Devising a screening technique

You have two ways to screen stocks. You can do it manually or you can do it on the Web. Doing your first screening manually, despite the time investment it takes, can have some positives. You get a real sense of the range and diversity of stock offerings. Your search may raise some questions such as, why are so many investors paying huge sums for companies with no earnings? Immersing yourself in detail helps bring clarity to your thinking. You may, for instance, quickly decide that you only want to look at companies that report earnings, or better, a rising trend in earnings. Reading Barron’s, a weekly stock market newspaper, makes it very easy to identify which companies are earning money, and whose earnings are rising (or likely to rise). You can also get a lot of valuable information from reviewing SmartSelect Corporate Ratings listed in Investor’s Business Daily. Companies are ranked on the basis of their earnings per share and several other measures.

To make the process of manually sorting stocks to find the 50 or so best for you, buy a copy of Investor’s Business Daily and Barron’s. Don’t subscribe to these publications just get a copy of each to use and mark up during your research. Make sure you have a highlighter to mark those stocks that you want to take to the next level of analysis ( see Chapter 5). Screening stocks by using one of the many programs available on the Web takes a lot less time and, for many, is the preferred way to go. Several Web programs can do the screening job for you. If you want to look for yourself, begin by visiting Yahoo! Finance at www.yahoo.com for plenty of links and information for the beginning investor. Or to cut to the chase, visit Hoover’s Online StockScreener. To use StockScreener:

1. Go to the StockScreener Web site at www.stock screener.com.

2. Click the Exchange drop-down list and select a specific exchange to search. You can also select the All Exchanges option to search all available exchanges.

3. Click the Industry Group drop-down list to select a specific industry or select the All Industries Groups options to search all industries.

4. Supply up to 20 different criteria in the appropriate areas provided and click the Search button to begin the search process. If you need any help, click the More Information link at the top of the page.

5. After the search is complete, a results screen lists companies that fit your search criteria.

At the end of your screening process, try to get your list down to something manageable like 50 stocks as potential candidates for purchase. In Chapter 5, I give you further instructions on how to cut your options down further.

Understanding the Limits of Research

In an information age, you may believe that if you just work hard enough, you can find reliable and accurate answers to all your investing questions. Unfortunately, nobody knows with certainty how the stock market as a whole, or individual stocks in particular, are likely to fare tomorrow let alone years down the road. The global economy is volatile, and this constant flux has a direct and unpredictable impact on the stock market’s upward and downward momentum. Anybody can pick winners from a field of past performances. With a computer and a database on stocks, you too, can assemble a portfolio that, looking back, would have doubled your money every six months. The trick is to pick the winners, the better performing stocks, beforehand. The bottom line for you is this: No amount of research can eliminate all the uncertainties and risks that go into stock market investing. All that research can accomplish is to shift the odds in your favor.

Finding Your Level of Comfort with Research

Unless you have absolutely nothing to do except dig through data on stocks, a reasonable approach to spending time on research should bear some relationship to the dollar amount that you plan to invest. For example, an investment of $10,000 warrants more research than an outlay of $1,000.

Restrain yourself if you’re tempted to get carried away with your fact-finding. With so many competing theories, so many available stocks, so many data bits, so much of everything stock-related, keeping your goal in focus can be a challenge. You’re trying to locate a few certainly no more than 10 different stocks that are going to provide above-average returns for the long run. Are you likely to miss some stocks that could have done even better? Yes, but you will only know that after the fact.

Exploring Sources of Reliable Information

Lots of quality information about an astonishing array of stocks is readily available in print and on the Web. In fact, you may feel overwhelmed until you’re able to focus your research amidst the sea of resources. In this section, I present a quick guide to sources and the varying levels of information and analysis available at each of these levels. Stock information of all kinds is available via two major media vehicles.

- The oldest, of course, is the print medium, the daily newspaper.

- Ongoing information also appears on a wide variety of online sources. While many Web sites are free; some sites require subscriptions for access. Better-quality updates provide more than just opening and closing stock prices. More in-depth updates may cost you, but you can also find out things like the extent of change in the stock price, the volume of shares traded, 52-week highs and lows in the stock prices, current dividends, yields, and other bits of information.

Don’t get caught up in daily or minute-by-minute stock market reports. Market fundamentals do not change by the minute or hour. Stay in focus. You’re invested for the long run.