Investing 102

[Woody]

I am very interested in this thread. I mostly lurk on Lateral G and over the last couple of days this is the first thread I have been coming to.

I have been investing in stocks and mutual funds for about 20 years now. I like the idea of working together with other people on investment ideas because many times other people have different viewpoints and it makes you think about things that you might not have considered on your own.

With that being said, I would like to throw out a stock for consideration that I like right now. The stock is Microsoft. I know Greg said Microsoft is dead money right now, but here is why I like it.

I believe it is out of favor and undervalued right now. If you look at a ten year history of revenue growth and earnings growth, it compares very well to any of the high quality stocks that have been mentioned in this thread. For example, the ten year growth rate of net income is 146% for MSFT. As a comparison McDonalds had a 150% increase in net income over the same 10-year period. During the same ten year period, the stock price of MCD has gone up 260%, while MSFT has declined 23%. The PE (Price Earning ratio) is only 9 for MSFT compared to a 15 PE ratio for the market as a whole. MCDs PE is currently 19.

So my thinking is that now is a good time to buy. I have found that chasing the hot stock/mutual fund generally gets you in at the high. I tend to be a contrarian and look for things that may be out of favor but have the potential to come back in favor.

MSFT currently has a 3.08% dividend rate, while MCD has a 2.87% dividend rate. I am mostly comparing MSFT to MCD, but MCD has had one of the strongest runs over the last ten years.

I would like to hear others thoughts about Microsoft as well as any other stock ideas you may have.

[GregWeld]

Originally Posted by Woody

I am very interested in this thread. I mostly lurk on Lateral G and over the last couple of days this is the first thread I have been coming to.

I have been investing in stocks and mutual funds for about 20 years now. I like the idea of working together with other people on investment ideas because many times other people have different viewpoints and it makes you think about things that you might not have considered on your own.

With that being said, I would like to throw out a stock for consideration that I like right now. The stock is Microsoft. I know Greg said Microsoft is dead money right now, but here is why I like it.

I believe it is out of favor and undervalued right now. If you look at a ten year history of revenue growth and earnings growth, it compares very well to any of the high quality stocks that have been mentioned in this thread. For example, the ten year growth rate of net income is 146% for MSFT. As a comparison McDonalds had a 150% increase in net income over the same 10-year period. During the same ten year period, the stock price of MCD has gone up 260%, while MSFT has declined 23%. The PE (Price Earning ratio) is only 9 for MSFT compared to a 15 PE ratio for the market as a whole. MCDs PE is currently 19.

So my thinking is that now is a good time to buy. I have found that chasing the hot stock/mutual fund generally gets you in at the high. I tend to be a contrarian and look for things that may be out of favor but have the potential to come back in favor.

MSFT currently has a 3.08% dividend rate, while MCD has a 2.87% dividend rate. I am mostly comparing MSFT to MCD, but MCD has had one of the strongest runs over the last ten years.

I would like to hear others thoughts about Microsoft as well as any other stock ideas you may have.

Woody ---

This entire thread is about THEORY of investing -- not really 'stock picks and tips of the day'.... With that said -- the reason it is NOT that kind of discussion and I've tried to stay away from that is because everyone needs to tailor THEIR OWN investments. If a person buys what someone else said to - and they don't know why they bought it - the first time they look at their account and the stock is DOWN -- they're going to want to sell (at a loss).

So -- if you like Microsoft -- and like "contrarian" investing (like salmon swimming up stream) then that's what you should buy. You'll be happy with it.

BUT since this is a beginners class.... the thread is called INVESTING 102... I've been doing just "basics" -- basic names - basic theory... which DOESN'T include "contrarian investing".

Okay --- I write the above -- because I have to write for the MANY eyeballs that read these things.... I write all my posts that way.

Microsoft has all the right "numbers" except one -- CAPITAL GROWTH -- and it has a HISTORY of that. Look at a chart -- the stock PEAKED in 1999 (December of 1999) and has what appears to be a MOUNTAIN... going almost vertical to the peak and then STRAIGHT DOWN on the other side. Microsoft (MSFT) has the largest "float" of any stock in the entire UNIVERSE... which means -- there are more SHARES available (issued) than any other company. PERIOD. So it takes much more BUYING INTEREST to raise the stock price than any other company (that might have one quarter the number of shares for instance). Add to this the Billy Boy (not a fan) DUMPS 4 and 500 million dollars worth a month.... and he has an ENDLESS SUPPLY (he can sell a BILLION DOLLARS WORTH PER YEAR FOR THE NEXT 50 YEARS). His stock is FOUNDERS STOCK -- i.e., it's never been in the market until HE sells it. So that is NEW SUPPLY. That right there knocks the price down. Look at an insider trading report -- you'll see he's in there dumping dumping dumbing month after month year after year.

PERSONALLY -- I want CAPITAL GROWTH.... AND.... the Dividend. So if you want to compare McDonalds with a 260% capital growth -- and a dividend -- against Microsoft (MSFT)... and that's where you want to put your money... I'd say your investing style is "GAMBLER" because you are gambling that you can swim up stream against a known (historical) tide.. and win. I'll bet against you and I'll buy MO - PM - MCD - KMP etc and at the end of the year I'm going to be richer than you are.

I have a broker (also a personal friend) that handles my bond account. His firm (McAdams Wright Ragen, Inc.) always has MSFT on it's "BUY" list.... and I keep telling Fred -- I'll take 100K in APPLE and you put your 100K in MSFT and get back to me at the end of the year. Just compare the two charts -- overlay them so you can see the two charts on the same chart... you can do this in GOOGLE FINANCE -- MSFT is DOWN 10% YTD while AAPL is UP 20% YTD... Same chart - overlay (compare) McDonalds -- UP 30% -- Compare that with Phillip Morse (PM) UP 35%

Again -- I'm doing this as a "lesson" -- please do not take this personally but I'm using your question to show a bit of research and what to look for and how to compare etc.... So I ask ANYONE -- why would you CHOOSE to put money in what has a history of going nowhere vs a history of going somewhere... UP vs DOWN....

Here's how I'd play MSFT -- because I think it's a LOSER... it's a LOSER in the tech wars in mobile which is where "computing" is going (and it's going there FAST).... I might PARK some money there because I would feel it's safe for a few weeks (I used to use GE for this) and if I played the dividend game I could pick up the dividend and then bail. But I would NOT invest in them hoping against hope that someday they might figure it all out and the public is going to come swarming back in a feeding frenzy and push up their stock.

Remember how the market works -- it takes more people that WANT to buy than people that want to SELL to lift a stock price. You tell me when that is going to happen going forward? In the meantime -- I'd prefer to have my money in something that at least historically looks like it's on the right path... which is going UP not sideways or down.

[Woody]

Greg,

I appreciate your input and that is why I posted. I wanted to get some others viewpoints and maybe some new ideas on how others analyze stocks.

I will try to keep it to a more general discussion in the future.

Thanks

[GregWeld]

Originally Posted by Woody

Greg,

I appreciate your input and that is why I posted. I wanted to get some others viewpoints and maybe some new ideas on how others analyze stocks.

I will try to keep it to a more general discussion in the future.

Thanks

Don't do that. I thought it was a great question!!

I'm posting from my phone or I'd tell you why.

[JoeliusZ28]

Well this is my first post on this site, I've been a lurker here for a while but James (LS1-IROC) pointed me to this thread. Just finished reading through it all, very good information, thanks! Right now I happen to be about halfway through the book 'bogleheads guide to investing.' I'm 25 and looking to get an index fund setup soon, I'm just wondering if anyone can offer some opinions on schwab vs vangaurd? Seems like they are both good, should I just pick one and roll with it, or could it be beneficial to have an account with both?

This thread definitely has piqued my curiousity in dividend stocks, now too

[GregWeld]

Originally Posted by JoeliusZ28

Well this is my first post on this site, I've been a lurker here for a while but James (LS1-IROC) pointed me to this thread. Just finished reading through it all, very good information, thanks! Right now I happen to be about halfway through the book 'bogleheads guide to investing.' I'm 25 and looking to get an index fund setup soon, I'm just wondering if anyone can offer some opinions on schwab vs vangaurd? Seems like they are both good, should I just pick one and roll with it, or could it be beneficial to have an account with both?

This thread definitely has piqued my curiousity in dividend stocks, now too

A discount broker is a discount broker -- so just pick one with an office that is handy to you - in the event you want to stop and deposit a check etc -- or need to send a wire transfer -- that kind of stuff.

Welcome aboard!!!

[LS1-IROC]

Originally Posted by JoeliusZ28

Well this is my first post on this site, I've been a lurker here for a while but James (LS1-IROC) pointed me to this thread. Just finished reading through it all, very good information, thanks! Right now I happen to be about halfway through the book 'bogleheads guide to investing.' I'm 25 and looking to get an index fund setup soon, I'm just wondering if anyone can offer some opinions on schwab vs vangaurd? Seems like they are both good, should I just pick one and roll with it, or could it be beneficial to have an account with both?

This thread definitely has piqued my curiousity in dividend stocks, now too

Welcome Aboard Joel!

[GregWeld]

Originally Posted by Woody

Greg,

I appreciate your input and that is why I posted. I wanted to get some others viewpoints and maybe some new ideas on how others analyze stocks.

I will try to keep it to a more general discussion in the future.

Thanks

Woody --- I thought your question on Microsoft was a very good one -- and I hope you didn't take my discussion of why I wouldn't choose that particular stock as a personal affront - that wasn't my intention.

It was a great question! Many people would love to be able to pick the "next Microsoft"... and still look at MSFT stock as some kind of a "must own". So it was a perfect name to bring up here -- since I've been pounding the desk saying to get into names you know and understand.

I was trying to use that question to put another level of thought process into this "stock picking" business. I really wish MSFT would be the stock that it used to be... but it has had 10 long dismal years of being stuck in the mud. I'm trying to get people that haven't EVER invested in anything -- to start saving and investing -- and I NEED them to buy a little bit of this and a little bit of that, and have SUCCESS! That success needs to be GROWTH in their money (account) AND to see what dividend investing can do for them. Even if a guy only gets a $10 dividend -- that is "free money".

On the way home today - I got a text that said "GO McDonalds"! -- So I called the guy and said "what's up with that" --- well he was all excited because 5 months ago I got him to start investing and one of the picks was MCD -- and he bought at $84 and today it closed at over $100....

He wouldn't be real excited if he'd bought MSFT at @ $25 and it closed today at $25.15


I'll come back to the "This thread is Investing 102".... I want these guys to see some RESULTS.

I've hammered 'em on LOOK AT THE LONG TERM CHART...... because that TREND CAN BE YOUR FRIEND (old dumb saying but it works)... Or "don't try to catch a falling knife" (don't buy a broken stock that is falling just because it used to be "good"). These are all sayings that actually do work. And they're good reminders to me (I use them to myself all the time!).

So again -- my only "lesson" point was -- if I look at a chart of MSFT -- and it's been FLAT for 10 years -- I don't get any good argument that says "BUY IT BECAUSE IT MIGHT GO UP".... That's just gambling. Like standing at a slot machine thinking "My next 20 bucks might hit the big one...."

[pw2006]

Originally Posted by Woody

I am very interested in this thread. I mostly lurk on Lateral G and over the last couple of days this is the first thread I have been coming to.

I have been investing in stocks and mutual funds for about 20 years now. I like the idea of working together with other people on investment ideas because many times other people have different viewpoints and it makes you think about things that you might not have considered on your own.

With that being said, I would like to throw out a stock for consideration that I like right now. The stock is Microsoft. I know Greg said Microsoft is dead money right now, but here is why I like it.

I believe it is out of favor and undervalued right now. If you look at a ten year history of revenue growth and earnings growth, it compares very well to any of the high quality stocks that have been mentioned in this thread. For example, the ten year growth rate of net income is 146% for MSFT. As a comparison McDonalds had a 150% increase in net income over the same 10-year period. During the same ten year period, the stock price of MCD has gone up 260%, while MSFT has declined 23%. The PE (Price Earning ratio) is only 9 for MSFT compared to a 15 PE ratio for the market as a whole. MCDs PE is currently 19.

So my thinking is that now is a good time to buy. I have found that chasing the hot stock/mutual fund generally gets you in at the high. I tend to be a contrarian and look for things that may be out of favor but have the potential to come back in favor.

MSFT currently has a 3.08% dividend rate, while MCD has a 2.87% dividend rate. I am mostly comparing MSFT to MCD, but MCD has had one of the strongest runs over the last ten years.

I would like to hear others thoughts about Microsoft as well as any other stock ideas you may have.

My take is that you have better downside protection with MSFT right now, than with MCD and like you said, they have a similar dividend yield around 3%. Next year's growth rates for revenue/EPS for MSFT are (7.6%/10.6%) versus MCD at (5.6%/12.4%). So, just looking at analyst estimates, revenue is expected to grow a little faster at MSFT than MCD, but margins are expected to grow a little better at MCD (which is likely why people are willing to pay more for MCD via the higher PE). With the large delta in the PEs, MSFT looks like a better investment to me than MCD right now.

Another option (pun intended) but more complex trade, is to look at options. If you are comfortable with options (no, not all options are risky), you can buy MSFT stock and write covered calls against your stock. For example, if you bought MSFT today at roughly $26 and wrote a March 2012 covered call for $26 for $1. $1/$26 / 3 (option expires in ~3 months) x 12 (est annual return) = 15%. This will cap your gains if the stock rises, but also gives you $1 of downside protection. If the stock stays flat, you let the option expire in March and write another option. If the stock rises, your stock will get called and you have to live with the $1 gain. I am not advocating this trade, but just giving you others options on trading.

If you are a beginner, start doing a little research (starting with Greg's awesome list of stocks above) and buy some shares. Do not try to get rich quick and if you are new to trading, do not use margin to buy stocks. Again, just my 2 cents.

[Woody]

Originally Posted by pw2006

My take is that you have better downside protection with MSFT right now, than with MCD and like you said, they have a similar dividend yield around 3%. Next year's growth rates for revenue/EPS for MSFT are (7.6%/10.6%) versus MCD at (5.6%/12.4%). So, just looking at analyst estimates, revenue is expected to grow a little faster at MSFT than MCD, but margins are expected to grow a little better at MCD (which is likely why people are willing to pay more for MCD via the higher PE). With the large delta in the PEs, MSFT looks like a better investment to me than MCD right now.

Another option (pun intended) but more complex trade, is to look at options. If you are comfortable with options (no, not all options are risky), you can buy MSFT stock and write covered calls against your stock. For example, if you bought MSFT today at roughly $26 and wrote a March 2012 covered call for $26 for $1. $1/$26 / 3 (option expires in ~3 months) x 12 (est annual return) = 15%. This will cap your gains if the stock rises, but also gives you $1 of downside protection. If the stock stays flat, you let the option expire in March and write another option. If the stock rises, your stock will get called and you have to live with the $1 gain. I am not advocating this trade, but just giving you others options on trading.

If you are a beginner, start doing a little research (starting with Greg's awesome list of stocks above) and buy some shares. Do not try to get rich quick and if you are new to trading, do not use margin to buy stocks. Again, just my 2 cents.

Thanks for the input.