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Inside Wall St. 
Stock Picking — Beginner |
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Keep an eye on the WealthEffect Portfolio |
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Or...stick with a set portfolio of names (such as the list at the bottom of this page) and readjust the percentages each January (ideally for tax purposes, try to take short-term losses just before the end of a calendar year and long-term gains at the beginning of the next calendar year) | |||||||||||||||||||||
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Either way, use dollar-cost averaging...putting a fixed amount of money into stocks each year | |||||||||||||||||||||
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Review the Investing 101 series, focusing on the Introduction and Strategy sections | |||||||||||||||||||||
Stock Picking — Intermediate |
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If you prefer to find your own ideas, use the Stock Valuator |
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Take yourself through the Investor Checklist, part of the Stock Valuator | |||||||||||||||||||||
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In the Investing 101 series, focus on the In-Depth section in addition to Introduction and Strategy | |||||||||||||||||||||
Stock Picking — Expert |
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To take your stock picking to another level, focus on free cash flow rather than earnings |
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Decide on a reasonable growth rate and project what the free cash flow will be in 10 years | |||||||||||||||||||||
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Decide on a reasonable multiple for this free cash flow to arrive at the projected stock price in 10 years | |||||||||||||||||||||
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Discount that stock price to the current stock price to determine an estimated annual capital gain | |||||||||||||||||||||
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Add in the dividend rate to determine an estimated total annual return on investment | |||||||||||||||||||||
Stock Picking — Double Diamond |
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If you're really serious, adjust the free cash flow for the impact of options and pensions. |
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For options...as a rule of thumb, for every 1% of the shares granted in options each year (minus the options cancelled, forfeited and expired) the net income portion of free cash flow should be reduced by 6%. (If a company is expensing options, you can skip this adjustment. To be more accurate, however, add back the amount of the option expense in the financial statements — which is understated since it is spread out over the vesting period — and subtract the cost of options as estimated here. How's that for complicated?) | |||||||||||||||||||||
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For pensions...net income should be reduced by 2% of the pension assets. This will adjust for the overly optimistic assumptions that companies make concerning the return on their pension assets. | |||||||||||||||||||||
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Take this adjusted free cash flow number and use it in computing the expected return, described in Stock Picking — Expert. | |||||||||||||||||||||
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Add in the dividend rate to determine an estimated total annual return on investment | |||||||||||||||||||||
Addendum |
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5%
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