look forward to meet the goal
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If a stock does not meet your growth and/or income goals, it is time to sell
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If management is not acting ethically, it is time to sell
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If you would not consider purchasing the stock, ask your self why you should not sell it
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If the company is dependent on one patent, technology or method that appears not to be working out or is not being adapted by the wider community, it may be time to sell
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The decision to sell is usually much more difficult than to buy. You will make mistakes; learn from them
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Be comfortable choosing not to sell if you have a good understanding of temporary cycles in that industry
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