Per the Federal Reserve, overall equity investments of US households are 18-85% of their total financial assets. [Big range, I know, but that’s because of the many types of financial assets available, a lot of which use equities as the underlying securities - more on this later.]
For self-employed people, the return on these financial assets tends to be a key additional source of current income (vs speculation or even retirement), particularly if they are bootstrapping their startups or expansions. As such, it is critical to ensure that these returns are maximized to grow principal while yielding cash through interest and / or dividends.
While there is a great deal of public and real-time information about publicly-traded companies these days, I am regularly surprised to hear how some people pick stocks based on the odd news article or friend recommendations. I find this rather dangerous. News articles are often driven by the company’s own PR and most friends, though truly well-meaning, have not necessarily done thorough research or analysis either. And, a lot of websites / newsletters that purport to provide winning investment tips are not entirely unbiased or qualified either.
All that said, some people just do not have the time to spend on stock research / analysis. Nor are they able or inclined to hire financial professionals to help. I generally recommend the use of stock screeners as part of an overall stock-picking approach. Keep in mind, though, that buying stock is like buying into a company, as Warren Buffett says. If you’re going to do it on your own, there is no getting around some research and analysis. But, you CAN be efficient about it using different tools.
Recommended Stock-picking Steps:
A) Quantitative Analysis:
1) Stock Screener (both fundamental and technical criteria)
2) Additional Fundamentals (economics of a business, the balance sheet, the income statement, management and cash flow)
3) Additional Technicals (statistics and patterns generated by market activity like historical pricing and trading volumes)
B) Qualitative Research
1) Company News
2) Company Reports (earnings calls, 10K releases, etc.)
3) Analyst Reports
What Is A Stock Screener, Anyway?
A stock screener is a software tool, usually online, that enables investors to filter a selection of stocks for a desired profile based on various user-defined quantitative criteria. Depending on the sophistication of the tool, screening criteria can be about fundamentals and / or technicals. Also, some tools will provide pre-defined screeners, which can be helpful if you’re a novice investor.
There are many such tools out there – free, premium or as part of an investor’s investment account management features. A Google search will help you find many comparisons / reviews to evaluate their suitability to your needs. The best way is to simply test out 2-3 different ones for free first. That will help you determine your level of comfort. Then, pick 1 that you will use regularly rather than one that has all the bells and whistles.
The ones I continue to like best, for their usability and the number of available criteria, are:
2) Monthly / Annual Premium – Y Charts
3) Part of Your Account Management – Fidelity
Over the coming few weeks, I will use one of the above to demonstrate how to create a custom stock screener. That said, if you’re a beginner, I encourage you to leverage the preset screeners in these tools first. They will give you a sense for the key criteria and parameters.
Some caveats regarding stock screeners:
1) Screeners are based on quantitative data. A certain level of preliminary research on the latest company news is still needed. For example, you may find a healthcare stock that shows up well in your screener, but you will still need to look into whether there are pending lawsuits or patent expiration issues that might drive future performance lower than projected. For this reason, I prefer to use screeners as a way of narrowing down a selection of 4-5 stocks. That reduces the amount of qualitative research needed. In a future post, I will also discuss an efficient approach for the latter.
2) Different screeners use different databases. Always check that you are using the most timely information.
3) Some screeners allow you to look at metrics relative to the overall industry sector norm. I highly recommend this. A bank’s debt/equity is going to look very different from that of a tech firm’s. So, whenever possible, check against the overall industry to get a sense of whether a metric is above or below the average as it might signify other issues to be investigated.
4) While screeners can be used to evaluate individual investments in stocks, funds, bonds, etc., they are not designed to help you create and manage a balanced asset portfolio. There are other tools, techniques and guidelines for defining and managing overall portfolios – a much larger topic that will require a lot more posts.
Improving the return of your stock investments does not need to be a time-consuming or expensive endeavor. Leveraging tools like stock screeners for quantitative analysis and managing an efficient and effective cadence for qualitative research can help busy self-employed people ensure that they are maximizing their investment returns to augment current income as needed.
Stay tuned for future posts on how to create a stock screen, how to do efficient research and how to manage overall portfolios.
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