Earn Me.

I just finished pairing down my portfolio which means that I am selling off the terrible plays that I had a hard time letting go of. This will free up some cash to put into good companies and get away from these naive plays that I made when I first started investing. This is leading me into a quick newbie lesson if your like me.

The first thing is get rid of companies when they dip 8-10% below your original investment. It’s a really, really difficult thing to do, especially considering you are really smart and made a nice pick on a value play that “seems” underpriced, only to watch it sell off. The problem here is you might wait a very, very long time for that play to recover, if it does at all. I was bad about this when I started investing and was holding on for dear life in numerous positions. For example, I held a position in NOOF and one in OPMR when they were almost double where they are now. Both of these were relatively speculative plays, especially with OPMR and I never should have been sniffing around them anyway. In a nutshell, they both started a nice downward trend with OPMR becoming a total massacre. I should have seen the signs and gotten out of the initial downward move and saved myself money in the further pullback. But you don’t learn those lessons until your out there trading.

The second important lesson I have learned is to research everything as best I can. A *lot* of people will invest following analyst recommendations, or blog posts like mine (Don’t do it, I am just learning :) ) and make plays based on these people. That’s a big mistake. Analyst recommendations are usually something to take into account and note, but they often are priced into the market already, or might not be giving an accurate picture. People writing about the companies on blogs or through twitter might have different investment objectives than you. It’s good to get exposed to what they are talking about to get an idea of the strategies that they are following, but don’t fall in love with their recommendation until you’ve done your homework. Remember this:

–Its a bit like getting to watch Texas Hold’em on TV where you see how the pros play their hands when you see the cards they have. The intarwebs, particularly in blogs and micro-blogs, like twitter, are opening up avenues of transparency that have never existed. Use this transparency as chances to learn.–

So in light of not following these two lessons, how are you going to find companies to invest in? Earnings. Earnings, I would argue, is the place where you can glean the most out of a company. This is capitalism, and if companies aren’t growing and turning over solid double digit growth, why even get involved? Even mediocre management has a tough time screwing up good products that are generating good revenue growth.

Stick with investing in good companies that are posting good earnings per share numbers of 20% growth or so. Don’t turn a blind eye to everything else and research the crap out of them, but use this earnings growth as a good screen to tuck away the crap and focus on companies that worth investing in.

This is just a simple way to start finding better companies to put your money into. But once you start here. quickly you will be eliminating the noise and picking up on the signals before the analysts and bloggers turn their eyes towards the companies you are getting into. That will pay off in returns that you would have missed if waiting for someone else to tell you what to do.

83 comments ↓

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