Investing 102

[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

[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.

[Bucketlist2012]

I just joined today, and after posting my car on the projects thread, here I am..

Investing and Cars, and Money management, are some of my Passions...

Being the Newbie, I just want to say hello, and I will be commenting from time to time..

Again, GREAT thread. What better , than to help each other with investment ideas, and strategies.

I think I am going to learn more than just Cars on this website...Very, Very Cool.

Merry Christmas and to a even better 2012....

[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.

[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!!!

[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...."

[RECOVERY ROOM]

Originally Posted by Musclerodz

Greg.......

Thanks again for the insight. It is crazy to think here I am on a car forum and the first thread I go look for is this one.

Me to Mike, sorta like those old EF HUTTON COMMERCIALS

[billscamaros]

So I can say that this thread has motivated me to look a little bit at the existing investments that I have ..... and I use the word "investments" loosely.

I have a long neglected Fidelity IRA with some cash sitting in cash reserve. As you might guess, my gain on cash sitting in reserve over the past few years has been .000000000000001%. I'm one of those guys who knows absolutely nothing about stocks or invesments; nothing beyond how to log into the account and see my balance. This stuff has always been so confusing!!

So .... due to Greg's obvious excitement about this investing stuff .... I decided to take the time to become familiar with my account. I've been poking around on the Fidelity website, using their research tools and reading their investing info. I decided to use the Fidelity account as my "test bed" for learning the basics. A few days ago, I bought some Nike and McDonalds stock out of my IRA cash. As Greg had mentioned in one post, the stock price immediately dipped into the red and I thought "crap ...... now I've made Greg loose millions!!" But after a day or so, it was back into the positive numbers. (Why does that initial price dip happen??)

Although I realize that it's all "paper", my Fidelity account has increased in value more over the past few days than it did in the past two years. I still have some cash left in reserve, and I've been Google Financing virtually every name that comes into my head ... I've even made up a few acronyms! Eventually I'll spread the cash out into small chunks of stocks that follow the "10 year gain" and "dividends reinvested" rules. Since this Fidelity IRA money is left over from a previous employer IRA that I rolled into another fund, I can't/won't "co-mingle" any other cash into it. And this is seperate from my current employer 401K where most of my retirement money is sitting.

Next up is to get my "emergency/regular savings" up to where I want them, and then I'll look at a seperate brockerage account.

Anyhow ..... thanks to this thread, I've learned a ton over the past week or so. And continuous learning is a life goal.

Thanks guys!!