Basics of Stock Market Investing -Easy Beginner primer
Step 1: Screening
Google Stock Screener has a powerful underlying algorithm but a junk interface: the industry filter does not work and must be left on “all sectors” and when entering min-max pairs select the min box and then use the “tab” button on your keyboard to move to the max box. You also must R-click and open new tabs to view graphs; the “Back” button will reset all criteria.
Link: https://www.google.com/finance#stockscreener
I add criteria that are important to me and then refine them so that I have less than 100 results (see attached example). Afterwards I filter my results, generally descending 5 year EPS growth.I ignore all Trusts, Funds and other Financial companies. Upon opening a new tab for a security, a paragraph describing the business will appear below the graph.
Step 2: Interpreting Graphs
- ID companies with sustained, long term demand (repeated cycle of new high points over a 1 to 5 year period). i.e. CHKP, LGND, MXL on 5 year view
- Check for seasonable behavior (i.e. has it peaked in the summer 4 of the last 5 years?)
- After large drops (~10+%), how quickly does the price rebound?
Security pricing is simple supply and demand and has little to do with the business itself. When you look at a graph you want to determine if there is surplus demand for the security.
Step 3: Reading Financials (Fundamental Analysis)
If a company passes the previous two steps, google the stock ticker and “corporate website”, navigate to the “Investors” Section and pull up the most recent 10-K. Read balance sheets and the financial data that has been arranged into tables. Ignore the rest of the document.
- Are non-milestone revenues increasing (typically Sales)?
- Is A/R/Sales decreasing and A/P increasing?
- Is Inventory Decreasing?
- Was any Debt paid off?
- Is R&D Rising?
- Is the “Net Profit” 3 year trend positive (not a problem if this year is flat and overall trend is positive)?
You want “Yes” answers to as many of these as possible.
Step 4: Build Watch-lists in Google Finance and Yahoo Finance
The process of screening with Google Finance, reviewing the Graphs and then reading 10-Ks shouldn’t take too long (< 15 minutes per security). Once you’ve done your background you’ll want to build a watch-list to monitor each of the stocks and look for entry points.
Yahoo Finance allows you to build custom views for your watch-list that surface important metrics (see attached image). They also publish the size of buy/sell orders on top of their graphs (you may have to adjust a few settings). I find this information to be valuable as it tells you whether a price change is the result of one massive orders or a bundle of smaller orders.
Google Finance puts small tabs onto top of their graphs with links to relevant articles (mostly useless unless related to an earnings call) and also lists upcoming events for that company on the right side when you scroll down.
Step 5: Waiting for Sell-Off
Typically there’s a lot of volatility leading up to and just after an earnings call/10-Q/10-K release but prices will change randomly throughout the year. Identifying a true bottom is extremely difficult, but the stocks you pick should have enough upside where missing the best price by a few % points won’t matter much. I find it useful to check after market activity (google the stock ticker), particularly on the Friday of a volatile week.
- Rule of Thumb is to only buy after a company loses 10% off its value. Do not buy immediately even if the price begins to slowly rise over the next week. Generally companies will make a second bottom where all the people who buy immediately after the sell-off cash out for a small profit. Buy windows are often much larger than you think; I frequently get sucked into micro-analysis when I am preparing to buy.