A Helpful Website Depicting the Movement of “Big Money” in Stocks (Dataroma)

Numerous hedge funds and mutual funds exist in the realm of the stock market, with some being big, and some being relatively small. Dataroma.com is a website that depicts all of these hedge funds and mutual funds and what they are all buying and selling.

It shows various things such as the current holdings of major investors:

Their buys and sells quarterly all the way back to 2006 and what they did the most recent quarter (just click the investor name on the home page),

The most bought  stocks in the last quarter and six months (boxes under Super Investor Stats),

The most owned stocks (S&P 500 Grid at the top),

The most owned stocks by percentages of portfolios (Grand Portfolio at the top),

Interviews and articles about the investors (scroll down on the investor’s portfolio page),

Investing quotes (right above the boxes, just refresh the page if you want another one),

Insider activity regarding stocks (bottom of the home page or type in the stock name in the search box in the top right hand corner and scroll down),

Individual analysis of stocks and how big investors have been buying or selling them (type in the stock ticker symbol in the search box),

How their portfolios looked like in the past (click on history in the investor’s portfolio’s page).

Be aware, however, that many stocks on the market, especially smaller companies, are not traded very much by these investors, as they invest millions, if not billions of dollars at a time, and could easily end up buying half the total shares outstanding of a smaller companies and still want more. Also, many of these investors tend to be long-term, value oriented investors, although not all of them, and so investors should not expect their buys to go up immediately after they buy, as many of them are probably long-term positions.

Some Notes On P/E Ratios Investors Should Never Forget

P/E Ratios and Debt

P/E ratios are an investor’s best friend when it comes to valuing a company, but what is debt’s relationship to a p/e ratio? Companies that have more debt tend to have lower p/e ratios, making them look like they have lower valuations while in reality, they just have more debt. This is because debt does not directly influence the market cap of a company, but still adds on to the total net worth of a company. Debt is basically just cash for a company, but doesn’t affect the market cap of the company. You never hear something like “Apple incurs fifty billion dollars worth of debt, shares soar ten percent”. Never blindly assume that a company has a low p/e ratio because it is undervalued, rather, take a look at the debt level, and if the company has an exceptionally high amount of debt relative to its market cap, then that might be the reason for the low p/e ratio, not undervaluation.

P/E Ratios and Non-Recurring Activities

When a company sells part of its business, the earnings for that quarter becomes artificially higher, since it earned money from selling some of its operations. This is not true earnings, however, and can make the P/E ratio look like it is low, while in reality it is not. A good way to look past this is to also look at the projected or forward P/E ratio, based on analyst projections for next year’s net income for the company, since that would not include the non-recurring selling of operations that is influencing the trailing P/E ratio.

P/E Ratios and Growth Prospects

Companies with high growth prospects tend to trade at higher P/E ratios. This is because investors are willing to pay a premium for the company they want to invest in, since they know it has potential to go up very fast in the future. This way, while net income (“E” in “P/E ratio”) may be low, investors are predicting that the net income is going to appreciate considerably in the future, resulting in a more normal P/E ratio. For example, if a company with a $1 billion market cap has high growth prospects for the future, and its current net income is $10 million, then its P/E ratio is 100. While that is considerably high in the current market conditions, the share of many technology companies commonly traded at those ranges in the 2000 tech bubble. Anyways, even though the P/E ratio is currently high, if investors believe the company has enough potential to earn $50 million annually in the future, then they are willing to pay the premium on the P/E ratio, since the new P/E ratio with the $50 million net income is just 20, a very controllable size. On top of this, those investors would earn from the upwards share price movements in the stock when it grows its earnings throughout the time period.

P/E Ratios and Investor Greed

Also note, however, that while earnings move upward, share price will too, and the share price will drive up the market cap of the company (“P” in “P/E ratio”). This in turn makes the P/E ratio remain at its high levels if the two numbers grow at the same rate. Unfortunately, no matter how fast the earnings of the company grows, it always seems to be the share price that grows faster, constituting an even higher P/E ratio, as investors expect the company to continue growing earnings at hyper-fast speeds in the future. In the end, many growth companies end at a place of extreme overvaluation and end up tanking, like technology companies in the 2000 crash. Investors should pay careful attention to the growth companies they buy, and use the P/E ratio to determine how much earnings would have to grow to get back into an area of fair price, while keeping in mind that market cap and share price will likely increase at the same time as well.

P/E ratios are an incredibly useful tool on the stock market, but they can be distorted in many ways. Investors need to be aware of these distortions and the causes of them, and therefore understand the true value of their equity holdings to the fullest extent.

Some Notes on Dividends That Investors Should Never Forget

Dividend Subtracted From Share Price

For any investor in a company that seeks dividend income from that company, some things should be known. The first is that any money paid out in dividends will be taken directly from capital gains of the stock. This means that if a company gives you a 5% dividend annually one time, on the ex-dividend date (the date the dividend is recorded in a company’s books) the company’s stock price will fall 5%, since they are essentially giving away 5% of their money to their shareholders and it is no longer their money.

Payout Ratio

Another thing to be understood by dividend investors is what the payout ratio of the company is and how it affects the dividend. The payout ratio of a company is the percentage of cash flow that goes to paying the company’s dividend. This number is important, since a high dividend isn’t necessarily good if it eats up all of the company’s cash flow and the company is spending all their money on the dividend. A low payout ratio for a company is therefore a good thing, as the company has a lot of room to increase their dividend without necessarily having to earn any more money from their base operations. Any payout ratio above 50% for a company is probably too high, although certain industries like consumer goods and food don’t really have anything else to spend their cash on, so the majority would go to shareholders.

Reinvest or Not?

It is common to ask oneself whether or not to reinvest dividends for the companies one owns. Reinvesting dividends does seem like a good idea, after all, after 10-20 years of a good stock market run with an average yielding (2-3%) dividend, reinvesting would secure double the market gains than if one put all the money into a giant cash pile. Then one thinks of the giant cash pile you would’ve accumulated throughout those years and wonder: if I had taken the hundreds or thousands of dollars I got in dividends every year and invested them into different companies, more undervalued and better poised for growth than the dividend paying company I had, would I have wound up with more money in the end? Perhaps. And many investors prefer to think that they can reinvest the dividends back into the equity or fixed income markets better than just throwing it all back into the same company, for there will always times when that company turns overvalued and would be a very bad buy, however there are a number of things investors need to be aware of before they reinvest the dividends themselves. First, dividends are taxed at a higher rate (in the U.S) than capital gains. This means that if you take your dividends as cash and reinvest them, you would have to pay the higher tax on the dividend than if you reinvested it into the same company where they would turn into capital gains. Also, trade fees are needed to spend the dividend on other investments, and DRIPs (Dividend Reinvestment Program) don ‘t charge trade fees for repurchasing the same company. This way, you are forced to earn substantially more if you choose to reinvest your dividends just to earn the same amount as if you reinvested into the same company.

Further Notes on Reinvesting

DRIPs work as a form of DCA (Dollar Cost Averaging), where you put the same amount of money into your stock(s) every set time period (e.g. every month you buy $100 of company ABC, buying more share when it is low and underpriced and less when it is up and overpriced). This method of investing proves very fruitful in the long run, as you are accumulating good companies all the time, but are buying more on dips and less on tops. Also, dividend reinvestment should be all but required for your strict long-term companies. I view my long-terms (the vast majority of my portfolio) as the best investments in the entire stock market, and I would be more than willing to pay large premiums to buy them, as I think they are good companies no matter slight overvaluation. I reinvest dividends for all of these companies, since I am willing to buy them all of the time, and DRIPs allow me to slowly grow my positions in these companies.

How to Do Better Than the Vast Majority of Investors (Emotional Tolerance)

When to Sell (And When Not To)

Long-term investors need to recognize one thing about themselves: that they are investing for the long-term. That means that no matter how many recessions there are, how much their investments go down, or how many bad earnings their companies give out, they shouldn’t sell. Sell a company only if there is something fundamentally wrong with the company that was bought, or because the reason you bought the company no longer exists. But never sell a company because it is down. If all the underlying fundamentals of the company that was bought are still healthy, then the smart move would not be to sell and lock in the losses, but to buy more and profit from future gains. Likewise, if a company goes up but its underlying fundamental are deteriorating, then it would be prudent to sell the stock, even if it is in the middle of an uptrend. Investors need to look at all of their investments with a calm head of thoughts. Too much money was lost selling at the bottom of bear markets through fear of losing more money, or buying at the top of bull markets in fear of missing out on future gains.

What to Do

Investors need to develop the emotional tolerance to see a recession, but also see great opportunities to buy good companies at cheap prices. Investors shouldn’t sell in a bear market just because their investments are down, they should buy more. Investors also shouldn’t buy in overheated bull markets, as there is a great chance a bear market is following, which would provide an even better entry point for the company they were considering buying. Emotional tolerance is what is needed in order to perform these actions without hesitation or fear. Think back to the financial crisis of 2008, or the internet bubble of 2000. What did you do back then when everything was down 50%+? Did you sell and lock in all of you losses, never to return to the market again? Did you calmly wait for everything to blow over and refuse to look at your investments until they were up again? Or did you buy more and more as the market went down more and more, seeing opportunities where everyone else saw a money-eating machine? Don’t sell because things are down, or buy because they’re going up. Buy when you find a fundamentally good company that you think will do well in the future, and sell when those fundamentals deteriorate.

Solid Long-Term Investmets (Dividend Growth Companies)

A highly acclaimed form of investing on Wall Street is Dividend Growth Investing (DGI). This form of investment refers to buying companies that have continuously grown their dividends (cash payouts to shareholders) annually without stopping for a number of years. These kinds of companies are good for two reasons: they prove that their company is financially sound since they will always have the cash flow to sustain the dividend that they give to shareholders regardless of market condition, and they ensure shareholders will recieve an increasing amount of money every year through dividends. Dividend growth companies are typically large coorperations that operate in lower-volatility industries such as the consumer goods and energy sectors. Multiple studies have proven that dividend growth companies outpreform the overall market by a wide margin over the long term, however, as many investors are probably aware, the past is very rarely a way to predict future. Nonetheless, many dividend growth companies will pay out 3% or more annually by dividends to shareholders, and with the long-term average annual return for the S&P at about 7%, having a dividend growth company earn 4% yearly on captial gains (when the stock price goes up) along with a 3% dividend would be preferable to a no dividend company earning 7% a year to match the market. My reccommendation is not to just buy every single dividend growth company out there and expect great returns; investors still need to do their own research about each of the companies they are going to buy. However, if ever in need of a solid long-term investment, investors should always consider dividend growth companies for their portfolio. Beware of when to sell dividend growth companies, however. Investors must have the emotional tolerance to not sell dividend growth companies during economic downturns, as they are long-term companies and will prosper throughout however many recessions there are. The only reason to sell a dividend growth company, if you bought it because it was a dividend growth company, is if it cuts its dividend or doesn’t increase its dividend for a year. An investor would be prudent to sell, then, since the reason they bought the company no longer exists: that it was a dividend growth company.

Here’s a list of dividend aristocrats (companies that have increased their dividends for 25 years or more consistantly).

The Current Stock Market Condition (and How to Play it)

The Current Stock Market Condition

If you watch any form of financial news you may know that market indexes are continuing to reach new highs and are showing no signs of stopping. Of course, knitted into that financial news are countless investment analyst’s opinions on where the stock market is going in a month, a year, or even a decade. However, you may begin to realize that these analysts rarely agree with each other, and bad news to one may very well be good news to another. Nowadays, many analysts arguing for the bearish case (betting that the market will fall) are citing the (moderate) overvaluation of the market, geopolitical risks in Russia, Ukraine, and the Middle East, increasing global debt, tapering of the Federal Reserve’s bond-buying program, record highs, and the longer than usual length of this bull market as reasons to sell everything. Bullish analysts (betting that the market will go up) insist that the economic recovery from 2008 is still in its infancy and has a long way to go.

How to Play it

So, who do you listen to? The bulls or the bears? How about neither? If you are a fellow individual investor in bond and equities, then I presume you wanted to invest your money yourself and not give it to someone else to invest for you. So why would you listen to these financial pundits that can’t possibly get everything right, or else they’d all be millionaires? They offer you no compensation if their predictions are wrong, and the only person to blame if you lose money following them is yourself. Here’s a bit of investment advice: do your own research and analysis of the companies you want to invest in, as well as the current stock market condition, and try not to time the market. If you honestly think a major correction is going to occur in the next year, and want to try and profit off it, just sell some equities and hold the cash for a while. The reason you shouldn’t go around shorting (earning money if an investment goes down in price) the S&P all the time is that, if you are wrong, you may never be able to cover your shorts for a profit. There is only one trend that has continued in the market for centuries, and that is that it goes up. No matter how many World Wars, depressions, recessions, and financial crisis’ there are, the generic trend of the market is up. So if you’ve done your own research and you truly, truly think the market is in for a correction, then sell some of your more cyclical or volatile holdings and hold the cash to buy in at the bottom of the correction. If you’ve done your own research and you think the economic uptrend isn’t going to end anytime soon, then feel free to leave your money in stocks. If you didn’t do your own research because you’re too lazy or you think its too much work, that’s fine too. You can still just leave your money in some strong long-term companies and hold them forever. If they are truly strong long-term companies, then they should live and prosper throughout the years.