Making Your Own Investment Decisions

Most people have a broker that makes all of their investment decisions for them. They rarely even look at their portfolio to see what it contains, and they review their account statements only once per year, because their goal is for their account to grow in the long run.

However, you should not rely on your broker to do everything for you, because most stockbrokers have many clients, and do not pay close enough attention to your account to make the small trades here or there that can really help you maximize your return, or get out of a stock that is weighing down your portfolio so that money can be transferred into something else that would be more remunerative. Simply put, your broker or financial advisor does not make the necessary short-term investment decisions to maximize the performance of your account. You need to become familiar with each stock you have in your portfolio so that you can make decisions on your own in the short-term, while still relying upon your financial advisor to structure your portfolio with a mix of the right instruments (stocks, bonds, money market, etc.) to help you make money in the long run.

To make your own investment decisions, you need to review the most recent balance sheet and income statement for the company, as well as some other important statistics. You can access these reports online on any stock quoting website. Simply enter the ticker symbol for the company you want to evaluate, and then there should be a link to their income statement and balance sheet on that page.

When looking at the balance sheet, compare the assets for the current reporting period to the previous period. Did the assets, such as revenue from sales, increase or decrease? Check the liabilities from the previous period as well. And, you should check whether shareholder equity has increased or decreased. This is important to you as an investor because shareholder equity is the true worth of a company to its shareholders. If the balance sheet does not have shareholder equity listed, simply subtract the total liabilities from the total assets to arrive at the number.

When looking at the income statement, you should look at the earnings figures. The earnings figures are listed at the bottom of the income statement. Have earnings increased or decreased since the previous income statement was issued? If there is a decrease, what is the reason? Is it because the company is struggling, or is it because of some non-recurring expense they had to pay that will not affect their earnings in the future? Earnings are important to you as an investor because a portion of this money is paid out to the shareholders in the form of a dividend.

Next, there are a few statistics that you should evaluate which are also listed on the profile for the company when you look them up online. The two most important statistics to look at are the P/E ratio and the PEG ratio. Typically, you can find these numbers under the statistics section for the company.

The P/E ratio is the price-to-earnings ratio. It is calculated by dividing the price for one share of stock by the earnings per share. Most companies have a P/E ratio between 15 to 25. Some companies trade at P/E ratios as high as 70 or higher, such as Google. If a P/E ratio is very high, the stock might be overvalued, meaning it could come down in price in the future. But, a high P/E ratio often means that the company is expected to grow its sales and earnings significantly in the future, so investors are willing to pay more than the stock is currently worth because the price will be justified in the long run, and the company will be able to pay larger dividends when its earnings increase.

A low P/E ratio could mean that a company is undervalued, meaning that the stock price will likely go up in the future. However, a low P/E ratio could mean that investors are abandoning the stock because future sales and earnings are expected to decrease. When evaluating the P/E ratio, you need to assess the overall situation and future sales expectations in order to properly interpret what the P/E means for you as an investor.

The other important statistic, perhaps more important than the P/E ratio, is the PEG ratio. The PEG is the price-to-earnings growth ratio. It is calculated by dividing the P/E ratio by the annual earnings growth per share. This ratio helps you to ascertain whether the company is growing its earnings enough each year to justify the current price of the stock. If a company is not growing its earnings at all, then the stock will not go up. If the earnings are growing significantly each year, then the price of the stock will rise accordingly. Since earnings growth is the real impetus behind an increase in the price of a stock, the PEG is probably the best tool for evaluating whether the stock has hit the wall or will continue to increase. If the PEG is less than 1, the stock will likely continue to go up. If the PEG is much higher than 1, then the stock might go down. However, a high PEG could mean that a company is expected to grow tremendously in the months and years ahead.

I hope this information will help you make your own investment decisions. Try to set aside some time to review each stock that you have in your portfolio, and then use the procedures outlined in this article to examine the value of the stock. This will help you grow your investments much more in the long run than if you rely solely on your broker or financial advisor to do all the work for you.

by Jim Pretin