Investing 102

[96z28ss]

Market could go down way more.

The Chicago Cubs no hitter could spell doom for the market.
Following Milt Pappas' September 1972 'no hitter', The Dow dropped over 40%
Carlos Zambrano's 'no hitter' in 2008 came during the Lehman bankruptcy weekend and was followed by a 30% plunge in the S&P in the next three weeks, as well as a 6000-point-plus total collapse in the Dow.

So, when we saw Jake Arrieta's 'no hitter' this weekend, we can only imagine what doom it implies for US stocks.

And if that is not worrying enough, the last time The Cubs won the National League Pennant was in 1945, two cities were destroyed by atom bombs.

LOL just joking around.

Another fun fact. In the Back to the Future movie when Marty goes to 2015 the Cubs won the World series.

[Payton King]

That is funny stuff right there

[sik68]

I have nearly all of my individual stocks in large-cap dividend companies with 'low' PE ratios: 10 to 25.

But I'm only 31 and have a long investment career ahead of me. So the devil on one shoulder wants me to be bold, and re-balance into 5-10% into these high-flyer tech companies with marginal profits and a ton of growth already priced in.

However, I just can't seem to convince myself that my money is worth it. Sure, NFLX, AMZN, FB, TSLA are pioneers. But according to their profit/loss sheets, their future potential is already priced in. At some point, won't the value of a company need to be reflected in the share price?

Ben Graham says to be wary of these types of stocks because it is very rare to buy a stock at a XXX PE level, then expect to make money as it descends to a 20x-ish PE level. I am trying to find historical examples of companies that have successfully done this, but am stumped. Thoughts/examples?

[GregWeld]

WOW! Really great question(s).


Since this is "Investing 102" --- I've personally attempted to stay away from discussion of the "high fliers" -- as this is NOT where someone that is a "newb/beginner" should be --- UNTIL they've built a decent base of good stuff (that we always talk about).

However... YOUNG people -- and those with a decent "base" of investments (the building blocks or rocks)... should certainly dabble in GROWTH.

Recommending GROWTH stocks is a precarious cliff. As you mentioned - by the time you know about them - or are willing to buy them - they've already probably gone a long ways.... That is NOT to say that they're done growing or that they'll "flop" just because their P/E's might be a bit out of whack NOW. Personally, I own NetFlix (NFLX) and Shake Shack (SHAK) and a couple others of this breed. They flop up and down like fish! Which is why they're not recommended for beginners! Most people couldn't stomach these wild swings - or the sea of red ink than can kill your performance on all the other wonderful names you own.

The trick is to really dig deep in your soul and ask yourself how much volatility can you take.... AND which of these "high fliers" do you see being around and growing LONG TERM -- 10 or more years out. That's what I do. Personally - I'll buy 100 grand of a name... which is small potatoes as an investment for me. You're going to give up the automatic compounding that's built in with reinvesting the dividends on the steady bigger companies. But the growth can be a triple or a 10X over time.

I have funds in venture capital... that is pure gambling and comes with great risk but also huge rewards if you get it right. Talk in that kind of arena runs around 4X "ordinary" to 9X "killing it". You're young and if your job and earnings potential is solid.. I'd say pick out 2 or 3 and go for it. Just KNOW that GAIN comes with PAIN... some folks can stand this short term (or even longer term) pain and understand what, and why, they've invested.

A year or two I'd have bet FaceBook was short lived or faddish and wouldn't be able to grow REVENUES into their valuation. Obviously those that bet otherwise have done very well! Netflix is a 9X since it's IPO.... it only takes ONE of those to make up for a couple of ho hums or a bleeder.

Originally Posted by sik68

I have nearly all of my individual stocks in large-cap dividend companies with 'low' PE ratios: 10 to 25.

But I'm only 31 and have a long investment career ahead of me. So the devil on one shoulder wants me to be bold, and re-balance into 5-10% into these high-flyer tech companies with marginal profits and a ton of growth already priced in.

However, I just can't seem to convince myself that my money is worth it. Sure, NFLX, AMZN, FB, TSLA are pioneers. But according to their profit/loss sheets, their future potential is already priced in. At some point, won't the value of a company need to be reflected in the share price?

Ben Graham says to be wary of these types of stocks because it is very rare to buy a stock at a XXX PE level, then expect to make money as it descends to a 20x-ish PE level. I am trying to find historical examples of companies that have successfully done this, but am stumped. Thoughts/examples?

[ErikLS2]

Great post there Greg! Do you ever use the PEG Ratio? I always look at the PEG ratio, it really helps figure out which of these high growers is cheaper than the other ones based on their current P/E Ratio and expected growth rate (which is subjective of course). You just have to watch what growth rate is used. I always compare PEG ratios from the same source when comparing them, i.e. don't use the PEG from Yahoo Finance for NTFLX and compare it to the PEG ratio for FB on Schwab for example. I try to keep any buys below a 2.0 PEG ratio. Here is a good explanation of it:

https://en.wikipedia.org/wiki/PEG_ratio

[GregWeld]

Originally Posted by ErikLS2

Great post there Greg! Do you ever use the PEG Ratio? I always look at the PEG ratio, it really helps figure out which of these high growers is cheaper than the other ones based on their current P/E Ratio and expected growth rate (which is subjective of course). You just have to watch what growth rate is used. I always compare PEG ratios from the same source when comparing them, i.e. don't use the PEG from Yahoo Finance for NTFLX and compare it to the PEG ratio for FB on Schwab for example. I try to keep any buys below a 2.0 PEG ratio. Here is a good explanation of it:

https://en.wikipedia.org/wiki/PEG_ratio

Erik - I know of the PEG... But when I'm buying this crap I use my gut. Take a NetFlix... I bought when everyone I know is USING it not just when the talking heads are talking about it on TV. I bought Shake Shack because my friends in New York City told me about the lines and the food. I'll be in NYC today and will test this theory myself. I bought Apple years ago after seeing the crowds in their stores at the mall. Went home and bought some.

[WSSix]

Another rule or metric you can use to help compare stocks is the Chowder rule. You'll have to search seeking alpha to find the information. It's fairly simple though. I'll look into occasionally just to give me a proper comparison between stocks I own or may be interested in.

I'm sure there are lots of different methods and ways to compare stocks. You don't have to get ridiculous about it. Just pick one or two that are easy and align with your goals or philosophy and go for it.