Your Questions About How To Pick Stocks

Charles asks…

If I invested 50k per year then how many years would it take to become a millionaire?

So if I put 50k per year into stocks and mainly tried to pick those stocks with a good dividend return in mainly high cap companies, investing in say 20 different companies. Then also if I reinvested any dividends paid. How many years roughly would it take to become a millionaire?

John answers:

$50k per year
Let’s assume 8% return each year on your investments

It would take roughly 12 years to have $1mil. If you take into account inflation and taxes, it’d be longer.

Thomas asks…

What is wrong with the stock picking programs?

sorry I wasn’t clear on the question
but for the software programs ive heard that they are not too accurate. I was wondering why.
what do the stock picking programs do to make them pick those certain stocks. what criteria do the pickers search for do you know?
basically I want to create my own software and want to know where they screwed up
any advice?

John answers:

The only thing wrong with them is that they can’t pick stocks! Of course this does not matter too much because there are so many desperate mug punters that think they can and are willing to pay for the privelege.
The simple ones will try and screen stocks on certain criteria like PEG ratios (get hold of Jim Slater’s REFs).
There was a computer system that collected news/financial/industry/market data and tried to predict which shares would benefit. That was 20 years or so ago, probably long disappeared.
To create your own software and to collect the data would be a horrendous task and would still miss out on the main ingredient–luck.
You may get it to work on long term investment but then you could easily do that manually. Very difficult to get an automatic trading program.

Sharon asks…

How to figure out value of company in Annual Reports?

So lets say i pick the stock TAL International Group, Inc. (TAL). Think about how much is it selling for now and how much do I think it’s worth?. Look at business first, try to figure out what it’s worth because looking at price first can influence me. If the price of the company is way less than what I just valued it at, I’m going to buy it. Valuing it is the trick. How do i figure out if it’s cheap and a good buy today?

Do i just rely on all those brokerage firms who have all the information up on their websites, all valuations already worked out, all the numbers needed worked out and all they say is buy/sell/hold or do i disregard what they say and do all calculations from scratch and try to value the company myself even though i don’t know how to value that company?

John answers:

The (book) value of a company is simply the shareholder equity you can find in the balance sheet:

shareholder equity = assets – liabilities

[ I personally adjust the assets by weighting 100% cash & cash equivalent, 90% the non-cash parts (whatever it’s in the balance sheet: inventories, land, equipments), and I set to zero any intangible (goodwill, patents, etc) ]

The difference between the market price and the shareholder equity is the expectation of future earnings that traders embed into the price. This expectation can be easily calculated with the discounted cash flow method.

Basically, if the market price of a company is P and the shareholder equity is Q, then (P-Q) is the expectation of all future earnings discounted, with an interest rate r, at today’s value.

It’s up to the investor/trader to accept or dismiss that expectation, which means, decide if the market price is reasonable or not.

NOTE: I may not be using the terms properly, but the concept should be clear. I forgot and just added that I set the values of intangibles reported in the balance sheet to zero.
Xpat: Thanks. I thought the term ‘goodwill’ was just used for part of the intangible.

Sandy asks…

what is wrong with the stock picking programs?

sorry I wasn’t clear on the question
but for the software programs ive heard that they are not too accurate. I was wondering why.
what do the stock picking programs do to make them pick those certain stocks. what criteria do the pickers search for do you know?
basically I want to create my own software and want to know where they screwed up
any advice?

John answers:

There are several stock picking methods i.e. Value, growth, technical, fundamentals. The problem is that one method will work for a while and then stop working as another method becomes more effective and so on. Secondly picking the stock is the easy part. When do you sell? As you wait for a sell point two emotions greed and fear need to be dealt with which play a factor when your money is on the line. You tend to sell too soon because of fear and hold to long because of greed.

Carol asks…

Novice stock trader has some questions regarding the fundamentals.?

Hi and thanks for having me in the forum. My name is Martin and I am fairly new to stock trading and would greatly appreciate if someone would take the time to point me towards or answers a few of the questions I have outlined below.
Currently I have $3500 in cash to put into stocks, with an additional $500 being added every month, $800 in stocks, a Zacks Premium subscription, and a ShareBuilder trading account. I am looking to switch to Ameritrade in order to take advantage of their better tool set and their 60 days of free trades promotion.
My long term goal is to eventually take some of the proceeds from my trades and translate them into a substantial down payment for some real estate such as an apartment or condominium and keep on growing from there. I live in NYC. I really don’t have any expectations in terms of a timeline.
– Are there any books/videos/online courses you would recommend for a newbie trader?
– What are some good resources for the basic trading terms and concepts?
– Which websites would you recommend in terms of gathering market news, stock tips, general research etc.?
– Are there any subscription services or newsletters out there worth subscribing too?
– Are there specific blueprints I should follow or develop when picking stocks?
– Are there any specific individuals I would be wise to follow?
– Is there any research software you would recommend?
– Is there any additional advice you could give me?
Thank you for reading my post.

John answers:

If you are going to be adding $500 every month to your investments I suggest you look at mutual funds instead of stocks. You can avoid the trading fees you would pay with a monthly purchase. Try looking at mutual fund companies like Fidelity or Vanguard. You can purchase individual stocks with them as well if that is really what you want to do, but they will charge you a trading fee on stocks.

Try reading books by Jim Cramer or the Motley Fool brothers.
Try watching Jim Cramer’s Mad Money weeknights on CNBC. Also try watching Nightly Business Report on PBS.

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