Read My Lips: My favorite books on investing

As any Amazon.com lover knows, there are a ton of books out there covering every subject known to man. Same goes for investing books. I mean, I am amazed at the number of books on investing exist, not even counting the ones that speak about personal finance more generally.

Despite the number of pickings, you definitely shouldn’t cast them all aside – investing greats learned everything they know from the best books written on the topic. So which ones are worthwhile?

The most famous, and arguably the best, book ever written on investing is The Intelligent Investor by Benjamin Graham. Graham was Warren Buffett’s (arguably the greatest investor that ever lived) teacher at Columbia University and investing guru. Graham strongly believed in buying stocks that are undervalued, or selling for less than their assets are worth. The Intelligent Investor breaks down this philosophy in excruciating detail. It’s actually the layman’s version of Graham’s investing textbook, Security Analysis. That said, I’ll admit that it is a bit dry; in fact, one of my best professors in college gave me the book during my senior year (2006) and I’m only just now (2013) getting past chapter 1. Yes, it is dense and academic, but if you’re super serious about investing, it’s a must-read.

The next most famous, in my opinion, is A Random Walk Down Wall Street by Burton Malkiel, a gem that was first published in the 1970s. I’d recommend this to ordinary investors because it covers an exhaustive range of information, but is so well-written and easy to digest. I gobbled it up like a novel. Malkiel purports that there is no point in trying to select individual stocks in order to “beat” the market because, ultimately, the market is going to outperform any manager. That being said, he advises investors to stick to index-based mutual funds. I found his argument very convincing and changed the way I thought about my (well, my husband’s, for right now) 401K allocation.

One that I encountered recently and found very helpful was the Motley Fool’s Million Dollar Portfolio by David and Tom Gardner. The Motley Fool is an excellent website, exploding with investing information, and is very well respected in the industry. Tom and David, the brothers who founded the site, explain portfolio building and management in clear, entertaining terms in MDP. It’s definitely not as long as the Intelligent Investor or A Random Walk, so if you want the juicy bits in a short amount of time, go for it! The tone is friendly and approachable, but it doesn’t just stick to giving basic information. The best part is the corresponding website, which keeps the book current -- definitely a plus among books that recommend specific stocks in this crazy, volatile world. (Unfortunately, the website is not accepting new members, but will soon, hopefully.)

Last, for the risk-averse among us, I’d recommend Zvi Bodie’s Worry-Free Investing. The book is smaller than it looks since the print is humongous and it has lots of graphics to make complex points perfectly clear. It lays out the simplest investment portfolio recommendations I’ve ever encountered in a book, but still covers next-step-up topics like derivatives and Treasury Inflation-Protected Securities. Great for investors who are really only interested in saving for retirement.

Since sometimes you’ll probably want to invest in a single stock, it’s good to know how to read financial statements. While my blogposts (here, here, and here) gave some information, you should become more familiar. For a brief, but in-depth overview of accounting concepts, try Financial Intelligence by Karen Berman. It says it’s for managers who do not work in financial services, but it is simple enough for someone with no business experience to understand.

As you all know, we recently weathered the worst financial crisis since the Great Depression. While there’s plenty of theories out there about who to blame for it, there are some clear sequences of events that led up to it. A great recounting and explanation can be found in Roger Lowenstein’s The End of Wall Street. Lowenstein’s writing style is unintimidating, but can be a little Wall Street-bashing, if you don’t mind that. If you do, I think you’d love Michael Lewis’s Liar’s Poker, the tell-all that reads like a novel and is supposed to be a cautionary tale, but only excites undergrads around the world about joining the ranks of the Street.

Well, those are my picks. What are some investing reads you all have found helpful or even entertaining?

'Tis the Season

As investors grow more familiar with the companies in their portfolios, there's a few times a year that build near Christmas-like anticipation: earnings season.

Companies typically report their earnings quarterly. Since they have to get their financial statements audited, checked, and re-checked, there's a slight lag between the end of the quarter (generally the last day of the months of March, June, September, and December) and when earnings are actually reported, so they typically are announced in April, July, October, and January. This is not to say that all companies report during these periods; companies can make up their own fiscal quarters and years if they wish.

Public company earnings are reported, well, publicly. The company CEO or other top management will hold a conference call with investment bankers and institutional investors, and tell them everything the company sold and earned during the quarter. Bankers and investors can ask questions on the call, which can get intense if the company delivers bad news. Retail investors like yourselves can listen to these calls as well, as they might linked to the company's stock listing on Google Finance.

Traditionally, Alcoa, the aluminum producer, is the first company to report, kicking off earnings season for public companies. Investment analysts cling to the company's every word, as they believe that a pattern in Alcoa's reporting may be repeated by other companies, even if they're in a different industry. For example, if Alcoa's earnings go down, and the decline is related to a slowing in construction of homes, analysts can extrapolate that other parts of the economy might slow down, too, from related industries like home improvement retailers (such as Home Depot) or seemingly unrelated ones like PepsiCo (can't forget what sodas come in!).

To that end, earnings season also gives investors an idea of the condition of the overall economy. If companies' earnings are falling across the board, it is likely a sign that consumers are not spending, probably because they can't afford to. If earnings are growing, then the economy is likely on a good curve, going up.

Investors also use a company's earnings announcements to try to predict what's to come in the company's future. For example, Apple's third quarter earnings were announced last week, on July 23. (Click here if you don't have Wall Street Journal access.) The company announced that sales of the iPhone had grown 20% over the past year, but iPad sales dropped 14%. Revenue was basically flat and profits declined 22%. From this information, investors might gather that Apple -- historically an extremely innovative company -- may be losing its edge, especially to competitors like Samsung. Investors show displeasure with earnings results by selling the company's stock, but they didn't sell off Apple very much, showing that they still believe the company can recover.

One thing to note during earnings reports is source, and quality, of earnings. The best reports come from increases in revenues, which lead to increases in net income (profit, or earnings). What we're seeing now overall is companies whose revenues are staying the same, but profits are increasing. This is still good, but could be better. The increase in profits here is coming from decreases in expenses; companies may be cutting back on spending on supplies or even salaries (layoffs!) to save money. This will result in an increase in earnings, but investors want to see growth, not just cost cutting.

While it's not good to obsess or make snap judgments based on one earning's report, I believe that retail investors should pay attention to these announcements and listen to the calls, if possible. If anything, they're a great way to learn more about the company, the closest to an insider's view many of us will ever get. But remember to keep the big picture in the mind: what's going on with the company's competitors? What's going on with the overall economy? In times like these, those questions -- especially the latter -- matter more than anything.

"Invest in us...Because you're worth it": Alternative Investments

Given the Security and Exchange Commission’s ruling this week that allows hedge funds and the like to advertise publicly, I can’t think of a better time to shine some light on what are known as alternative investments.

Alternative investments are called that because, well, they are alternatives to investing in regular stocks and bonds. Some of the most popular alternative investments include hedge funds, private equity funds, and venture capital funds.

Hedge funds are basically mutual funds for the ridiculously wealthy. A hedge fund pools money from different people or institutions, and invests in stocks on their behalf, but the fund doesn’t typically invest the way a mutual fund would. A hedge fund will invest in derivatives or sell stocks short, for example.

Private equity funds are similar to hedge funds in that they pool money from wealthy people and institutions, but these funds don’t buy or sell stocks that trade on the public markets. They buy whole businesses, sometimes by buying that company’s stock (which is known as “going private”) or buying it from its previous owners. Private equity funds generally invest in businesses with the intention of making them more efficient; after several years, the fund usually sells the company again, hopefully for a significant profit.

Private equity was talked about which a lot during the 2012 U.S. presidential election, as one of the candidates used to work for a large PE firm. Commercials featuring disgruntled employees he had “fired” from the companies riddled the airwaves. My personal opinion is that the attacks on the PE industry were unfounded and the candidate’s work was taken out of context. Rest assured that PE is not evil; it is very complex, but it is not bad.

Finally, there’s venture capital. If you watch the ABC show Shark Tank, you’re already familiar with the concept. Venture capital also pools money from wealthy investors, but these funds invest in companies that are babies, also known as start-ups. VC, as it’s known, is widely considered the riskiest of alternatives because the investments are in companies that are so unsure; many have not even made a profit yet. But the upside is that you can help an entrepreneur fulfill a lifelong dream that may be the next Google or Facebook.

All of these investments could potentially make you A LOT of money. But you know the drill: with high reward comes high risk. These investments are certainly more risky than buying Treasuries, and are generally more risky than investing in a stock index fund. BUT, there are a few other stipulations that make these investments even more out of reach:

• The minimum investment for these funds is typically $250,000 to $1 million, sometimes more.
• The fund managers generally get a 20% cut of the profit AND you have to pay about 2% per year to help them run the fund.
• Only “accredited” investors can play in the sandbox anyway.

That being said, if you start to see ads for alternative investments, most of us can only do just that: watch. But for those who could afford to play, be cautious, as with any investment, and know what you’re getting yourself into.

401K/403B Mutual Fun(d) Decisions: Part 2, Fund Allocations

*My apologies for the brevity of this post. I’m feeling terribly under the weather (thanks, DC, for being 80 degrees one day and 40 the next). More on this topic to come.

Now that we’ve gotten what fees and expenses to look for out of the way, it’s time to talk actual funds. Please note again that I am not an investment professional (yet!) and can only educate on the types of funds out there. I’m not selling funds until I get some commission. ;)

For starters, you already know about equity (or, stock) funds and bond funds. (More on bonds in a future post.) Depending on the financial advisor, advice will range from “go 100% equity” for young people to “keep it 50/50 stocks/bonds.” As stated in previous posts, your choice depends on your risk tolerance, but know that risk aversion, or a very high allocations to bonds, can lower your returns potential over time.

That said, look for stock funds that have the broadest range of stocks possible, like an index fund that reflects the S&P 500 or Wilshire 5000. If you find an index fund that has every stock available (more than 5,000), go for it, for maximum equity diversification.

Next, throw in a good mix of U.S. Treasury, and maybe corporate, bonds. The longer the maturity, or length of time until you get the principal amount back, the higher the yield, to compensate you for the risk you’ve taken of giving your money to the government for such a long time (the longest maturity available for U.S. Treasury bonds is 30 years). 

Don’t forget international stocks and bonds! They provide great diversification to a U.S. investor’s portfolio. 

I recommend finding index funds for all of these asset classes. If you have to go with an actively managed fund (as you would have to do for bond funds), go with one with low fees and high ratings on Morningstar.com, a well-respected finance research website.

401K/403B Mutual Fun(d) Decisions: Part 1, Expenses

Anyone my age or younger will probably never know what a corporate pension looks like. And, sadly, Social Security will have likely run out by the time we retire. So, saving for retirement is a burden we bare all to ourselves. Employers try to help by offering 401Ks or 403Bs, but this gets overwhelming when there are typically approximately 80,000,000,000 mutual funds and ETFs to choose from.

How do you know a good fund from a bad one?
What the hell is the difference between a "core value" fund and a "large cap blend" fund, anyway?
Should you go for gold, just because a metals and mining fund is available?

Don't pull your hair out over your 401K. Remember that it's there to help you. Over the next couple of posts, we'll talk through some high-level details to consider when selecting funds for your portfolio.

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One of the biggest things to keep in mind are fees and expenses. These dollars can set the best of funds apart from the worst because of simple math: the more you pay in fees, the more your investment has to return to make up for those fees. God only knows that you don't want to just go around giving your money away for free. So, here are some brief explanations of the fees you'd typically see from mutual funds.

Mutual funds will typically have 4 types of expenses: operating expenses, a front-end load, a back-end load, and a 12b-1 fee.

Operating Expenses
Operating expenses are costs necessary to run the fund. Fund managers have to pay electricity bills like the rest of us, plus employee salaries. Operating expenses are generally hard to get around because they're just a part of doing business.

These fees can be as low as .06% (also known as 6 basis points) of invested assets and as high as 1.5% or greater. Index funds generally have the lower fees, as it doesn't take as much work on the part of the fund manager to run the fund, since it is supposed to just be a reflection of an existing stock or bond index. You might also see this style of investing called passive management. It's sister, active management, is much more expensive. Actively managed funds are typically trying to outperform the overall market or a certain index by investing in specific stocks. In order to do that, fund managers are much more involved in the fund, handpicking stocks or bonds. As a result, these funds wind up being much more expensive; unfortunately, they don't always meet their goal of beating the market, either, meaning that investors are charged more for worse performance, potentially. 

My advice to you is to go for a passive index fund that will reflect an index like the S&P 500, or even better, every stock in the market (more on that next week) for lower expenses.

Loads
Now, the front- and/or back-end loads, on the other hand, are not so necessary. A "load" is basically a sales fee charged to you when you first buy the mutual fund ("front-end" load) or when you sell, or redeem it ("back-end" load). Then there are no-load funds, mostly from a company called Vanguard, which is extremely well respected in the finance community.

These expenses can run from 0% to 8.5%. The load is especially important to note because it can be total robbery of your investment. When you pay a load, especially a front-end load, you really are just giving your money to a fund manager and not asking for it back. You do expect for the return on your investment to be greater than the load, but you've put yourself farther in the hole from the start.

Example from my own life (glad I learned these things the hard way, so you don't have to!). When I switched jobs to my last job before business school, I rolled over my previous 401K into an IRA (we'll talk about those later, too). I was curious about active management, so my retirement advisor at my bank recommended that I go with a Goldman Sachs fund that had a 5.25% load. I started with about $4,000. After the load, I was only investing $3,800. I needed the fund to return me my $200 (AT LEAST), plus the 1.25% annual expense.

Let's just say, after the market spun itself around in 2010 and 2011, I was lucky to finish right back where I "started," with $3,800. I could have lost much more. But had I invested in an index fund that reflected the S&P 500 with a no-load fund, I would have gained about 15% over that same time period. You live and learn.

12b-1 Fees
12b-1 fees are optional fees the fund can charge so investors pay for part of the fund's advertising costs. Funds do charge them, but again, if there's no need to just give your money away and dig yourself further into a hole, don't do it.

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So, now you know some the key expenses to look for when selecting a mutual fund. (Remember to go cheap!) Next week, we'll look at some of the types of funds that will help you diversify and grow your retirement savings.

Can you risk it?

My great aunt had a way with words. Among her best quotes are, "Love is good, but money's better," "Love don't pay the rent," and "Don't marry a man if he don't have a key to something." (Great advice on all fronts.) Once, my sister told her about a guy she'd started dating, and my aunt wanted know if the guy was trustworthy. Instead of asking, "Do you trust him?," she said, "Can you risk him?"

She wasn't all wrong in correlating risk and trust. It's hard to trust the market, since you know it flucurates so much, so it all comes down to how much you stomach.

The first thing to know and remember like your own name is that there is no such thing as a risk-free investment. (Although U.S. Treasuries are called "risk-free" because they are backed by the government, their value is still at risk of being eaten away by inflation. And, it doesn't seem all that possible, but the government could default one day.)

So, if anyone ever offers you an investment opportunity that has "no risk," RUN AWAY because it is a scam.

That said, the amount of flucuation you can stomach is known as your risk tolerance. To help determine your level of tolerance, there are a ton of quizzes you can take. A couple of ones that I found legitimate were from Merrill Lynch and Rutgers University. The one from Merrill focuses solely on investment decisions, while the Rutgers one -- since it is actually a study on risk behavior -- is more broad and user-friendly, in my opinion.

Quizzes like these present you with questions that try to get at how much you are willing to lose for the chance of making gains. It may surprise you how much the magnitude of the potential gain matters versus the magnitude of potential loss. (I won't give it away; I'll let you take the quiz and find out for yourself!)

Some general rules/thoughts regarding risk are:

• If you're younger, you can take more risks. This is because of precious time your portfolio will have to recover from market losses. For example, if you'd invested $100 in the market on January 7, 2000, by December 27, 2002, you would have lost almost $41 dollars. Let's say you decided to hold on to those shares instead of selling them at a loss.* By December 28, 2007, you would have recovered your losses.* Holding for a brief period (that, in this example, was a terrible time for the market overall) would not have served you well, but over a longer period of time, you actually gain.
• Small-cap stocks tend to be riskier than medium- and large-cap stocks. This is because small-cap stocks are from smaller companies that are not as established, but have a lot of growth potential. Take Rocky Mountain Chocolate Factory, which operates in malls, primarily, in 40 states, Canada, Japan, and the UAE. This company is growing in different geographies, but since chocolate is not a commodity, its business can flucuate in hard economic times, so this investment would certainly be riskier than one in Hershey, for example, since the latter has been around for 100 years or so and has a strong global presence.
• Women tend to take fewer risks when investing. Common thought holds that women tend to be more risk averse when it comes to investing. Which could mean that a woman's retirement savings will likely be much lower than her male counterpart's. However, loss aversion can be useful. Women may be more inclined to make more thoughtful investment choices than men and stay out of overly risky investments. Some say that if more women were on the boards of banks, the financial crisis would never have happened.
• Stocks tend to outperform bonds. Historically, stocks have consistently outperformed bonds over time. From 1928 to 2012, the S&P 500 beat out ten-year Treasuries by more than 3 percentage points, which could be the difference between making $871 or $564 off of a $100 investment. It's good to have a diversified portfolio of stocks and bonds that complement each other, but stocks tend to have greater upside potential. Since bonds are debt, the bondholders, like a credit card company, are ultimately more concerned with getting their money back rather than what can be made on top of it. Equityholders, on the other hand, do not have to be paid back, so upside is all they can hope for; in exchange for taking on this risk, they get a higher reward. Get rewarded for holding stocks!

Don't be afraid to take risks, but if you don't have the funds to spare, do not risk them at all. It's much more important to pay down high-cost credit card debt than to start investing. But once you're free from that bondage, fly higher into stocks for [potentially] added financial security.

*Source: Google Finance S&P 500 chart.

Investing in Emerging Markets: Growth for your portfolio and the world over

Today we're going to talk about investing in emerging markets, what exactly that means, how to do it, and some of the risks involved.

First, let's get out of the way what emerging markets are: developing economies that may still have relatively high rates of poverty, but are growing rapidly. Examples include China, India, Brazil, Mexico, and South Africa. (For the sake of comparison, countries such as the U.S., Canada, U.K., France, Germany, and the like are all considered "developed.")

There are also "frontier markets," which are even riskier than emerging markets because they are generally less economically and politically stable, but still have potential to grow into emerging, or even developed, nations. These include countries such as Argentina, Ghana, Colombia, and Vietnam.

The key thing to note about emerging and frontier markets is their incredible growth potential. In the early part of the past decade, investors were lured by these countries' huge economic growth rates, anywhere from 7% to 10% per year or more. In contrast, the U.S.'s and other developed economies' gross domestic products (GDP) only grow about 3% per year, and that's during a good year. (GDP is typically what people are referring to when they talk about the "economy" more broadly. It's basically the value of all the goods and services made in the country.)

While the global financial crisis slowed almost all countries' economies, some emerging nations proved more resilient. For example, although China's growth has slowed, it is still grew more than 7% in 2012 (compare to the U.S., which grew only about 2%. Final numbers on U.S. GDP growth for 2012 will be out soon).

Because of this outstanding growth potential, investors stand to make a ton of money. Think about it: think about people who invested in U.S. railroads, for example, in the 1800s -- those families are still wealthy today! Emerging and frontier markets investors can take essentially the same stance. Incredible!

However, where there is significant reward, there is significant risk. Note again some of the countries I mentioned: Mexico, Argentina, Vietnam. While they make for great adventure vacation spots, they are not known for being the most politically stable. Democracy and capitalism are working their way around the world, but in many places, governments control (and often inhibit) countries' growth. This adds a lot of risk for investors.

For example, let's say an investor has found a way to fund infrastructure building in Argentina, but new government leadership comes in and decides that alleviating proverty through social programs will be the new priority and all infrastructure building will come to a halt. Panicked, the investor looks to sell her investment, but no one wants to buy it now that everyone knows that infrastructure has gone kaput. During all of this, the value of Argentina's currency declines, so she now owns even more of an investment that no one wants. So, the value of the investment tanks and the investor loses her money. 

This is a very elementary (and likely unrealistic for Argentina) example, but I want to highlight exactly how risky investing in emerging and frontier markets can be. Not only are there the risks we discussed previously about individual companies, but there are also political and currency risks.

Know that investments in other countries will likely be made in that country's currency, not in U.S. dollars, so there may be money gained or lost during the translation. Additionally, one has to pay taxes on these investments as well, which will eat into returns even more. These investments can also be less liquid, or harder to sell, than developed markets equities (stocks).

So why on earth would anyone invest in emerging markets after all that?

Because of faith in the growth stories.

Emerging markets investors get to be a part of helping build roads, factories, and maybe even schools around the world, giving people jobs, educations, and livelihoods. And, as I mentioned earlier, these countries generally grow much more rapidly than the U.S., so investment values go up very quickly. They also tend to go up when U.S. equities go down, and vice versa, so they can add a layer of diversification to a U.S.-based stock portfolio. (This excludes recent times of economic decline around the world. We live in a very unique time that I pray will get much better soon.)

So, if you are not overly risk averse, and if you are young, then you should be investing in emerging and/or frontier markets. As stated in previous posts, time has a way of ironing out wrinkles brought on by volatility.

If you have a 401k or 403b, see if there is a mutual fund that invests specifically in emerging and/or frontier markets and add it to your portfolio. You can also likely find index funds or ETFs from your brokerage to invest in, such as the Schwab Emerging Markets Equity ETF.

Only make these investments if they fit your risk appetite. Next week, we'll talk more about risk and how to determine how much of it you can stomach.

Hello, Good Buy (Part 3)

To put skin on the numbers, let's look at a company like Coach (COH). (I would use Michael Kors [KORS], which I've mentioned in previous posts, but an older company like Coach will tend to have more solid numbers.)

Coach is a strong brand, growing around the world. When a woman works her way up the work world, her first luxury handbag well maybe COH. Well-respected by consumers and consistently well-received by the fashion community, Coach is poised to excel as it expands into Asia, particularly China.

Let's look at the numbers, as of market close today.

Range: $61.15 - $62.72 -- Nothing out of the ordinary here. The short range says that there was probably no major news about the company out today, as big news, like earnings hits or misses, can cause a price to flux more during the day.
52-week range: $45.70 - $79.70 -- If you've read news about the financial crisis raging in Europe, you probably already know that it's taken a toll on American markets recently, so some of this variation is likely due to that and not the fault of the company. The current price of $61.82 is about in the middle of the range, which can be a sign that the stock is now not so expensive.

Market cap: $17.77B -- Coach is big -- and growing! Its market cap is about $10 billion more than KORS, due to its higher price and that more of its shares are available in the market.
P/E ratio: 18.47 -- Personally, I think this is the best signal about COH. The S&P 500, one of the most common market indexes referred to, has a P/E of about 14 right now. In a way, this means that the market itself is worth about 14 times what it earns; anything close to that number sets a company up on the road to fair valuation, rather than overvaluation. Basically, you're paying the right price, rather than too much. COH's 18.5 is completely and totally manageable, and actually quite low for a company growing as quickly as COH is. A low PE is a sign of maturity, but can also be a signal strength. Excellent sign here, as its in line with its peers (TIF, with 15.72) but a steal compared to UA, with PE of nearly 57, or KORS, with about 60.

Dividend: $0.30/share, with a dividend yield of 1.94% (Dividend yield, or DY, is the percentage of the current stock price that the annual dividend makes up. The higher the better, of course.) -- YAY, free* money!!! And a DY of nearly 2% for a cyclical consumer stock in the US is a great deal right now since many companies are keeping their cash to expand operations or to save in case of a rainy day that looks like 2008.

EPS: $3.35 -- Again, solid performance in the past year by COH. This means that if you'd bought 10 shares last year, you would have pocketed an extra $33.50 on your investment. Not bad at all.
So, there you have it. Narrative + numbers = a good buy. Coach looks like a pretty good one right now if you can afford the $62 per share.
Next time, I'll take you through the scary stuff: the financial reports. Don't be scared --- they're not that bad, and you don't need a CPA to get what's going on.
Til next time!

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* You know that old saying about the only two envitable things in life are death and taxes? Yeah, we'll talk about taxes later.

Hello, Good Buy (Part 2)

So, you’ve got the narrative. You know the industry well enough to know that this company has room to grow, or you know the company well enough to know that it will shoot for the stars and be on target. Your gut says yes.

But objectively, how do you know this stock is a good buy?

Let’s start with the price.

To find a stock’s price, you can go to nearly any finance-related website. My favorite for straight-no-chaser information is Google Finance (http://finance.google.com), but Yahoo! Finance (http://finance.yahoo.com) is a formidable competitor. I’ll use Google Finance on this blog, just to stay consistent.

Most finance websites these days will let you type in the name of the company to pull up data, but you’ll want to know the company’s ticker symbol as well. It’s basically an abbreviation that identifies the company most quickly on a stock exchange.

When the company profile comes up, the first thing you’ll see is the price per share of the stock. Ask yourself how many shares you can afford at that price. Some brokerages have a required minimum number of shares in order for you to purchase with them (often 1 share is enough). However, ING’s Sharebuilder is unique in that, with the right plan, it will allow you to purchase fractions of a share of stock. There are downsides, though: (a) you can only purchase on a certain day -- typically Tuesdays, (b) you have no control over at what time of day -- and thus, at what price -- the stock is purchased, and (c) you'll wind up paying full commission for a smaller portion of stock. For simplicity’s sake, I’ll assume on this blog that you have a regular broker that will only allow you to purchase full shares of stock. Either way, you should always buy a number of shares whose proceeds will make the cost of commission worth it (see Post 2 for more information).

So, you’ve got money and you know how many shares you can afford – great! But hold on.

Take a look at the information available, particularly:

Range

52-week range
Market Cap
P/E
Dividend
EPS

Range – This is the lowest and highest prices the stock traded at in the past trading day. Basically, it represents a stock’s volatility, or how much the price fluctuated in the past day. Normally, this doesn’t move very much (maybe $1 or $2, or just a few cents), but if the whole stock market went up or down, you’ll see more variability here. You should equate volatility with risk – generally, the more volatile a stock is, the riskier it is. But with high risk comes high reward [in theory]. That said, don’t be afraid if a stock moves up and down more than $2 – Under Armour fluxed between $94 and $102 today, so it definitely happens.

52-week range – Similar to the day’s range, but, in my opinion, a lot more important. This gives the range of prices the stock has experienced in the past year. It’s an even better signal of volatility, especially if the highest price is waaaaaay more than the lowest (like, 3 or 4 times as much). Sometimes, you can look at a 52-week range to judge how “expensive” a stock is – if it’s at the top of the range, you’ll probably want to wait until the price goes down to buy; if it’s at the low end….well, that depends. It could be a signal that the stock is really cheap, but if the company is not doing well financially, it’s a sign of the worst.

Market Capitalization (Market Cap) – This basically tells you how large the company is, financially-speaking (and even more specifically, equity-speaking. I’ll get to debt later.). It is the total of the number of shares the company has available to investors multiplied by the price per share. Generally speaking, large-cap companies like Wal-Mart and McDonald’s tend to have less-risky stocks than small-caps like Basset Furniture.

P/E – P/E stands for price-to-earnings (or price-earnings) ratio. I would say that it’s the most commonly used ratio to decide if a stock is expensive or not, though that idea does not always hold. The P/E ratio can be found two ways: by dividing the company’s market cap by its net income or by dividing its current price by the amount it has earned per share in the past year. Either way, you’ll get the same answer.

Basically, it tells how much you’re going to pay per share for the amount of money the company earned. If the ratio is high (and “high” depends on the company’s industry), you’re paying too much for the stock; if it’s low, you’ve found a bargain. But as I said, this doesn’t always hold. Older, more established companies like GE tend to have lower PEs (GE’s is less than 16) whereas newer companies, such as Lululemon, tend to be higher (LULU’s is 58). This is because the PE can reflect investors’ expectations of a company’s growth. In this example, one would think GE has grown as large as its going to grow, but Lululemon has room to spread itself around.

Dividend – Sometimes, you get a tip from the company to thank you for investing in it. It’s called a dividend, and it’s a portion of the company’s bottom line earnings that it felt it should share with its shareholders. Why would a company do that? Well, they want you to keep investing in the stock and sometimes, they don’t want to keep too much cash on them and a dividend is a good way to get rid of it.

EPS – Stands for earnings per share; it’s a measure of how much the company earned in net income for each share of stock it has available to investors. The higher the better, but this figure can fluctuate wildly depending on what’s going on in the company, the industry, and the world. EPS is also a shadow – what’s happened in the past. There’s no guarantee that the same (for better or worse) will happen in the future, but it can give you an idea of what the company’s stock is capable of earning.

***

Now, you’ve got the story and you’ve got the numbers. Next, we’ll put them together.

Hello, Good Buy (Part 1)

By now, you should have your brokerage account set up and your idea of the company who's stock you would like to own.

But how do you know if this stock is worth buying?

Loook at your company two ways: qualitatively and quantitatively. (Don't be scared of the numbers! Actually, don't think of them as numbers...think of them as dollars. Makes things much less intimidating somehow.) You probably already have the qualitative story down and there's more on the quantitative to come.

The Qualitative Story

Let's take my journey Michael Kors, for example. Michael Kors, the American fashion designer and famous face of Project Runway, took his company public in December 2011 in an initial public offering, or IPO. When a company "goes public," that means that its stock is now listed on a stock exchange (generally the New York Stock Exchange or Nasdaq) and the company received just about all of the proceeds from selling its stock on the IPO day. After that, the shares are traded among investors, but the company does not get any more money; only from the IPO does the company recieve funds.

Anyway, I was ecstatic beyond ecstatic when Michael Kors went public because that meant that I could own, not just a watch or a handbag designed by the wonderful MK, but an ACTUAL PIECE OF THE COMPANY. Owning stock means exactly that -- you own a portion of the company. Empowering!!!

Qualitative analysis: I knew that Michael Kors is very well respected in the fashion community. He creates trends, but is not a [laughably] trendy designer. His designs are typically composed of clean lines and classic silhouettes that flatter girly girls and menswear women alike. His label's reach goes far beyond the US, into Europe and Asia. He is arguably the next Ralph Lauren.

For me, this came through knowledge of the fashion industry and being in touch with my own preferences. I know how much my friends love MK, and how much I look forward to his fashion shows (especially fall. There's always something about fall fashion that just gets you). Basically, it was women's intuition, my gut. I believe that women have a special edge in investing because we have less tendency to get laser focused on the numbers and take the broader picture into view.

From this intuition, I knew that his company was worth more than $31 per share, where it was trading when I first looked into it in early February 2012. I mean, an MK watch is $250 at Macy's! It HAD to be worth more than $31 per share because after the company recieves its money from the IPO, investors are essentially trading the company's reputation. They may sell their shares because they feel the company has done (or not done) something it should have, or the buy shares because they believe that it's an amazing company doing amazing things (see ticker symbol AAPL for an example). The stock price can be a reflection of investors' anticipation of all the great things the company will do in the future, short- and long-term. But sometimes, the stock price hasn't caught up with company's reputation, which I felt was the case with Michael Kors.

Sidenote: Crocs is a great example of the importance of looking at the narrative/big picture. In 2007, Crocs traded at nearly $70/share, and I predicted that it would come crashing down. Why? Because Crocs are ugly. Every fashionista around the world (including Anna Wintour herself) cursed the person who started wearing them outside of a hospital. Suburbanites across the US found them comfortable, and Wall Street cleaned up. Luckily, fashion (and a global financial crisis) slapped everyone, and Crocs now trades at around $20/share. Still worth too much in my view, but meh.

I was sure that MK was a good buy in qualitative terms -- I just needed the numbers to back me up. Tune in to the next post for details!

Talk to Chuck...Or a talking baby

Now. Got that company in your head that you think would be a good buy? Good. Hold on to that thought.

In order to buy any stocks, you'll need a brokerage account. There are tons of "discount" brokerages online, many of which you might of heard of, including eTrade, with the cute babies in the commercials.

To find the perfect broker for you, think about how much you would want to pay for the privilege of investing (known as a commission fee to the brokerage) and how important customer service is to you. You'll also want assess the amount of cash you have available to begin.

The last step is where a lot of women I know get hung up: account minimums. I know shelling over $500, $1,000, or more can be an extremely daunting thought. Don't be intimidated by it. Think about how you're building security for yourself; security is worth far more than any account minimum.

That said, you may be in a situation in which it is virtually impossible for you to save more than $20 per paycheck (I've been there, too). There's a brokerage out there for you, too.

Below is a chart giving some details about some well-known online brokerages. Poke around their websites and see which one you might want to invest with. I speak very highly of Schwab, but brokers aren't one size fits all.

Once you've chosen a broker, stay tuned. The fun is just beginning...




* Why is a low price per trade important? Aside from the obvious of lower prices generally being better, commission fees eat at your overall returns. So, if you decide to buy a stock for $10, and the commission fee is $5, your return will be $5 lower. In other words, you've only bought $5 of the stock. When you sell it, that'll be another $5, leaving you with no returns (except if the price of the stock went up). So pay close attention to fees!

In the beginning...

We'll start off with the very, very basics:

- Where do you like to shop?

- What are some of your favorite [chain] eateries or cafes? (Don't gag at chains! They feed America!)

- What products do you clean your house with?

Now, notice that I didn't throw a barrage of acroynms at you. There's a time and place for everything. We'll get there eventually. Right now, I just want you to think about yourself -- that can't be too hard!

As portfolio manager of an investment fund, I take a close lens to the consumer sector and identify what shoppers are doing en mass. I chose this sector because, well, I'm a consumer. Always have been, always will be. I tell you this because beginning investors should start with themselves -- look at what you like, what your favorite companies are. If you're spending money with them, it's incredibly possible that others are spending their money in the same place. Why not invest in what you love?

In my next post, I'll delve a bit deeper, of course, but I'd like for you to start thinking about you, your habits, your hopes, your dreams. There is a large part of investing in the consumer sector that comes from intuition. Know thyself well.