Stocks to buy or sell

In January 1998 I openend an account with Datek, to allow me to invest some of my money in US stocks. I selected to go with a deep-deep discount broker, even though I plan to make long-term investments. That's because the total amount I want to invest in stocks is quite limited, and nevertheless I would like to have a diversified portfolio with a lot of different stocks. This will result in buying just a few stocks per trade, and for that low fees are very important.

Diversified for the moment means diversification in companies. But my US investment shall be focused primarly on tech stocks.

When I first wrote this page, I stated:

My previous investment experience is with mutual funds only. Thus I didn't have to care about which stocks to buy or sell. Now I have to study myself the companies, to decide which stocks to buy or sell. I maintain this page to help me in that task, with links to information sources and guidelines on how I shoud act. This page will grow as I learn more and more.

Fact is, I never spent enough time to learn anything. I ended up picking up stocks more or less at random. The only thing which helped a bit was my focus on technology stocks, where I know a bit about the products which those companies produce.

While buying is at random, I at least set up there two rules, for deciding how much I would invest in a company, and when to sell:

  1. Buy at more or less regular intervals a stock for $1000, so that commision is about 1% of purchase price, and hold them.
  2. When some stock gets over $2000 sell half of it ($1000).

There are no rules, for what to do when some stock performs badly. The sell when it doubled value could be turned into a rule for bad performers in two ways:

  1. If I interprete the doubling rule as "Take the profit" I should have a "Take the loss" rule saying "when the price falls below $500 sell it".
  2. If I interprete the doubling rule as "Keep the price within bounds" then I should have a "when the price falls below $500 buy another $500 worth of it" rule. This would average out the buying price.

I didn't like neither of these rules. The first one would have made me sell CORL and BEOS and I wouldn't have profited from their raise later. The second rule would have made me pay big bucks for those stocks who didn't stop to sink.

So I stick with having no special rule for loosers. When I've bought them, I hold them for as long as I don't need the money. If they are bad they will sink to zero and I loose my investment, or they will be bought by some other company and I'm forced to accept whatever price was fixed, and loose the difference to my buying price.

To see my portfolio, and how it evolved, go to the Stocks at Datek page.

In December 1999 I opened an account with the swiss branch of german online broker Consors. I did this, so that I could invest also in swiss, and, as soon as they allow it, in german and other european stock. At this point I judged the US market as pretty high, and therfore didn't want to increase my Datek portfolio. On the other hand, european markets in general, and especially the swiss market didn't perform very well during last year. So maybe there is more potential here, than overseas.

To see my portfolio, and how it evolved, go to the Stocks at Consors page.

Basic knowledge

Things I've read, but never really learned, except the very basic thing, i.e. ask/bid price and limit/market order, which you really have to know if you want trade stocks.

Ask price

This is the lowest price someone wants for the stock she or he is selling. So when you are buying a stock, this is the highest price you should have to pay.

Bid price

This is the highest price someone offers to pay for the stock she or he wants to buy. So when you are selling stocks, this is the lowest price you should get.

Limit order

An order to sell of buy at the specified price or better, i.e. sell when the bid price is at or above your limit, or buy when the ask price is at or below your limit.

Market Capitalization

Number of outstanding shares times the current price per share. This value is used to classify stocks into these four categories:

Large-cap > $5'000'000'000
Mid-cap $500'000'000 - $5'000'000'000
Small-cap $100'000'000 - $500'000'000
Micro-cap < $100'000'000

When market capitalization is used to compute other figures, like the Price-to-Sales Ratio (PSR) it is often augmented by the long-term debt of the company. This takes into account, that if you really wanted to buy the company, you would not only to have to pay for the share, but also pay the debt.

Market order

This is an order to buy/sell at the current price. If the stock price is not changing rapidly, then this will be the Ask Price when buying or the Bid price when selling.

Short selling

Selling stocks you don't own, but have borrowed. You would do this, if you speculate, that a stock price will fall. I've decided to not use it.

Stop limit/market order

You ask to sell the stock, when the bid price is less than or equal your activation price. You ask to buy the stock, when the ask price is more than or equal your activation price. When the condition is reached, your order is transformed into a either a limit, or a market order, depending on whether this is a "Stop limit order" or a "Stop market order".

Investment strategies

There are some words you find in describing investment strategies and mutual funds. Here I wrote down for me the three most heard: Value, Growth, Income. I think my own decisions are influenced a bit by all of the factors governing the individual investment strategies.

Value

This is used to indicate an investor who tries to find stock which is cheap regading the real value of the company. The price of the stock should in the best case be less than what one would get if liquidating the company.

Instead of just finding the value of the company, they might concentrate on stock which have low P/E ratios, good dividend yield, a high book value per share and high sales to market capitalization ratio.

Growth

These investors look for companies which have a high potential to increase sales and earning.

The investors look at usually new companies or companies entering new markets of which they hope they can increase sales or earnings quicker than other companies.

Income

These investors care much more about payed dividend than for an increase in stock price.

They buy shares of companies in sectors like utilities, which might have a slow share price growth, but consistently pay a high dividend.

Living in Switzerland I should totally avoid such companies for tax reasons, as dividens are counted as income, while capital gains are not taxed at all. Yet I think a good mix in the portfolio is more important, than optimising taxes up to the last cent.

Rule of thumb

Use P/E and EPS as buy/sell guidance

The Price-to-Earning ratio (P/E) is computed as the share price devided by the EPS.

The Earnings Per Share (EPS) is the company's profit divided by its number of shares.

EPS growth in % times 1.5 => max. acceptable P/E ratio. E.g if EPS growth=14% then stocks with a P/E below 21 are probably a better buy, than those with a P/E greater than 21.

Another rule found on the Motley Fool site says: divide the P/E ratio by the EPS growth in percent. E.g. it the P/E ist 21 and EPS growth is 14% then you would get 1.5. Given this value you should buy or sell according to this valuation:

Ratio Action
< 0.5 Buy
0.5 - 0.65 Look to buy
0.65 - 1.0 Watch (or "hold")
1.0 - 1.3 Look to sell
1.3 - 1.7 Consider to sell
> 1.7 Sell

Use PSR to valuate a company

The Price-to-Share Ratio (PSR) is another measure by which one can valuate acompany. This is computed by dividing the market capitalization by the revenues. In general, the lower the value, the better, e.g. a strategy could be to look for companies who's PSR is below 1. It is also useful to compare companies in recession years, or new companies in starting businesses where there are no earnings.