Monthly Archives: May 2014

Flash Boys Book Review

michael lewis flash boys book review

Read this book review to see what Flash Boys is all about…

Flash Boys, by Michael Lewis, is the story of “a Wall Street revolt”.

And if you’re looking to get the inside scoop on high frequency trading (HFT), then Flash Boys is a finance book you won’t want to miss.

And as you probably know…

Michael Lewis is a very well-regarded financial journalist and novelist; with previous hits, such as Moneyball, Liar’s Poker and The Big Short. I really enjoyed Lewis’ earlier books so I was enthusiastic to review Flash Boys on StockIdeas.org.

So:

This Flash Boys Book Review will give a basic overview and summary of Flash Boys. Plus, I’ll share what I liked most about the book and where Flash Boys came up short. That way, when you’re done reading, you should have a good idea of whether Flash Boys is the right book for you. Sound good?

Why Flash Boys Is Worth Reading:

Flash Boys was a much-anticipated book that finally brought light to the insidious world of HFT. While I previously blogged about how individual investors can beat HFT, Flash Boys does a much better job going into depth about what HFT is, why it matters to you and what’s being done to prevent it.

Flash Boys starts off with some interesting anecdotes about how much money HFTs invest in their technology. Flash Boys makes the escalation of HFT technology feel like an arms race. It’s incredibly eye-opening.

From there, Flash Boys picks up a narrative that follows the careers of a few unsuspecting bankers and technologists at the heart of the HFT puzzle. The book does an exemplary job using anecdotes and personal stories to explain the complex world of HFT. Without this personal focus I think the topics would have been much more difficult to understand.

Next, the book continues to follow these character as they strive to solve the HFT riddle and build their own stock exchange to try and overcome the challenge HFT algorithms present. It’s a fast-moving story that gives you an inside look at the ever-changing world of Wall Street.

Without giving away too much of the story, I can tell you Flash Boys is an encouraging tale. And for anyone who wants to learn about current day market structure (and the underlying incentives and conflicts of interest) Flash Boys will be an educational yet enjoyable read.

What I Liked Most About Flash Boys:

Flash Boys is a really entertaining book. And that was one of the things I liked most about it. Just like in his book, The Big Short, Michael Lewis does a very impressive job of taking a confusing financial topic and breaking it down with stories and anecdotes.

Flash Boys does a great job of following the people (and yes, they’re all boys) involved in the world of HFT.  I really liked this focus on character because not only does it make the story of HFT more relatable, but it shows that there are still good and noble people on Wall Street (and even at Goldman Sachs).

It’s easy to paint broad strokes about the evils of Wall Street. But Flash Boys reminds you there is still some good in the world. And even more importantly, that huge successes can be had when you do the right thing. Unfortunately I’d be naive to say Flash Boys addresses all the problems with Wall Street.

And that’s my main gripe with Flash Boys…

Where Flash Boys Came Up Short:

Flash Boys was a well-written and entertaining read. And while Michael Lewis should be congratulated for exposing the world of HFT to a wider audience, the book leaves some things unsaid. To some degree this is necessary to keep the book short and engaging.

But as an example:

While the world of HFT is far from honourable, and definitely costs investors billions each year, it’s probably not the biggest problem facing global markets. Compared to the effects of quantitative easing and 5+ years of ZIRP I think HFT is basically just a drop in the bucket. So…

I found it a little bit misleading that HFT is framed as the biggest demon facing investors and markets; especially when, compared to some of the other problems facing the market HFT is a drop in the bucket. I appreciate that Michael Lewis has a book to market so wants to make the problem seem big. But it would have been nice for him to tie it back to the bigger picture a little more.

Flash Boys – The Final Word:

Flash Boys was a really great book. Plain and simple. And even though it didn’t point out some of the other big red flags with the financial system, it did a great job bringing the mysterious world of HFT to life. I was especially impressed with how easy to understand Flash Boys makes these very complex problems.

So if you’re looking for a book to read this summer that’s a good combination of fun and educational, I encourage you to buy Flash Boys on Amazon,you won’t regret it! If you’re still looking for a little more information on Flash Boys I encourage you to check out the video book review below.

Flash Boys Video Book Review:

Extraordinary Popular Delusions and the Madness of Crowds (Book Review)

Extraordinary Popular Delusions and the Madness of Crowds

Read this book review to learn more about Extraordinary Popular Delusions and the Madness of Crowds.

Extraordinary Popular Delusions and The Madness of Crowds by Charles Mackay is a classic book about behavioural finance and crowd psychology.

And it’s a must-read for any trader or investor looking to understand the irrational dynamics of markets. Extraordinary Popular Delusions and the Madness of Crowds was published in 1841 and you can still by the original version on Amazon.

So…

In this book review we’ll comb through Mackay’s classic Extraordinary Popular Delusions and the Madness of Crowds. I’ll share with you what this book discusses, what I liked about it and what I could have done without. Sound good?

Extraordinary Popular Delusions and the Madness of Crowds Summary:

Extraordinary Popular Delusions and The Madness of Crowds is a great book that discusses some of the most common bubbles, fads and crazes that swept through society over the last 500 years. So basically…

This book is a series of historical case studies on crazy things that people did. Make sense?

Extraordinary Popular Delusions and the Madness of Crowds starts off talking about a number of important financial bubbles that rocked Europe, including Tulip Mania, the South Sea Company bubble and the Mississippi Company bubble.

And to be honest:

If you haven’t read about these bubbles in-detail before, it’s an incredibly eye-opening experience. Extraordinary Popular Delusions and the Madness of Crowds does a great job showing how the average person can easily get swept up into the mania based on a popular delusion.

The rest of the book goes on to talk about other popular delusions and crazy things that crowds of people did together. The topics are very diverse and cover everything from alchemy, to witchcraft and even the crusades. The book takes a sober second look at all of these delusions and helps to explain why they became so popular (despite defying all logic).

I really enjoy Extraordinary Popular Delusions and the Madness of Crowds because it did such a great job showing that over the last 500 years the same psychological patterns have repeated themselves.

While reading this book and applying the lessons are two different things, I think this book really helps paint a picture of popular delusion. And if you keep these ideas in mind (and always refer back to the facts) you can avoid getting swept up in the madness of crowds.

By the way, it’s rumored this book was also a favourite of John Templeton, so it must be good, right? Now you must be wondering…

What was the best part of Extraordinary Popular Delusions and the Madness of Crowds?

The Best Part of Extraordinary Popular Delusions and the Madness of Crowds:

The best part of Extraordinary Popular Delusions and The Madness of Crowds is definitely the first couple of chapters on the major historic bubbles.

That’s because…

Extraordinary Popular Delusions and the Madness of Crowds does an incredibly illustrative job  of showing how these bubbles developed over time. It shows how those speculative undertakings got started, how they gained momentum and why they eventually exploded (leaving whole countries in ruins).

The book also goes to great lengths to show that while these bubbles had a lot in common, they weren’t exactly the same either. For example the book explains that when the British government proactively stamped out the South Sea bubble, they avoided some of the pain their French brethren experienced in the Mississippi Meltdown that preceded the French revolution.

Of course it was also interesting to see how emotions and irrationality can influence people in all walks of life. But the financial applications were certainly the most interesting and I think are the main benefit to any readers of StockIdeas.org.

For the purpose of illustrating financial bubbles (and providing historical context around them), Extraordinary Popular Delusions and the Madness of Crowds is unmatched.

But there was one thing about this book I found a little difficult…

The Challenge with Extraordinary Popular Delusions and the Madness of Crowds:

Extraordinary Popular Delusions and the Madness of Crowds is an excellent book and despite being written in 1841 it is actually quite entertaining. But the fact remains…

The book was written over 150 years ago and the language is a little bit difficult to read. Plus the text is really small and packed quite densely on the page. You’ll notice I read a lot of investing books. But even this one was quite slow for me to get through. It’s not that I didn’t enjoy it, but  the book was physically a challenge to read.

So while I don’t think that’s reason to avoid Extraordinary Popular Delusions and the Madness of Crowds it is something you should be aware of before buying the book. So let’s wrap this book review up…

Extraordinary Popular Delusions and the Madness of Crowds – The Final Word:

Extraordinary Popular Delusions and the Madness of Crowds is a book like no other. It has really stood the test of time because of the timeless wisdom it shares. The lessons about how people due to “popular delusions” was incredibly eye opening for me. For that reason, I recommend you buy Extraordinary Popular Delusions and The Madness of Crowds on Amazon.

Just keep in mind the book is a tough read and you don’t need to rush your way through it. Even though the language used is a little out-dated, the lessons in the book are contemporary as ever. If you’re still looking for some more information on Charles Mackay’s book, check out the video book review below.

Extraordinary Popular Delusions and the Madness of Crowds Video Book Review:

contrarian value investing strategies

Best Contrarian Value Investing Strategies

The Best Contrarian Value Investing Strategies can really help you improve your stock market returns. But learning the secrets of contrarian value investing isn’t exactly easy. Do you know why?

The reason is…

Being a contrarian value investor means going against the tide. If you embrace the best contrarian value investing strategies you’ll be turning your back on the investment community at large. When CNBC tells you to zig, are you ready to zag instead?

Because the truth is:

It’s exactly this kind of alternative thinking that’s required to be a contrarian value investor. So if you’re interested in contrarian value investing and you think you have what it takes, then I encourage you to keep reading this blog. You’ll learn…

The best contrarian value investing strategy that’s easy to use, as well as actionable tactics to help you find your own contrarian value investing ideas. You’ll also discover the biggest mistake that most contrarian investors make and how to avoid it.  Sound good?

The Best Contrarian Value Investing Strategy:

There’s a lot of buzz around contrarian value investing strategies. But in my opinion, the best way to think abut contrarian value investing is the following strategy…

Seek out and use contrarian ideas as a starting point for your value investing analysis and diligence. That means you look for contrarian ideas first, and then screen them using value investing methodology. It’s a two-step process. Does that make sense?

When you use this strategic approach to (1) finding and (2) analyzing contrarian investment ideas you are doing a couple of important things. First of all, you’re finding ideas that are our of favour. This is the essence of being a contrarian. Next, you analyze these investment processes methodically to find a margin of safety, using methods described in books like Security Analysis or The Intelligent Investor. Got it?

The reason to do this in two steps is so that you avoid the biggest mistake most contrarian investors make.

The Biggest Mistake in Contrarian Value Investing:

Contrarian investing is based in large part on emotional arguments. Whether you’re following the group-think or taking the other side of the bet, the essence of being a contrarian investor is disagreeing with the mainstream consensus view.

And that’s where things get dicey. Because when opinions fly, people often get emotional. So do you know the biggest mistake most contrarian value investors make?

The big expensive error most investors make is to be contrarian just for the sake of it!

contrarian value investing mistake

Don’t be a contrarian just for the sake of it. The results won’t be gooder.

If you are being contrarian just because everyone thinks something else, you are probably going to lose a lot of money.

Seriously.

The consensus view exists for a reason.

Now that’s not say you can’t get rich with contrarian investing, because lots of people do. But the successful contrarian investors look for instances where the crowd is saying one thing and the FACTS (not your emotions, opinions or arguments) say another.

Got that?

It’s a big difference. And being “right” is a lot different from being rich. So when you are doing your contrarian investing it’s okay to be emotional and passionate when selecting ideas. But make sure to back up your contrarian investments with very thorough value-investing-based analysis before putting any money to work.

Contrarian investing can be very profitable, or you can go broke. For most value investors looking to be contrarian the breaking point is ego. So use the facts to guide you and make a trading plan to limit your risk.

Now let’s get into some more actionable information so you can start finding contrarian value investing ideas for yourself.

List of Tactics for Finding Contrarian Value Investing Ideas:

Now that you know to be disciplined and logical in your contrarian value investing ideas, you’re ready to start finding some contrarian stock picks. So where do you look?

To find ideas that are contrarian and might also hold up well to value investing methodology, I recommend using some of the following tactics.

  • Check the 52 Week Low List: It’s easy to find stocks that are trading at new lows. A lot of financial news websites have lists of companies that are trading at annual lows. You can also use a free online stock screener to help you find stocks at 52 week lows. Just remember, these stocks are trading at lows for a reason. So while they may be out of favour, make sure the facts support your contrarian value investing case. Of course if you want to be a contrarian short-seller you would just reverse this and look for new 52 week highs (or upgrades, in the tactic below).
  • Downgrades: One of my favourite ways to find contrarian plays that are beaten down is to look at stocks that have recently been downgraded. Again, while there is probably a reason the stock is being downgraded, contrarian value investors might believe the market is over-reacting. One great place to find downgraded stocks is using the Finviz signal stock screen. It’s easy and quick to find downgraded stock ideas that might make contrarian stock pick ideas.
  • News Stories: One final place that’s a great resource for contrarian value investing ideas is the front page of your local or business newspaper. Most media sources these days are filled with negative stories about companies that are doing harm. But in a lot of cases these negative journalists can be a great source of contrarian value investing ideas.

Remember, with all of the tactics above, the key should be to find ideas that the market has over-reacted to. But while searching out contrarian value investing ideas can be filled with emotional opinions, be sure to conduct your research on the basis of logics, fact and reason. Those are truly what it takes to be a successful contrarian value investor.

And By the Way: If you’re looking for more information on value investing strategies I encourage you to download my free eBook below. You’ll get a ton of insight into how I came up with a system to find and analyze value investing ideas. You’ll also get free information each week on the best tools and tips to help you manage your stock market investing and trading decisions a little easier.

The Only Sure Thing in Stock Market Investing

sure thing stock market investing

Is taking money from the stock market a risk-free thing?

Is Stock Market Investing a Sure Thing?” You wouldn’t believe how many people ask me if investing in the stock market is a sure thing.

And in this little blog post, I’m finally going to address the matter of stock market investing as a sure thing once and for all.

Sound good?

Now to be sure:

I totally understand why people are looking for a stock market sure thing. It’s a classic struggle between fear and greed. You see, on one hand…

People want the reward of the stock market. They appreciate the stock market goes up. But they don’t want to take on the risk either. So instead they are left hoping for a sure thing in the stock market.

But can you have your cake and eat it too?

Why There’s Only One Sure Thing in the Stock Market:

The only sure thing in the stock market is that there are no sure things. I know this probably isn’t what you wanted to hear. But it’s the truth.

And here’s why you’d be wise to listen:

When you remember that there are no sure things in stock market investing, you are much less likely to get suckered into paying for a “sure thing.” And that’s a sure-fire way you can save money.

Seriously…

When you remind yourself that there are no “sure things”, you stop getting hyped up about the latest penny stock products, or shelling out for a hot new “trading system.” You won’t fool yourself into thinking you can find a stock-market-magic-bullet. Instead, you’ll see these tools as ways to round out and help you incrementally improve your stock trading.

Make sense?

Stop looking for tricks and tactics to beat the market and focus on improving yourself. When you look inwards to objectively analyze your stock picks and investment research methodology you embrace reality and make the uncertainty of no sure things work in your favour.

One More Nearly-Sure Thing in Stock Market Investing:

In case it’s not clear, anyone who is promising you a sure thing in the stock market is little more than a snake-oil salesman. The only sure thing are no sure things.

But:

Before we get too jaded and pessimistic there’s one more point I want to share with you, okay?

And that is…

While you can never know with 100% which stocks will go up, you can usually bet the stock market as a whole will go up. It’s not a sure thing. But over the course of history it has tended to be true. Just take a look for yourself…

long term chart for investing your money in the stock market

As you can see: Over the last 100 years, investing your money in the stock market has been a winning proposition.

As you can see from the chart above, even though there have been lumpy periods in stock market history, over the long term the stock market (as an index) has gone up. And hey…

If you’re still not convinced, just look at these long term charts of the S&P 500 and the Dow Jones Industrial Average.

So I don’t want to call this a sure thing. Because markets go up and down. But over the last 100 years the stock market has (for the most part) gone up. And the passive index-based investing strategies advocated in books like The MoneySense Guide to the Perfect Portfolio can help you take advantage while minimizing your risk.

But anyone who promises a anything more specific than the above is likely trying to convince you of a “sure thing” that simply isn’t, make sense?

And By The Way:  If you’re looking for more information to help you improve your ability to find winning stock picks I encourage you to download my free eBook below. There are no sure things, but it will tell you how I came up with a hybrid technical and fundamental approach that helps me consistently make profitable investing decisions. You’ll also get free tools and tips each week to help you become more knowledgeable about the stock market.

Best Book For Stock Market Investing

best book for stock market investing

Keep reading to discover the best book for stock market investing…

What’s the Best Book For Stock Market Investing? That’s a great question. And since I’ve spent so much time reading investing books I’m happy to share my opinion with you.

Sound good?

Instead of beating around the bush and teasing you with clues about what I think the best book for stock market investing is, let’s just get to the point. So…

If you want to start investing for the long term and having a chance at beating Mr. Market then the best book for stock market investing is The Intelligent Investor by Benjamin Graham.

And I’m not the only one who thinks that! Warren Buffet also believes the Intelligent Investor is the best book for stock market investing. But…

Before you go buying that book, let me explain why it’s a must-read so you know what you’re in for with this stock market investing book.

Why The Intelligent Investor is the Best Book for Stock Market Investing:

There’s one simple reason The Intelligent Investor is the best book for stock market investing. And that’s because anything that is NOT “intelligent investing” (as described in the book), is NOT investing.  Let me elaborate a little more for you.

You see…

Without an “intelligent investor” framework you are basically gambling (or speculating, as traders like to call it) on pieces of paper and historical price patterns. While you can certainly make money at this type of trading, it’s not truly investing.

Do you know why?

The Intelligent Investor is so great because it thoroughly explores a few key concepts. One of the main take-home points of this stock market investing book is the revelation that “price is what you pay, and value is what you get.”

And that is the essence of investing (getting future value at a discount). So here’s what you need to know…

The Intelligent Investor does a fantastic job of illustrating this concept of investing (for value) and then showing you how to find stock ideas and investment picks where the price is less than the value.

Finding these under-valued bargains is the main thesis of The Intelligent Investor and what (in my opinion) makes it the best stock market investing book.

But here’s what Mr. Buffett has to say…

3 Reasons Why Buffett Loves This Stock Market Investing Books:

Warren Buffett is a huge fan of The Intelligent Investor. He said it was the most impactful stock market investing book he’s ever read. But what are the things he liked most about it?

Glad you asked.

Below is an excerpt from The Dhandho Investor (another great stock market investing book from the same school of thought) that explains  what Buffett loves most about this time-honoured stock market investing book.

best book for stock market investing

Here’s why Warren Buffett thinks The Intelligent Investor is the best Stock Market Investing Book. (Click to Enlarge).

If you are feeling a little bit curious to learn more about the best stock market investing book, I really recommend you read this Intelligent Investor book review. That will give you an idea as to what you can really expect from this amazing book, and how it will help you as an investor. Sound good?

And By The Way: If you want to learn how I incorporated this “Intelligent Investing” approach to my own portfolio I encourage you to download the free eBook below. You’ll also get weekly updates with the best tips and tools to help you improve your investing and trading decision making.

toronto retail store location case study

Mini Case Study on Retail Store Location – RY, BBBY and SBUX

This Mini Case Study on Retail Store Locations features publicly traded companies that (at a glance) seem to be doing a good job with their brick and mortar retail locations.

Now keep in mind…

This quick case study is only based on my anecdotal experience, so you’ll want to take the results with a grain of salt and compare and contrast them with other sources of information, okay?

Nonetheless:

One of the best parts about living downtown in a big city like Toronto is that there is always something happening. Urban change is always underway. And in big city centres there are always corporate giants looking for opportunity, and planning their next move.

So it’s fun and educational to see how companies are making the most of retail space given this changing landscape. And that’s what inspired me to share this little case study on retail store location.

Mini Case Study on Retail Store Location – Royal Bank of Canada:

Royal Bank of Canada (NYSE:RY, TSE:RY) is Canada’s largest bank. And yet I think most Canadians would agree that TD Bank (NYSE:TD, TSE:TD) is the retail favourite. Those TD Green Machine ATM’s are everywhere! But…

As this mini case study will show, that might be changing. At least on the streets of Toronto.

That’s because while walking around downtown Toronto I’ve noticed something…

RBC seems to be pursuing a new strategy.

It looks like they are making a dedicated effort to build branches underneath new condo developments. That’s a smart retail location strategy, right?

Personally…

I love the economics of putting a store under a condo because you are guaranteed to have thousands of potential customers going by your front doors every single day. It’s a pretty captive audience you should be able to milk a regular profit from (assuming you didn’t overpay for your location).

But don’t just take my word for it.

Look at some of these photos I snapped while running errands over the last week:

Mini Case Study on Royal Bank of Canada Branch Locations (Photos):

This new condo near Bay and Dundas is right in the heart of downtown. It’s a very busy intersection and there are more buildings going up in the area. This new RBC branch seems very well-positioned:

Retail store Location Case Study 1

Photo of Royal Bank of Canada Branch under a new condo development.

The next day when I was walking up Yonge Street, I also noticed that RBC was staking out some territory underneath another new condo development. This building hasn’t even started going up yet. But RBC has already staked their claim:

Retail Store Location Case Study 2

Case Study Example #2: New RBC branch coming soon to another new condo building.

Finally, downtown Toronto is home to (what will be) the tallest condo tower in Canada. And while you can’t see it in this picture, RBC has staked out a prime location on the ground floor:

Retail Store Location Case Study 3

Case Study Example #3: RBC has a new branch in Canada’s tallest condo.

It’s also worth mentioning that Bed Bath and Beyond (NASDAQ:BBBY) has a location under the Aura Tower above. And remember, BBBY is a  well-run and well-managed retailer, so if this is a location they have prioritized, I am seriously paying attention.

Just think about it, there are bound to be thousands of people living in that building who desperately need bedding and banking. Additionally…

(And maybe this goes without saying)

Starbucks (NASDAQ:SBUX) has also done a great job cornering the condo market. Every time a new condo development is built, there are seemingly 2-3 Starbucks opening on each of the street corners nearby. Admittedly, you could also just argue SBUX stores are everywhere.

Either way, it’s neat to walk around and catalog the companies that are doing a good job executing their retail store location strategy. It’s also a good distraction if you get bored form shopping.

Anyway, I’m curious:

I wonder if these companies are doing a good job growing their footprint in Toronto only, or if the same is true in your neighbourhood as well. So…

If you have any observations of your own please let me know in the comments below!

Retail Store location Case Study Wrap-Up:

I hope you enjoyed learning from this quick case study. Of course these photos aren’t conclusive one way or the other. Retail store location might be an indicator of management skill. But without knowing how much the locations cost to set up and operate, it’s hard to get an accurate estimate for the shareholder value they create.

Nonetheless, it’s one more  indicator that’s easy to keep an eye on. And it makes running errands around town a little more interactive. When you combine these anecdotal observations with accurate price target calculations you can start to get a sense of whether or not a company is worth investing in.

So while it seems like the finance and accounting job market is strong, RBC should continue to ride these tailwinds and conquer urban market share with this smart retail store location strategy.

And By The Way: If you’re looking for more information on how to improve your approach to investing I encourage you to download my ebook below. It’s free, and you’ll also get easy to use tips and tools each week to help you be more profitable in your trading and investing.

stock market correction 2014

Correction in the Stock Market 2014

Will there be a correction in the stock market in 2014? It’s a question I hear from more and more readers at stockideas.org. And rather than stick our heads in the sand and ignore the possibility of a stock market correction in 2014, let’s dig a little deeper.

So…

In this blog post we’ll look more seriously at the possibility of a correction in the stock market in 2014. You’ll get an overview of the progress year to date, and where the cracks are forming in the major stock market indices.  Sound good?

No Signs of a 2014 Stock Market Correction on the Surface:

When you look at the S&P-500 ,as well as the Dow Jones Industrial Average in 2014 it doesn’t look there is a stock market correction underway. The Dow is actually within striking distance of all time highs. Just take a look for yourself:

Dow Jones 2014 Stock Market Correction

The Dow Jones has been coiling for most of 2014. Could this trend line finally break higher? (Click to Enlarge).

Year to date, the S&P-500 and Dow Jones have been more or less flat. So at a glance, it doesn’t appear that we’re seeing a stock market correction in 2014 (yet). But let’s take a closer look at what’s going on under the surface…

Small Cap Stock Index Correction in 2014:

The small cap Russell 2000 index is another part of the stock market that is a little bit higher risk than the relatively safe mega-cap stocks making up the Dow Jones. Additionally, the small cap stock index led the way higher last year.  So if there is some faltering in the small caps, this might indicate a possible stock market correction in 2014.

IWM Small Cap Stock Market Correction 2014

The Small Cap ETF is starting to diverge lower. Will this continue? (Click to Enlarge).

As you can see, the small caps have broken their previous uptrend. And now the small cap stocks are making a series of higher lows and higher highs.  Is this a correction?

Well either way…

This pullback is a significant divergence from the more mainstream S&P-500 and Dow Jones. While this does not portend an imminent stock market crash, it does raise a little cause for concern. So if yore curious you can read more about what’s happened in the past when the risk index has led the market lower.

But there’s another part of the stock market that also appears to be correcting in 2014.

Technology Stock Market Index Correction in 2014:

Technology is an amazing thing. But sometimes, investors hyped up expectations get ahead of the facts. And in the case of biotechnology, social media and internet security stocks (among others) we started to see some crazy valuations heading into 2014.  When you compare these sky-high valuations with the record levels of margin debt, it appears the stock market could pullback or correct in 2014, right?

But don’t take my word for it. If you take a look at the chart below you’ll see that just like the Russell 2000, the Nasdaq has broken it’s prior uptrend and now looks to be starting to trend lower (or at least consolidating sideways).

QQQ Nasdaq Stock Market Correction 2014

Nasdaq stocks are struggling to rotate. Is a deeper correction in store? (Click to enlarge).

While traders and investors might contend the Nasdaq and Russell will play catch-up to the major indices, there are a couple of red flags. First of all…

The earlier Nasdaq leaders like FB, YELP, AMZN, WFM, FEYE, and many many others have taken huge losses after their almost never-ending run-up. And it’s worth nothing that many of these companies had seemingly good earnings only to sell-off. So could these stocks continue to lead on the way down?

Another consideration is:

Despite the big sell-offs in marquis tech stocks, a lot of these stocks are still quite over-valued based on traditional metrics. It seems like even after this pullback a lot of growth is still priced-in to these former stock market leaders. Since they were irrational on the way up they can also be irrational on the way down.

Further, most of last year’s gains came from multiple expansions, stock buybacks and reducing expenses. Revenue growth hasn’t been amazing across the board. So it’s hard to predict the stability of these lower-quality earnings drivers, especially with FED slowing the pace of QE.

For these reasons I think it pays to err on the side of caution when considering a stock market correction in 2014. It’s hard to resist the potential reward, but you shouldn’t ignore the risk of a stock market correction either.

One glimmer of hope for bulls will be the old technology stock rotation. I previously outlined the best tech investments in 2014, and they continue to be the stodgier old names like ORCL, MSFT and AAPL (rather than the social media darlings of 2014). If these older names can hold onto the baton their might be some strength to the bullish sector rotation argument.

For now though, I remain skeptical.

Will the Stock Market Correction Spread in 2014?

The main issue going forward is going to be whether or not the stock market correction in biotech and internet stocks will spread to the larger parts of the market. Keep an eye on the biggest components of the Dow Jones Industrials to try and get a hint. I’m also watching for a higher USD as a sign the correction could thread through the rest of the stock market in 2014.

Finally, even if you don’t think the stock market will see a correction in 2014, it doesn’t hurt to think about what you would do if it did. Don’t stick your head in the sand. Make a plan, just in case.

And By The Way: If you’re looking for more information on how to prepare yourself for the stock market in 2014 I encourage you to sign for my email updates below. You’ll get the best tips and tools each week to help you improve your approach to the stock market. You’ll also get a free copy of my ebook to help show you I built a system to help with my investment and stock trading decisions.

Long Term Charts of The US Stock Market (S&P and Dow)

Long Term Charts of the US Stock Market (specifically the S&P and Dow Jones Industrials Average) are really useful to modern-day investors. Getting the historical perspective of these long term charts really gives you a more comprehensive view of the stock market.

Taking a long term view of charts can also help put the day-to-day stock market price action into focus. So…

Below are some of the best long charts of the US Stock Market. I have aggregated these stock charts from some great sources, and each long term chart is linked to the original website.

Now let’s take a look at some long term charts of the US stock market…

Long Term Charts of The US Stock Market:

These long term charts really help you understand the cycle of the stock market over a generational time span…

Long term charts of the stock market (Dow and S&P)

Take a look at where the stock market is today, relative to it’s historical behaviour (click to enlarge).

The chart only above was last updated in 2008. But it should put the “bull market” of the last 5 years in perspective. Stock market technicians might therefore contend we are in a cyclical bull market within a secular bear market. Make sense?

Take a look at this long term chart to see how that vocabulary is applied:

Long term chart of secular bull and bear markets

The major market cycles are secular bull and bear markets. There may be multi-year cyclical bull and bear markets during these larger market cycles. (Click to enlarge)

Here’s another long term stock market chart to illustrate the concept of long term bull and bear markets:

long term chart for investing your money in the stock market

As you can see: Over the last 100 years, investing your money in the stock market has been a winning proposition.

 

And here’s another long term stock market chart that shows how these long term market cycles map to popular valuation metrics. I think this si definitely a long term stock market chart to consider…

Long term chart of S&P composite index

This long term look of the S&P Index shows where we are today, and how that matches up with historical cycles and valuations (Click to enlarge).

Another interesting long term stock market chart shows how the S&P and the Dow have tracked against each other over time…

Long term chart of dow jones industrial average and S&P index

The S&P and Dow long term charts show how the relationship between these indexes has changed over time (Click to enlarge).

Finally, here’s a look at the Real Long Term growth in US Stocks from Ritzholtz.com…

Long term stock market chart inflation adjusted

Although the recent stock market pullbacks have been violent, the market is still above the long term average. note this chart was last updated in 2010 (Click to enlarge).

Hopefully these long term charts of the US stock market have given you some perspective on the rally over the last 5 years, and where we are positioned today. Are we going to be running into a new secular bull market? Or is this just one big counter-trend rally that needs to reset before we can really correct.

What do you think the long term charts of the US stock market foretell?

And By The Way: If you want to learn more about how ti build a holistic approach to the stock market I encourage you to download the free e-book below. You’ll also get weekly tips and tools to help you improve your stock market trading and investing.

biotech bubble 2014

Are ALL Biotech Stocks in a Bubble?

Are ALL Biotech Stocks in a Bubble? It’s something I’ve got to ask myself as the second half of 2014 approaches. At this point in time there’s a lot of talk about biotech bubbles.

And to be honest…

I tend to agree! I think biotech stocks have had a wild run over the last couple of years. And at this point, a lot of them are laughably overvalued. But don’t take my word for it.

Here’s an updated monthly chart of IBB, (a publicly traded ETF for biotech stocks). See for yourself:

Biotech Stock Bubble 2014

Biotech stocks have gone on quite the run in the last year. Is this bubble about to burst? (Click to Enlarge).

By the way, you can read the IBB component companies too. But the main thing to consider is that biotechs have gone on an epic run over the last 2 years. And now they’re coming back down to earth.

But are ALL of these biotech stocks still overvalued?

Maybe not.

Just take another look at the IBB monthly chart above.

Do you see what I’m getting at? While the biotech stocks have clearly had a huge run going into 2014, they were also stagnant for the 10 years prior. If you look carefully you can see that heading into 2013, biotech stocks as an index were trading at the same levels they were in 2002!

So are ALL biotech stocks really in a bubble?

Biotech Stocks in 2014: Bubble or Buying Opportunity?

The simple truth is that the broad panic selling of the biotech index will cause fear to spread in people who are over-exposed in biotech stocks. That means they will probably consider selling their biotech stocks too (at least to lock in some profits).

Do you see where I’m going with this?

biotech bubble popping 2014

Is this bubble about to pop?

The selling in biotech stocks starts to bring the IBB down almost as fast as it went up! And this big time price volatility is sure to leave some investors running scared.

But blind biotech selling also leads to inefficiencies in the stock market!

Think about it: Not all biotech stocks are the same. They have different sales growth, EPS and free cash flow rates. But the market doesn’t seem to care.

Right now, the liquidation is hitting the whole biotech sector. And if that goes on long enough, certain biotech stocks begin to look really under-valued.

Of course, the trick is finding the right ones.

Biotech Buying Opportunities in 2014:

There are couple of ways to hunt for biotech buying opportunities in 2014, if that’s your inclination. And naturally…

One of my favorite ways to find stock ideas is using stock screeners. For this biotech stock research I would probably use a variation of the best value stock screens in 2014. In this case I think consistent free cash flow, sales growth and strong growth estimates are necessary to ensure you have a sufficient margin of safety. Make sense?

Another way to whittle down your list would be to use an intra-industry analysis stock screen focused exclusively on the biotechnology sector. You can set this up for free in Finviz and really drill down on the different biotech stocks. By looking for the most under-valued stocks (from a current and future sales, EPS and/or free cash flow perspective) you can really start to identify biotechnology buying opportunities.

One idea that popped out on an initial screen was Jazz Pharmaceuticals (NASDAQ:JAZZ). I don’t own any JAZZ and I probably won’t end up buying any.

But it’s a perfect example…

JAZZ meandered from 2007-2011 before going on an epic run higher from $10 to almost $200 over the next three years. JAZZ has now pulled back to $137 and still threatening to sink lower.  So while the fundamentals may not justify a $200 price tag, they might justify a $160 price tag.

But is it worth catching falling knives?

And remember…

Valuing biotechnology companies comes with a unique set of challenges owing to the complex regulatory framework, the various reimbursement programs and the intense intellectual property competition. If you’re not familiar with the space you’re going to need to get up to speed… (or maybe you have a friend who’s a doctor).

Another Word of Warning About Biotech Bubbles:

At this point, all of this is just an academic exercise about where biotech bubbles stand in the current market environment. Putting money to work is much riskier of an idea. And I need to stress to you that just as markets were irrational on the upside, there is a very good chance they could be exuberant to the downside too.

If you try to bottom pick biotech stocks you’re probably in for a bit of pain.  There’s a lot of indecision in the market about biotech stocks right now. So tread lightly.

You’re going to need to be patient. And pick your battles carefully. But I’m willing to bet…

If you can put in the work, and your time frame is long enough, there could be a very profitable buying opportunity right around the corner in the world of biotech stocks. I actually have my eye on a few. Additionally…

One strategy might be to buy puts against the most overvalued biotech stocks and build equity exposure in under-valued biotech stocks only when they start to move up (along with broad market strength). Building these positions slowly with some insurance might be the safest way to play this (note: I’m not recommending you play this one way or the other – this is just for discussion).

And By The Way: If you’re still looking for more information on how you can approach the stock market with an integrated use of technical and fundamental analysis I encourage you to download my free eBook below. You’ll also get free tips and tools each week to help you improve your stock market profitability.

How to Pick Stocks for Growth

how to pick stocks for growth

What does it take for a stock to grow strongly over the long term?

How Do You Pick Stocks for Growth? It’s a great question. That’s because learning how to pick growth stocks can help you build portfolio profits passively for years to come.

Just think about it:

There’s nothing that feels as good as investing in a company and then watching the stock continue to go up in price, year after year. You have to admit…

It’s fun to watch your portfolio swell in size. And learning to pick growth stocks is probably the best chance you’ll have at building your wealth in this manner. Make sense?

Now in this blog post let’s take a look at some important things to consider if you’re trying to figure out how to pick stocks for growth. So here’s how you can stack the deck in your favour if you’re investing in growth stocks…

Pick Stocks in Growing Industries:

When it comes to picking stocks for growth, you can really tilt the odds in your favour if you invest in growing industries. I think Warren Buffett said it best…

“When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.”

— Warren Buffett

I think this little quote hits the nail on the head. The point is, if you’re paddling against the current you are really making things tough for yourself. Instead of trying to grow in dying industries (like paper or coal) why not focus on the future?

Of course investing in growth stocks requires a bit of optimism. But by focusing on growing industries you can really improve your odds and speed up the time it takes you to learn how to pick stocks for growth.

And remember…

Buffett has invested in a wide variety of businesses over the years. And he has learned first-hand that when the economics of the industry aren’t in your favour you set yourself up for failure. So there’s no need to re-invent the wheel on this one.

Now let’s turn to the next big mistake most people make when trying to pick stocks for growth.

Look for Companies with a History of Growth:

While you definitely want to focus on growing industries, you also don’t want to rely on blind optimism when buying into fast-growing companies. Personally speaking…

I’ve had the best luck buying growth stocks when finding companies that not only are in a fast-growing industry but also have a strong track history of growing revenue and earnings themselves. While past performance is no guarantee of future success, it is a good place to start.

how to pick stocks for growth

Growth stocks need a strong foundation.

Lucky for you…

There are lots of places to get historical information on growth stocks. My favourite place to check out is Morningstar.com. They “Key Stats” tab on their quote pages allow you to see 10 years of historical facts.

That means:

You can easily see how stocks have grown over the last 10 years. When you find stocks that have been consistently growing revenue, EPS and free cash flow, it becomes a lot easier to have conviction these companies will continue to grow.

On the other hand, if you see companies revenues have not been steadily increasing you better dig deeper to find out why. By the way…

When picking growth stocks, a big part of success is avoiding the worst investments. Looking at historical data and understanding how management has grown the business can really help you determine what kind of growth you can expect.

But how do you know if the growth narrative will play out as expected? You can’t be sure. But there’s one approach worth trying…

Learn to Pick Growth Stocks by Reading Investing Books:

Learning to pick stocks for growth is something investors have been doing for decades. So if you’re curious about improving your ability to pick stocks for growth you might want to read a few specific investing books.

These books can really speed up your ability to pick stocks for growth. And to be honest…

While I’ve read tons of trading and investing books there are a few special ones that stand out in terms of helping you identify and analyze growth stock opportunities.

Specifically:

Phil Fisher’s book Common Stocks and Uncommon Profits is an excellent read for any aspiring growth investor. It’s one of the best books for teaching you what to look for in growing companies. It covers all of the most important aspects. And more importantly, they’ve stood the test of time. So if you’re looking for an actionable and exciting primer in growth investing you’ll want to read this growth stock book

William J O’Neil’s How to Make Money in Stocks is another excellent book to help you capitalize on the opportunity in picking growth stocks. This book is packed with annotated charts and in-depth explanations of specific criteria to look for. The neat thing about this book is that it’s really focused on finding fast-growing companies who also have common stock that are likely to explode in price. It’s a very insightful read for anyone looking to take their growth stock investing to the next level.

So now that I’ve shared some of my tips, I’ve got to ask: What strategies, tools and tactics do you use to find growth stock picks?

And By The Way: If you want to learn more about how to find a profitable approach to the stock market I encourage you to download a copy of my free eBook below. You’ll also get weekly tips and tools to help you improve your approach to the stock market and your ability to pick fast growing companies.