Tips and tricks for the value investor

some of these lessons I've learned from the school of hard knocks.

• never buy on a stock tip, even if it's from a guru. Do your own research. Buy with conviction. "I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years." Warren Buffett
• do check to see what the gurus are buying and selling and see if you can understand why they are seeing value where the market does not. I use www.gurufocus.com. Do NOT blindly follow the gurus, however. They are dealing in the billions of dollars and many excellent prospects for the smaller investor are not suitable for them and vice versa.
• generally, ignore analysts' ratings of stocks. They generally upgrade stocks that are going up and downgrade stocks that are dropping--- they are too late to the party. Morningstar's security ratings and assessment of intrinsic value are definitely worth paying attention to, however. www.morningstar.com. (unlike the other links here, this one isn't free for full service)
• generally, stockbrokers know the price of everything and the value of nothing. The are remunerated when you buy and sell a lot so they are motivated to involve you in short term, speculative investments based on momentum. This exposes you to the whims of a madman (Benjamin Graham's "Mr. Market"), something that is not nearly as important over the long term.
• do not buy on valuation alone. Most stocks that have a low P/E and P/B ratio do so for good reasons-- usually low growth (check out the PEG ratio too). Always compare valuation to the competitors and see if you can figure out why the market has punished the stock. If the reason is irrational or short term, it MIGHT be a buying opportunity.
• If you're considering buying shares of a company always read a transcript of the last quarter's conference call and the last year end Q4 call (available at www.seekingalpha.com). If you don't have time to read the whole thing (who does?) ignore the opening comments (mostly hype) and just read the CFO's report and the Q & A section at the end. The CFO is not a salesman like the CEO and COO, so he/she gives the straight stuff. If it's US based company, execs can go to jail for longer than Canada puts our murderers away if they present something misleading so don't be put off if they seem cautious--- wouldn't you be? They shouldn't be evasive without stating a good reason for being so. After reading the transcripts you should be able to understand two things: how the company earns it's $ and how it plans to increase those earnings in the future.
• When you look at financial reports always compare the statement of cash flows to the earnings. If earnings are increasing and cash flows are not, get nervous. There are legit reasons for this phenomenon; however, they should be easy to find. If you can't figure it out, ask the investor relations dude. If you still don't understand (in plain english), sell!
• ignore technical analysts/chart readers. Pseudoscience substituting for momentum investing. I don't know any rich chartists.
• if everyone is talking about a stock or you read about it in the newspaper, you're too late to the party. Far greater minds have probed it's every nook and cranny and the market has evaluated it long ago.
• if you want to invest in a sector and you don't have the time or energy to research it yourself, buy an ETF with the lowest management expense ratio you can find. I prefer fundamentally indexed ETFs (as opposed to those indexed by market cap, as the majority are). An objective easy-to-read summary of ETFs is here.
• Don't over-diversify, despite what you read in the financial mags. "Wide diversification is only required when investors do not understand what they are doing. " Warren Buffett
• If you feel a sickening feel in your stomach when you buy value stocks (particularly after they fall even further...) and everyone else you know is selling when you are buying, then you are finally getting the idea... :-)
• if the market is volatile--- buy your stake in 25% portions-- hopefully on the way to the bottom. If the market is moving "sideways" save brokerage fees by buying all at once
• dividends DO matter. really high yields may be unsustainable--- check the "payout ratio". if it's > 50% of the retained earnings, be wary. if a company has otherwise good balance sheets and has been increasing dividends regularly (even from a modest amount) I find this more reassuring than a large dividend yield in a shaky company
• do not buy a company with the latest technological breakthrough, no matter how impressive. Focus on companies that know how to sell product and make money from it by controlling their costs, managing their debts and beefing up their margins. (look at Dell-- not the best innovator and definite not the first big PC manufacturer... but if you bought $10,000 worth of shares in the late 80's, you'd be a millionaire now).
• try to choose companies with products that don't become obsolete for a long time i.e. Cemex. Cement doesn't change much year to year, lol. Inventory management is a perpetual nightmare, particularly with tech products and vehicles. Companies that manage their inventories well maintain and increase their margins which pretty much always translates into the bottom line.