8 tips on stock investing

What should be your approach if you want to invest in stocks:

1. Start by reading

Before buying stocks, you should start by reading some good books or papers, like

• The Intelligent Investor by Benjamin Graham,
• The Zulu Principle by Jim Slater,
• The Little Book That Beats the Market by Joël Greenblatt
• The Use of Historical Financial Statement Information to Separate Winners from Losers, paper by Joseph Piotroski
• The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy by Robert G. Hagstrom

These people define strategies and criteria on which stocks to invest in. Uncle Stock is a stock screener that is inspired by these principles.

2. Don’t over-invest

Stock investing is dangerous. Be aware that most beginning investors lose money on the stock market. Only invest in stocks with money that you could miss, and start small. At the same time, the reward can be high. Many people win after learning from their mistakes..

3. Compare price to intrinsic value

Do not confuse the value of a company on the market with its actual value: the intrinsic value of the stock. The value of a company on the market is its market capitalization, or market cap, and is the overall value of its shares. The market cap is the result of stock trading on the stock markets, and therefore affected by peoples' opinions of how companies are performing. The price is the result of the investors’ thinking of how well the company will perform.

The intrinsic value is what the actual company is worth. The problem with intrinsic value is that it is determined by its future earnings, or free cash flow. So this is the big unknown. Sophisticated analysis of the past financial results can give a clue. What are the expected future earnings? Will liabilities not undermine future earnings?

Uncle Stock makes it easy for you to find out whether a stock is cheap or expensive. Uncle Stock makes clear the financial situation of a company and provides a variety of ratios to compare the stock price to the intrinsic value: how cheap is the share.

4. Understand the battle between trend investing and value investing

Your goal is to find stocks that are under-valued, or cheap and buy them and sell them when they became over-valued, or expensive.

However, this is a lot more difficult as it seems. Often, stock prices that have increased over the last year, will keep on rising, stock prices that have decreased will often keep decreasing. Long time price trends can be very strong. A stock that is apparently cheap will often keep getting cheaper.

This is the never-ending battle on the market between the value, or fundamental investors and the trend, or technical investors. This battle drives the market. Beware not to be on the wrong side of the market. The market can be wrong for a long time.

Although most ratios provided by Uncle Stock take the value investing point of view, the Uncle Stock score takes into account both point of views. Stocks should be cheap and rising.

The adagio ‘keep your winners, sell your losers’, is of ultimate importance.

5. Know what you buy

Be careful with stock market tips. When starting with stock investing, I followed blindly some investment magazines. They did not give me any profit, on the contrary. Do not buy stocks from a list heading something like “penny stocks to buy”.

You can start with a list of stock picks, but that’s it, it’s just a start. It is you that has to make a judgment on all these factors. It is you who has to know what you buy.

Also, do not just buy a stock because it ranks high on an Uncle Stock list. Uncle Stock is a stock screener that provides some good lists of top stocks, based on different financial strategies. You can also make your own queries and save them. A major benefit of Uncle Stock is that it gives you the possibility to back test the criteria that made up your query. Back-testing is the process of testing an investment strategy on prior time periods. Uncle Stock provides the user the possibility to make a simulation of a query on relevant past data in order to gauge its effectiveness. So you know what to expect on average.

However, Uncle Stock does not know the future. It does not know where commodity prices will go up or down in the long term. However, even then you should research the company thoroughly before buying stock in it. You are basically making a bet about how well you think a company is going to perform in the future. Use the companies’ web-site and annual and quarterly reports to understand the business.

It is a big benefit if you know the company. If you buy Apple, Google you are well aware of its business. It’s even better to buy a local company, or one you personally know, as it gives some advantage against other traders.

Uncle Stock helps you to

• understand the key financial ratios.
• Evaluate the financial results (balance sheets and income statements) for the past years. Companies with a high debt load and poor record of profitability may be quickly eliminated.

6. Diversify, using head and heart.

When I started investing, I lost a lot of money by buying too many gold and silver miners. It is important to focus on some different industries, different themes, different regions.

However, you should believe in all of them. Make up a list of industries and regions that you believe in. This choice is based on vision or head and hart. My sun Victor is for years screaming to buy Coca Cola. I told him the stock is overvalued. He would have made excellent returns if I would have let him buy it. I was wrong here.

If you buy stocks of all industries and regions, your profit will follow the market, and nothing more.

Uncle Stock lets you compare companies within one industries, to get the cheapest amongst them. This is called benchmarking.

7. Focus on not too many stocks, with long track records

Ideally, a list of stocks to buy should consist of great companies that you intend to hold for the long term. Warren Buffett, the most successful investor of the 20th century, said that if you cannot hold a stock for 10 years, you should not even consider holding it for 10 seconds.

Uncle Stock uses many ratios that are based on historical averages (providing more weight to the more recent results). This way, the selection of stocks does not need to be overly dependent on short term fluctuations.

Uncle Stock gives you the possibility to keep a watch list.

The key to successful investing is to stick with your strategy. Once you set your target, and the stock hits the target price, you buy. Uncle Stock lets you enter this price and alerts you when the price drops below.

8. Be awake, but stay cool

Stock prices are also affected by earnings reports, which companies release four times a year.

• If a company releases strong earnings reports, its stock is likely to go up. For a non-professional investor, it is often difficult, to be on time to buy the stock. It is better to let the price go up a bit, and wait for a likely drop. Otherwise, accept that you were too late.
• If a company releases lower-than-expected earnings reports, the stock price is likely to go down. If you were planning to buy the stock, it might be worth reconsidering. If you have the stock, this is a dangerous situation. A common mistake of beginning investors is to buy extra shares (‘down averaging’). A bad financial report can be an indication of long term problems. If the stock goes in a down trend, this will be hard to turn. Sell your losses.

Use the Uncle Stock stock screener to get advice and ideas.