closing date is February 11, which occurs after the date of record. Because you aren’t on the books as an official stockholder on the date of record, you aren’t getting that quarterly dividend. In this example, the February 9–10 period is called the ex-dividend period.
Evaluating Investment Tips
Here’s a tip: Never automatically invest just because you get a hot tip from someone. Good investment selection means looking at several sources before you decide on a stock. No shortcut exists. That said, getting opinions from others never hurts — just be sure to carefully analyze the information you get. Here are some important points to bear in mind as you evaluate tips and advice from others:
Consider the source. Frequently, people buy stock based on the views of some market strategist or market analyst. People may see an analyst being interviewed on a television financial show and take that person’s opinions and advice as valid and good. The danger here is that the analyst may be biased because of some relationship that isn’t disclosed on the show. Analysts are required to disclose conflicts of interest on business channels.
Get multiple views. Don’t base your investment decisions on just one source unless you have the best reasons in the world for thinking that a particular, single source is outstanding and reliable. A better approach is to scour current issues of independent financial publications, such as Barron’s or Money magazine, and other publications and websites.
Gather data from the SEC. When you want to get more objective information about a company, why not take a look at the reports that firms must file with the SEC? These reports are the same reports that the pundits and financial reporters read. Arguably, the most valuable report you can look at is the 10K. The 10K is a report that all publicly traded companies must file with the SEC. It provides valuable information on the company’s operations and financial data for the most recent year, and it’s likely to be less biased than the information a company includes in other corporate reports, such as an annual report. The next most important document from the SEC is the 10Q, which gives the investor similar detailed information but for a single quarter. To access 10K and 10Q reports, go to the SEC’s website (www.sec.gov). From there, you can find the SEC’s extensive database of public filings called EDGAR (the Electronic Data Gathering, Analysis, and Retrieval system). By searching EDGAR, you can find companies’ balance sheets, income statements, and other related information so that you can verify what others say and get a fuller picture of what a business is doing and what its financial condition is.
Chapter 2
Investing for Long-Term Growth
IN THIS CHAPTER
What’s the number-one reason people invest in stocks? To grow their wealth (also referred to as capital appreciation). Yes, some people invest for income (in the form of dividends), but that’s a different matter (see Chapter 3 in Book 3). Investors seeking growth would rather see the money that could have been distributed as dividends be reinvested in the company so that (hopefully) a greater gain is achieved when the stock’s price rises or appreciates. People interested in growing their wealth see stocks as one of the convenient ways to do it. Growth stocks tend to be riskier than other categories of stocks, but they offer excellent long-term prospects for making the big bucks. Just ask Warren Buffett, Peter Lynch, and other successful, long-term investors.
Although someone like Buffett is not considered a growth investor, his long-term, value-oriented approach has been a successful growth strategy. If you’re the type of investor who has enough time to let somewhat risky stocks trend upward or who has enough money so that a loss won’t devastate you financially, then growth stocks are definitely for you. As they say, no guts, no glory. The challenge is to figure out which stocks make you richer quicker; this chapter gives you tips on how to do so.
Becoming a Value-Oriented Growth Investor
A stock is considered a growth stock when it’s growing faster and at a higher rate than the overall stock market. Basically, a growth stock performs better than its peers in categories such as sales and earnings. Value stocks are stocks that are priced lower than the value of the company and its assets — you can identify a value stock by analyzing the company’s fundamentals and looking at key financial ratios, such as the price-to-earnings (P/E) ratio. (See Chapter 4 in Book 3.) Growth stocks tend to have better prospects for growth in the immediate future (from one to four years), but value stocks tend to have less risk and steadier growth over a longer term.
Over the years, a debate has quietly raged in the financial community about growth versus value investing. Some people believe that growth and value are mutually exclusive. They maintain that large numbers of people buying stock with growth as the expectation tend to drive up the stock price relative to the company’s current value. Growth investors, for example, aren’t put off by P/E ratios of 30, 40, or higher. Value investors, meanwhile, are too nervous to buy stocks at those P/E ratio levels.
However, you can have both. A value-oriented approach to growth investing serves you best. Long-term growth stock investors spend time analyzing the company’s fundamentals to make sure that the company’s growth prospects lie on a solid foundation. But what if you have to choose between a growth stock and a value stock? Which do you choose? Seek value when you’re buying the stock and analyze the company’s prospects for growth. Growth includes, but is not limited to, the health and growth of the company’s specific industry, the economy at large, and the general political climate.
