Shrewd Safe Stock Investment Strategies

The stock market is a crazy messed up world, and can be unforgiving to naive captains setting sail for the first time. If you want to get your feet wet, without getting shark-bit, try following some level-headed investing advice.
The following guidelines are based on advice from a large-cap value fund managers.


THREE STANDARDS
Don't spend your time and energy trying to predict the economy, interest rates, inflation, or the current market flow; focus on finding stocks of great businesses whose prices have been beaten down. If you want companies that will deliver the highest possible returns with the least amount of risk, but also provide great growth, you should be looking for companies which meet the following criteria:

• High return on tangible assets.
These are the numbers on the left side of a balance sheet. Compare them with the company's cash flow minus depreciation. There is a strong relationship between assets and profitability - the more assets it takes to earn one additional dollar of revenue, the more difficult it is to improve your earnings. Make sense? For this reason, you should also avoid companies that are in capital-intensive industries, such as railroads, airlines, utilities, and industrial commodities like paper and steel.

Focus on the following types of companies:
• Unique professional services: tax preparation, advertising, money management, etc...
• Development, manufacture, or distribution of vitally important, inexpensive, or widely used products: pharmaceuticals, retail, etc...
• Media outlets with few, if any, competitors: tricky in this digital age, but think about Amazon's app store and Apple's iTunes to get your brain kicking...
• Government-guaranteed franchises: mortgage and student-loan packagers (if their numbers, and contracts, are good after all the bailouts and bubbles of late, then they are definitely worth looking into)...


• Shareholder-oriented management.
Defined as management that has demonstrated an ability to recycle cash flow in a strategically effective manner. Management has a number of choices about how it can allocate capital. The most important is reinvesting cash in research and development, improving marketing, or implementing cost-reduction programs.
Other ways include: acquiring other businesses, liquidating less-profitable sections, buying back company stock and paying down debt, or paying dividends. There should be evidence, over time, that management will actually use capital in the best strategic way.
Clearly, the way management allocates capital is a good test of its regard for shareholders and the company's future growth, however, this is a subjective conclusion, which is usually reached by conducting interviews with top executives.


• Low purchase price.
Don't think of this in a "penny stocks" mindset. Think of it in relative terms, and I don't mean your uncle Joey's inside tip. Look for a company's stock price to be substantially below its "private market value," which is what an intelligent businessperson would pay for the stock.

Three reasons for a "cheap" price:
• Stock market decline
• Perceived external threat to the company's cash flow, even though the company is doing well
• Overreaction of the market to a short-term problem with the company that can be easily corrected

ADDITIONAL CONSIDERATIONS
As you can probably imagine, you don't have to look far to find companies that match the above criteria. Simply summarized, we want slightly above-average quality companies in a discounted state. Consider a good discount to be 60 to 70 percent of "true" value. Consider selling when your purchase reaches 80 to 90% of that value. Consider that this could take years, and remember we are discussing shrewd safe investing here. This keeps you from being swept up in short-term market and economic trends and limits your portfolio's risk.

- The Rules -
• Look at a company's "free cash flow."
- This should be considered instead of its price-to-earnings and price-to-book ratios (the traditional tools of value investors). Technically, free cash flow is a company's net income plus depreciation and amortization, minus maintenance and a portion of capital expenditures. Basically, this tells us what kind of earnings a business really is capable of generating for its shareholders.

• Invest in a few well-chosen companies.
- Concentration (Confucius would be proud) on the big hitters is just the way good teams win - like it or not. This doesn't mean you have to limit yourself, but make sure you know where your loyalties lie. Consider your top five stocks holding around 30% of your total portfolio value, and your top 20 accounting for around 65% overall.

• Invest for the long term, and trade as little as possible.
- On average, expect to hold stocks for five years.
• Think independently.
- Don't get caught up in the market mentality, and don't buy stocks based on firm ratings. Use the standards, follow the considerations, and remember the rules. This is not the be all to end all, but it will get you started on the right track. Once you've developed your own trustworthy instincts, feel free to make your own rules.

Be Great - Keep a Journal (Part 1)

Most great people in history have kept journals. Take a step towards being just like them, with the following information as your guide.

The exercise of writing down reflections about events experienced each day is an invaluable way to evaluate your performance, allowing you to set higher standards of excellence for yourself, and it can also help you find new ways to solve difficult problems.

WHAT CAN A JOURNAL DO?
Many people resist keeping a journal because they think:
- They aren't good enough writers,
- Someone will read their innermost thoughts (heaven forbid!), or
- They have much more important things to do.
These reasons are just excuses, and you can't succeed in anything if you let worthless excuses stop you.

= A journal is for your own benefit, so your writing ability is only being judged by you. Practice makes perfect, and as long as you can read it, it's good enough for you to get started!
= In order to succeed, many people will need any number of other people to help them along their paths. Coaches, mentors, or even just confidants, can all help you better if you have a more complete understanding of your own self. You may find yourself actually asking others to read your journal (or at least parts of it), in order to help them help you. Crazy, I know!
= You need a way to evaluate your feelings and abilities, and also accept self-criticism in order to improve your weaknesses or build on your strengths. When is becoming a more effective and efficient human being, friend, relative, worker, etc... not on your priority list??

Instead of thinking of a journal as a list, in which you merely relate the day's events ad nauseum, relate it the diary you imagined (or even started) as a child - fill it with self-reflection, self-expression, and self-exploration. Emotions and opinions are paramount, meaning adjectives are your premium ingredient! The more descriptive you are, the easier it will be for you to recall your exact state of mind when you are looking back over your collective works.

A powerful benefit of thinking about your emotions, is that when you become consciously aware of them, you are more capable of shaping them. Woo woooooo (train noise)! Next stop: Emotional Stability.

Other powerful benefits of keeping a journal:
* Improve Self Expression. In a journal, or writing in general, you are able to express what you feel in ways that may be too difficult or even impossible at work, home, or especially out with friends. Getting drunk and spilling your proverbial guts, doesn't count as real self expression.

* Stress reduction. Expressing your anger in writing releases the emotional pressure that builds up when you hold feelings inside. Is it any wonder that many people say they feel calmer and spiritually at ease after a journal-writing session? Think of it as venting to your best friend.

* Stronger relationships. Writing about people you know will help you understand them better and put you in touch with your own feelings about them. When you're furious with someone close to you, discharging raw emotion in the privacy of the page enables you to work out solutions in advance, rather than face to face in an irrational outburst. Also consider that the other benefits discussed, will lead to a healthier individual en-total, meaning relationships in general will be easier for you to sustain.

* Better organizational skills. By structuring yourself to write regularly, you automatically develop stronger organization skills, such as list-making and time management. Needs and goals are also easier to clarify and prioritize once they are written out.

RULES OF JOURNALING
Oh great, now there are rules?!?
Keeping a journal is first and foremost and exercise in creative freedom.
Some people are inspired by an elegant bound notebook with fine paper, while others feel more comfortable letting the words flow onto loose-leaf sheets that can be clipped into a binder. As easy and convenient as it may be for you to keep your journal in a digital format, studies have shown that the "archaic" form of actually writing, for whatever reason, is much more powerful. You can always scan the documents into digital copies later.

Do your best to write something every single day. You can schedule 15-30 minutes at the same time each evening, or just pick up a pen when the mood hits you. If you're more of the latter style, try to make sure you keep the utensils (pen and paper) handy at all times, so you'll be ready when your fancy strikes.

Easy ways to get started:
- Put yourself in the mood. Close your eyes and take five deep breaths, in through your nose, out through your mouth. This focuses your vision inward, clears a space in your mind, and eases the transition from workday reality to contemplation. Simply begin by asking yourself "What am I feeling at this moment?"

- Jot down a few lines to summarize the major high or low points of your day. This exercise is equivalent to stretching before working out or playing scales before jumping into Mozart's greatest hits on the piano.

Great job so far, you're well on your way!

Stay tuned for the next installment where I'll talk more about what to include in your writings, and how to get your flowjo kicking.