| Home | My photos | Forex | My trading | Contacts |
|
|
You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
|
If you own shares or have a bullish position on the stock using options, these people are handling your investmentsHow do you spot explosive profit opportunities? Its an awareness that needs to be developed, And if done correctly will enable you to make 100 percent on your money, sometimes in minutes, hours, or days, instead of years. How do you find the growing money trees hidden deep within the information forest? Simply use the vast amounts of information available to you; learn to filter the data and find the best investments. The problem is that there is so much information. This can be overwhelming and quite confusing. Many would-be investors pick up a newspaper, look at the financial section, quickly decide that they cant make heads or tails out of the information, and promptly give up. The general feeling is that anything this complicated must be extremely difficult to succeed in. What if you gave up the first time you fell off a bicycle? What if you gave up the first time you sat behind the wheel of a car to learn to drive? What if you gave up on anything halfway challenging? You wouldnt get anywherewhich is why many people never succeed. Successful individuals persevere. This also is true in learning the financial markets. It may seem difficult at first; but once you know the basics about how to ride the bike, it gets easier. After a while, youre cruising down the road yelling, Look, Momno hands! Recognizing an excellent trade when you see it is just half the battle. As a trader, you must know how to go about finding explosive profit opportunities. There are an overwhelming number of methods used by the investment community to evaluate trading opportunities. I will not attempt to impart an exhaustive study of analysis techniquesthere are far too many of them, and most do not work on a long-term basis. However, there are two basic categories that should be included as basic components of a traders arsenal: fundamental analysis and technical analysis. FUNDAMENTAL ANALYSIS Fundamental analysis is a trading approach used to predict the future price movements of a market based on the careful analysis of an investments true worth. Various economic dataincluding income statements, past records of earnings, sales, assets, management, and product developmentassist in predicting the future success or failure of the company. Thus, a fundamental analyst studies the fundamentals of a businessits products, customers, consumption, profit outlook, management strength, and supply of and demand for outputs (i.e., oil, soybeans, wheat, etc.). Fundamental analysts use this data to anticipate price transitions. They see a company or market as it is now in the present, and they attempt to forecast where it is going in the future. Annual reports and quarterly financial statements (and their close government-mandated cousins for publicly traded companies, the 10-K and 10-Q, respectively) are part of the information used in fundamental analysis. The first question is, Why should we be concerned about financial statements? They are, after all, simply a restatement of the past, not a road map to the future. There are two primary reasons. The first reason for looking at financial statements is to determine how well management has handled the affairs of the company, because . Is management operating the company well or poorly? Is management efficient or inefficient? How is this firms management as compared to its competitors? The second reason for looking at financial statements is to determine if the firm is positioned to carry out the goals of management. For instance, if they are about to run out of cash, expansion projects are probably not going to be realized. The first step in studying financial statements is to get ones hands on the items from the annual or quarterly report. There are many sources for acquiring an annual report. The most direct way is to call or write the investor relations department of the firm you are interested in analyzing, and simply ask them to send you one. If you already own one or more shares in the firm, they will automatically send you both the annual report and the quarterly financial information. Another location for financial information is the firms own web site. Most companies will post at least the numbers from their financial statement on their web site. Your local library will often have copies of firms of local interest. In addition, there are a number of web sites, including EDGAR Online, that will give you access to a firms 10-K statement and other financial information. Libraries also carry many other sources of financial data on a firm. One final bit of housekeeping: Which is better, a 10-K or an annual report? A 10-K is a financial statement required by the Securities and Exchange Commission to be filed with the SEC by every publicly traded company on an annual basis. The report is a comprehensive look at the financial dealings of the firm throughout the year. The difference between the 10-K and the annual report is that the 10-K requires all firms to file certain detailed information and to list it in a specific order. The annual report will often include the 10-K, but even if it doesnt, it has basically all the information required in the 10-K, and sometimes with even more detail. Personally, I prefer an annual report because I like to look at all the photos of smiling employees and happy customers, as well as the management discussions that usually accompany the dry numbers. Okay, say you have an annual report in front of you. Where do you start? The first thing you should realize is that there are no absolutes in financial statements. Unlike the basic laws of physics, what you see is not necessarily what you get; and everything is always open to interpretation. What we will be concerned with is not necessarily in coming to a conclusion on a particular annual report, but rather to point out the pitfalls and areas to be aware of when you start to analyze a statement. Remember: First, foremost, and always, an annual report is often a sales pitchmanagement pays for the annual report, and they will be putting their best foot forward in the presentation. Therefore, dont let subjective statements sway your opinion of the company too much. Most fundamental analysts dig deeper inside the report and study the actual numbers. Some traders overlook fundamental analysis. However, as most trades are not totally neutral (in other words you have a bias as to whether you would prefer the shares to go up or down), studying the fundamentals of a firm should at least help you to be in front of the trend. If you are looking at a strong company in a strong industry, you should think twice before putting a bearish trade on that stock and vice versa. This is especially true for longer-term trades. There are three important factors to consider when studying the income statement and also three from the balance sheet. On the income statement, you want to look at sales, gross profit (or operating income), and net income. From the balance sheet, you need current assets, current liabilities, and total assets. In addition to these six numbers, the curious investor will have to do a couple of divisions to glean about 80 percent of the information available. Sales are good. They are necessary to generate income, so more is generally better than less. In addition to the raw number, most investors divide this years sales by last years sales to look at the rate of growth. Increasing growth is generally better than decreasing growth, providing each sale is generating more revenue than it costs to produce it. To determine if a firm is generating profitable sales, we use the second number from the income statement, the gross profit. Dividing gross profit by sales gives the gross profit margin, a number that describes what percent of each sales dollar is available (after the direct costs of producing that sale) to pay for overhead, debt repayment, taxes, and, of course, dividends. Larger is better. A gross profit margin that is deteriorating from prior years is generally not so good. It may not be a problem, but a deteriorating number should raise a red flag so that your antennae are tuned into looking for the reasons when you read articles about that company. The reasons for a deteriorating gross profit margin can come from many things. Raw material and employee costs can escalate faster than the firm is able to raise prices; this is typically not a very good situation. On the other hand, the firm could simply be changing its sales mix (selling a larger percentage of low-margin products) or be going after sales that are less profitable (possibly large orders with associated discounts, etc.), which could be a good strategy. The idea, here, is for the investor to simply be aware that there is something happening. Finally, the net profit line on the income statement is important. As a bullish investor, you want to see this number positive and increasing. If you are looking for a bearish position, negative and decreasing is your ideal. However, remember that net profit is a result of many things, not just the operations of the company. From your perusal of the footnotes and the auditors letter, you should be able to judge just how much confidence you can place on this particular number. While the income statement gives us a picture of just how well the firm prospered over the past year, the balance sheet gives us a glimpse as to how conservative the firm is with its assets and how efficiently it is using them. Current assets and current liabilities are defined as those assets and liabilities that either are or will, in the normal course of business, be turned into cash over the next 12 months. Thus, receivables will be collected, inventory will be sold, prepaid expenses will be utilized (et cetera) in the upcoming year. Similarly, all accounts will be paid, notes and loans will be paid, and unpaid taxes will, by definition, be paid during the upcoming year. Thus, if current assets are greater than current liabilities, there should be no trouble (barring some unforeseen circumstance) meeting all obligations with cash collected from various accounts, even if there are temporary glitches in sales, collections, or production. Obviously, the larger the difference in those two numbers (current assets and current liabilities), the better. The final number that we are concerned with on the balance sheet is total assets. By dividing net income by total assets, we get return on assets (ROA). This is a measure of just how efficient management is in utilizing the assets at its disposal. This is a more accurate measure of management efficiency than is the return on equity (ROE) that many investors utilize. ROE is a direct result of ROA, adjusted for the amount of debt management has assumed. By simply borrowing more money, management can usually increase the ROE without doing anything better operationally. In fact, the total profit will decrease, as additional funds will be needed to pay the interest costs of the new debt. If carried to the extreme, or if the firm hits a patch of trouble, the increased leverage of the additional debt will become critical. The standard income statement is generally constructed utilizing what is called accrual basis accounting. In laymans terms, this means that management chooses when a sale is final and then records it, regardless of when the firm actually receives cash for that good or service. This gives rise to the balance sheet account called accounts receivable, or the amount of money owed the firm by its customers for goods and services delivered but not yet paid for. To fairly represent the true profitability of the firm, the costs of those raw materials used in the products delivered are then listed on the income statement as a cost, regardless of when they are paid for. Similarly, assets such as buildings and equipment are depreciated, or expensed a little bit each year as management feels they are used up, again regardless of when they are actually paid for. The statement of cash flows, then, is the vehicle that converts accrual accounting back to a cash basis, and hence is far more critical than most investors give it credit for being. If the firm cannot generate enough cash from its operations to pay for those operations, it will never be able to pay for new investments needed for continuing operations nor be able to repay debt previously borrowed nor pay dividends to shareholders. Thus, the net cash provided by operating activities should always be positive (if the company is going to prosper), and the second major category (investing activities) should not always be negative. A negative number in this category is fine if the firm is doing major expansions, but it should, after a few years, turn positive. Finally, a glance at the financing activities section should clue you in on how the firm is paying for all the cash needs it has. Is it raising cash through debt (adding risk) or through the sale of more equity (diluting the shareholders position)? Or, as one would hope in a mature company, is it repaying past borrowings? The final section of numbers that the trader should look at is the Reconciliation of Retained Earnings. This statement is a detailed look at the depreciation and other noncash adjustments that resulted in the final balance of the shareholders equity account on the balance sheet. This account lists extraordinary items that have taken place during the accounting period as well as adjustments to prior years statements that do not directly flow through the income statement or any of the other balance sheet accounts. This statement should tie in with your investigation of the footnotes. While you are not looking for anything specific, strange entries should raise questions. Again, there is no right or wrong answer to any of these particular categories. You are just trying to get a feel for the general health of the firm. If too many of the numbers turn up negative, then you should recognize that this firm is not a slam-dunk gold-plated investment, and appropriate precautions must be taken in your trading efforts. Entire industries are built around fundamental analysis. Every major brokerage firm has armies of analysts to review industries, companies, and commodities markets. The majority of what you see and hear on television or read in the newspapers is fundamental analysis. Fundamental analysis comes in many shapes and forms. For example, you may hear that a companys product is selling like hotcakes, or perhaps there has been a management change. Maybe the weather is killing the orange juice crop. Its up to you to learn how to apply this information to making money in the markets. Typically, I dont listen to others, because too often they are wrong. On the other hand, I love to find opportunities to do the opposite of everyone else. This is known as the contrarian approachwhen all the information is too positive, look for an opportunity to sell, and when it is too negative, look for an opportunity to buy. Moral of the story: Listen to the market. It will tell you a great deal. Use a discerning ear when listening to anyone else. |
|
|||||||||||||||
Previous Issues
|
| ©2007 Olesia | Home • My photos • Forex • News • My trading • Contacts |