Investing 102

[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.

[GregWeld]

I think I've said this before --- and I think everyone should have and know how to use various "metrics" for helping to make a judgement call. The only thing I would ADD to this is --- don't let metrics over rule your head/gut. When you're buying risky assets... ONLY YOU can live with the result... and if you let metrics talk you into something you really didn't want in the first place... then when it goes south - you'll tend to cut bait -- and kick yourself while you watch "the one" your really wanted to buy - go ballistic.

Growth stocks don't trade well on "metrics" - they trade on momentum... they trade on fear (fear of missing out and fear of being in front of a train)... they trade on hype... they trade up if the talking heads like 'em - and they trade down if the talking heads don't.

Personally --- I like it when people are buying or talking about buying or using the stuff they produce... and sometimes you miss the first legs up because I want to actually witness what's taking place in the real world. I want to see a two block long line out the door (Chipotle and Apple)... I want to see an actual consumer shift (NetFlix). I don't need to be the first guy in and GUESS with my money. GoPro is selling like hot cakes -- has the lions share of that market... buy after the HYPE left... it's done nothing but drip red ink after it's quick rise. Maybe the market is smaller than the P/E can achieve IDK. Tesla -- they're killing it... the car(s) are fantastic.. it trades at a ridiculous P/E... but all my friends seem to want one. To me - that's a good thing (I don't own it). They have a very expensive build out to be a real mass produced manufacturer and I would expect a ton of hiccups.... FaceBook seems to have real lasting traction. I don't use it - so am not buying it - why? Because I won't know when or if it's going to fade into the sunset.... But I think it's a real company and "everyone" is using it. So I miss out... I'll live just fine. I can't own them all and don't want to.

These are all risks -- take them at your own speed.... be sure you want to live with them while they suck.. because usually this stuff drags you down - and then just about the time you're ready to bail and take the loss... they jump 10 points. Or.... they just drip and ooze and cause your stomach to burn. LOL
Sometimes it's just fun to see if you're right. Just don't be upset when the market hands you your ass, it will NOT be on a silver platter. But man do you get bragging rights when you kill it with one or two.

[ErikLS2]

Well said Greg, I like the feeling I get when I can physically see what's happening. I often wonder what would have happened if I just put a little money into each new thing when I noticed a trend developing, i.e. people buying personal computers, EVERYONE getting a cell phone or listening to music that WASN'T on a CD, hell even the company that made those Baby On Board window hangers probably killed it for a while LOL.

Amazon is what's blowing me away lately, I like never buy anything at the store, except groceries and maybe clothes/shoes that I want to try on first. They sell EVERYTHING! I just ordered a bunch of parts for my boat and these flossing things for kids teeth, on the same order, had it in 2 days, free shipping as a Prime member! Sometimes I even get stuff the same day since they put a fulfillment center in here.

[sik68]

Thanks for the feedback fellas, as well as the metrics you use. Maybe I'm not a 'GROWTH' guy; I'm okay with that

[GregWeld]

Originally Posted by ErikLS2

Well said Greg, I like the feeling I get when I can physically see what's happening. I often wonder what would have happened if I just put a little money into each new thing when I noticed a trend developing, i.e. people buying personal computers, EVERYONE getting a cell phone or listening to music that WASN'T on a CD, hell even the company that made those Baby On Board window hangers probably killed it for a while LOL.

Amazon is what's blowing me away lately, I like never buy anything at the store, except groceries and maybe clothes/shoes that I want to try on first. They sell EVERYTHING! I just ordered a bunch of parts for my boat and these flossing things for kids teeth, on the same order, had it in 2 days, free shipping as a Prime member! Sometimes I even get stuff the same day since they put a fulfillment center in here.

I can only wish that I'd have bought into this retail behemoth! Wow -- anyone that's interested should check out their chart (AMZN) - UP 70% year to date - UP 60% for 1 year - UP 280% 5 year - UP 1128% in 10 years...

I just wish it paid a dividend... because for my own personal investing that's a critical piece of the puzzle particularly given their share price.

[MPM IV]

Hey gentlemen, I received my 1st dividend from Shell today, which was nice to see, but I'm a little confused. I bought RDS.B, and when I looked today I now own a few shares of RDS.A. I'm just curious if anyone knows why that is or what effect it might have, if any. Thanks in advance.

[GregWeld]

Originally Posted by MPM IV

Hey gentlemen, I received my 1st dividend from Shell today, which was nice to see, but I'm a little confused. I bought RDS.B, and when I looked today I now own a few shares of RDS.A. I'm just curious if anyone knows why that is or what effect it might have, if any. Thanks in advance.

Good question --- I couldn't find an answer. A and B both pay the exact same dividend (.94 a quarter)... and the two shares mirror each other. Sometimes A shares are voting and B shares are Non Voting.... but I wasn't going to spend the time to research it.