How to Calculate Your Odds of Winning the Lottery

Lotto_Max_Logo.pngIn Canada, there is a lottery called LOTTO MAX.  Basically, you pick 7 unique numbers between 1 and 49.

To calculate your odds of winning the lottery, you need to find how many ways there are to pick 7 unique numbers, in any order, from a group of 49 numbers.

Here is the formula:

= \frac{49!}{7! * (49-7)!)}

= \frac{(49 * 48 * 47 * ... * 3 * 2 * 1)}{(7 * 6 * 5 * 4 * 3 * 2 * 1)(42 * 41 * 40 * ... * 3 * 2 * 1)}

= 85,900,584

Therefore, the odds of winning Lotto Max is 1 in 85,900,584.

Good luck!

Published in: on December 9, 2016 at 2:23 pm  Leave a Comment  

TFSA vs RRSP

tfsa-vs-rrsp

Published in: on September 14, 2016 at 6:32 am  Leave a Comment  

20 Supermarket Survival Tips to Save You Money

Supermarket Survival Tips

Published in: on July 25, 2016 at 3:39 pm  Leave a Comment  

24 Famous People Who Struck It Rich After Age 40

Stan Lee Spider-ManFor the more neurotic among us, a birthday can be a reminder of how another year has passed and our loftiest aspirations have faded farther into the distance.

There are plenty of examples, however, of successful people across many industries who prove that you don’t need to have it all figured out by the time you turn 30.

We’ll take a look at some of them, from renowned fashion designer Vera Wang, who didn’t design her first dress until she was 40, to writer Harry Bernstein, who authored countless rejected books before getting his first hit at age 96.

Get inspired by those who show it’s never too late.

1. Stan Lee

Born: December 28, 1922

Stan Lee created his first hit comic, “The Fantastic Four,” just shy of his 39th birthday in 1961. In the next few years, he created the legendary Marvel Universe, whose characters like Spider-Man and the X-Men became American cultural icons.

2. Donald Fisher

Born: September 3, 1928

Donald Fisher was 40 and had no experience in retail when he and his wife, Doris, opened the first Gap store in San Francisco in 1969. The Gap’s clothes quickly became fashionable, and today it’s one of the world’s largest clothing chains.

3. Vera Wang

Born: June 27, 1949

Vera Wang was a figure skater and journalist before entering the fashion industry at age 40. Today she’s one of the world’s premier women’s designers.

4. Gary Heavin

Born: 1958

Gary Heavin was 40 when he opened the first Curves fitness center in 1992, which ended up becoming one of the fastest-growing franchises of the ’90s.

5. Robin Chase

Robin Chase cofounded Zipcar at age 42 in 2000. She left the company in 2011 and continues to build and advise startups, as well as serve as a member of the World Economic Forum.

6. Samuel L Jackson

Born: December 21, 1948

Samuel L Jackson has been a Hollywood staple for years now, but he’d had only bit parts before landing an award-winning role at age 43 in Spike Lee’s film “Jungle Fever” in 1991.

7. Sam Walton

Born: March 29, 1918

Sam Walton had a fairly successful retail management career in his 20s and 30s, but his path to astronomical success began at age 44, when he founded the first Walmart in Rogers, Arkansas, in 1962.

8. Henry Ford

Born: July 30, 1863

Henry Ford was 45 when he created the revolutionary Model T car in 1908.

9. Jack Weil

Born: March 28, 1901

Jack Weil was 45 when he founded what became the most popular cowboy-wear brand, Rockmount Ranch Wear.  He remained its CEO until he died at the ripe old age of 107 in 2008.

10. Rodney Dangerfield

Born: November 22, 1921

Rodney Dangerfield is remembered as a legendary comedian, but he didn’t catch a break until he made a
hit appearance on “The Ed Sullivan Show” at age 46.

11. Momofuku Ando

Born: March 5, 1910

Momofuku Ando cemented his spot in junk food history when he invented instant ramen at age 48 in 1958.  He founded Nissin Food Products Co., Ltd.

12. Charles Darwin

Born: February 12, 1809

Charles Darwin spent most of his life as a naturalist who kept to himself, but in 1859 at age 50 his “On the Origin of Species” changed the scientific community forever.

13. Julia Child

Born: August 15, 1912

Julia Child worked in advertising and media before writing her first cookbook when she was 50, launching her career as a celebrity chef in 1961.

14. Jack Cover

Born: April 6, 1920

Jack Cover worked as a scientist for institutions like NASA and IBM before he became a successful entrepreneur at 50 for inventing the Taser gun in 1970.

15. Betty White

Born: January 17, 1922

Betty White is one of the most award-winning comedic actresses in history, but she didn’t become an icon until she joined the cast of “The Mary Tyler Moore Show” in 1973 at the age of 51.

16. Tim Zagat

Born: 1941

See 17.

17. Nina Zagat

Born: August 12, 1942

Tim and Nina Zagat were both 51-year-old lawyers when they published their first collection of restaurant reviews under the Zagat name in 1979. It eventually became a mark of culinary authority.

18. Taikichiro Mori

Born: March 1, 1904

Taikichiro Mori was an academic who became a real estate investor at age 51 when he founded Mori
Building Company. His brilliant investments made him the richest man in the world in 1992, when he had
a net worth of $13 billion (£8.3 billion).

19. Ray Croc

Born: October 5, 1902

Ray Kroc spent his career as a milkshake device salesman before buying McDonald’s at age 52 in 1954.  He grew it into the world’s biggest fast-food franchise.

20. Wally Blume

Wally Blume had a long career in the dairy business before starting his own ice cream company, Denali Flavors, at age 57 in 1995. The company reported revenue of $80 million (£51.6 million) in 2009.

21. Harland Sanders

Born: September 9, 1890

Harland Sanders, better known as Colonel Sanders, was 62 when he franchised Kentucky Fried Chicken in
1952. He sold the franchise business for $2 million (£1.2 million) 12 years later.

22. Laura Ingalls Wilder

Born: February 7, 1867

Laura Ingalls Wilder spent her later years writing semi-autobiographical stories using her educated daughter, Rose, as an editor. She published the first in the “Little House” books at age 65 in 1932.  They soon became children’s literary classics and the basis for TV show “Little House on the Prairie.”

23. Anna Mary Robertson Moses

Born: September 7, 1860

Anna Mary Robertson Moses, better known as Grandma Moses, began her prolific painting career at 78. In 2006, one of her paintings sold for $1.2 million (£774,000)

24. Harry Bernstein

Born: May 30, 1910

Harry Bernstein spent a long life writing in obscurity but achieved notoriety at long last at age 96 for his 2007 memoir, “The Invisible Wall: A Love Story That Broke Barriers.”

Published in: on June 27, 2015 at 5:18 am  Leave a Comment  

11 Common Financial Mistakes People Make in Their 40s

lotteryTurning 40 represents a unique period in your financial life. You’re older, wiser and well-established, but there are still a few things you have yet to figure out — like how to afford your children’s university education and where you’re going to retire.

Though you might feel settled, becoming complacent could impact your financial well-being. Don’t fall prey to these common money mistakes that people often make in their 40s.  In this article, we will show you common mistakes many 40-somethings are doing and what you should do instead.

1. Not Having a Plan for Your Money

The bar has been steadily rising for 40-somethings who are working to maintain their place in the middle-class pack, notes economist William Emmons of the Federal Reserve Bank of St. Louis. On top of that, many Generation Xers took a financial torpedo during the Great Recession right at the time they were stretching to afford housing and establish careers.  “That’s the group we feel maybe doesn’t get enough attention for having suffered a great deal in this cycle,” he said.

Forty-somethings who are just now recovering from losing a house or a job need to make a plan for their money now and stick to it. “If you’re reeling from this blow financially in your 40s, there’s not a lot of time to recover,” he said.

2. Not Maintaining Enough Liquidity

A lack of access to cash in an emergency sends many Gen-X families to predatory payday lenders, Emmons said. “It should be a high priority to have enough cash reserves so that you don’t have to go to a high-cost lender or to sell off assets or pass up opportunities when they arise,” he said.  If you don’t have an emergency fund by this point, you might need to make some aggressive moves to establish one. The short-lived sting will pay off big over the years.

3. Letting Your Emergency Fund Fall Behind Your Growth and Expenses

If you’ve had an emergency fund in place for years now, don’t pat yourself on the back too hard. Many people realize in their 40s that their emergency funds now fall woefully short of supporting their larger incomes and budgets.

Whether your cash reserves have kept pace with your budget or not, when you’ve reached your 40s, it’s time to invest your emergency fund for maximum growth while keeping your funds liquid.

4. Getting Complacent About Carrying Consumer Debt

It’s easy to get too comfortable when you’re tucked into a good job and cozy home. Don’t get complacent about carrying consumer debt. “Not that everyone that has borrowed has trouble, but people who have trouble typically have borrowed,” Emmons said. Limit your exposure to debt, and don’t use a current position of strength to justify putting yourself in precarious position.

5. Prioritizing Paying Off the Mortgage

Some people crave the security of owning their home free and clear, but putting your mortgage ahead of other financial obligations is almost always a bad idea. Before you pay off your home, Dave Ramsey recommends paying down all your other debt, establishing your retirement savings and setting your children’s university funds into motion.

6. Assuming Remodeling Will Add Value to Your Home

The luxurious bathroom remodel you feel brings a little slice of heaven to your humble cottage-style home may be exactly the thing a potential buyer will want to rip out and redo. Don’t count on others to value remodeling and renovations the same way you do. Over customization can lower the value of your home.

7. Putting Kids’ Education Ahead of Retirement Savings

When your family, friends and neighbors are putting their kids through university, the pressure’s on to do the same — but if your retirement savings aren’t already on or ahead of target, funding the kids’ education is the wrong move. Your children can take out a loan for their education, but you can’t take out a loan to live on during retirement. Treat this like putting on your own oxygen mask first in case of an airplane emergency and don’t help the kids until you’ve helped yourself.

8. Dipping Into Your Retirement Funds

The power behind retirement savings is time — time for interest to work its magic, time for the market to lean your direction over time. When you dip into your retirement funds, even with the best of intentions, you take away the very time that makes long-term savings so effective. Not to mention the hefty penalties that you’ll receive for early cash-out.

9. Not Diversifying Your Investments and Savings

The reason boomers came out of the recession in better shape than Gen Xers is that they had diversified their savings and investments. “It’s true, the stock market crashed at the same time as the housing market did — but the stock market came back,” Emmons said. “Older people tend to be more diversified, so they have done very well in that regard.” Don’t throw all your eggs into one basket, he advises, whether that’s your house or a particular investment.

10. Considering Being Risk-Averse a Bad Thing

“It doesn’t get glamorized the way entrepreneurs and risk-takers [do], but being risk-averse is a very good strategy for most people,” Emmons said. “And by that I mean keeping your checking account stocked so you have emergency cash, having a very diversified portfolio and keeping your borrowing very low. … Control the things you can control — so reduce risks and be boring and conservative and prudent.”

11. Assuming Your Best Earnings Are Still to Come

It’s easy to assume that your income will always grow the way it has so far in your career. “Incomes rise in their 20s and 30s and a little bit in their 40s, but peak earnings are usually around 50,” Emmons said. For people with more education, that peak comes a little later but is generally stronger, with more of a peak and more of a fall-off.

Forty-somethings should plan not only for a flattening income curve but increasing concern for job security. “There’s more risk as you get older,” Emmons said. “It is a little more difficult if you lose your job, the company shuts down or you lose your job for whatever reason. … It’s illegal to discriminate against someone based on their age, but we know that there are some difficulties.”  It’s easy to become complacent once you’ve reached your 40s, but don’t set your finances on cruise control just yet. Keep your head up for what’s just ahead, to prevent poor assumptions and common mistakes from tanking the financial security you’ve worked so hard to build.

Published in: on June 23, 2015 at 4:34 pm  Leave a Comment  

Cycle of Stock Market Emotions

Cycle of Stock Market Emotions

Published in: on April 18, 2014 at 4:19 pm  Leave a Comment  

5 Bad Investment Ideas to Avoid

cashflowThe stock market can help you grow your wealth and enjoy a comfortable retirement. However, it can also fry your precious nest egg if you’re not careful.

Here are 5 Bad Investment Ideas to Avoid

“This cheap stock is only $0.11 per share! I can buy 10,000 shares for just $1,100!”

Penny stocks — those trading for less than about $5 per share — are usually very bad investment ideas, as they can be easily manipulated and are often tied to shaky, unproven companies. Sure, they entice us with their seemingly cheap prices, and the thought of owning 10,000 shares of something is somehow more exciting than owning far fewer shares. But a low price isn’t necessarily a cheap price. A $200 stock can be undervalued and more likely to rise than fall while a $0.11 stock can be worth much less than that and be more likely to fall than rise.

“I have my eyes on this stock.  I’m going to buy some as soon as its price drops further.”

Many investment mistakes we make are things we didn’t do instead of things we did do. If you’re ready to invest in a stock because you have great faith in its future growth and believe that its stock is undervalued, then consider just going ahead and buying it, instead of hoping to snag a slightly better price for its shares. After all, if it’s such a great buy, others might be thinking the same thing and may snap up shares, resulting in the stock never falling to your hoped-for price.  It is a good investment idea to wait for a better price if you think a stock is overvalued. Just aim to buy stocks when they seem like bargains, given their growth patterns and promise and their valuation measures such as price-to-earnings (P/E) ratios, price-to-sales ratios, price-to-cash-flow ratios, and so on.

“I’m going to load up on my employer’s stock. After all, I know this company better than any other.”

Another of the most dangerous investment ideas is buying a lot of your company’s stock. It does seem like a good idea, as most of us tend to understand our employer better than we do other companies. But consider this: Your employer is already responsible for much of your financial security, as it provides the income on which you live. Most of us can’t diversify our work across many companies. We have most or all of our income eggs in that one basket. So if you then entrust much of your stock portfolio to that same company, well, you’re taking on a lot of risk. Think of Enron and Lehman Brothers and other companies that essentially went out of business or saw their stock values vaporized. Employees heavily invested in them lost much of their savings — at a time when their jobs were in jeopardy or lost, too.

“This analyst on TV is making a great case for this stock. I’ll have to buy some.”

Beware of financial commentators or money managers who appear on TV (or in print, for that matter) touting their investment ideas. It’s easy to make a compelling case for most stocks, as you can simply leave out negative factors or red flags. Some of these folks are making recommendations that will serve you very well. However, others will flame out. Remember that you rarely know the full performance record of these folks, and even the worst of them will have some successes. Meanwhile, truly smart stock pickers will make occasional bad calls. No one is perfect. Meanwhile, even stock analysts are not necessarily looking out for your best interests, either.

Take responsibility for the investment ideas you act on, and if you discover a seemingly compelling stock somewhere, don’t buy into it without doing further research on your own. Make sure the company is healthy and growing, that it has solid competitive advantages, and that it’s trading at an attractive price that offers some margin of safety. If you’re not sure, add it to your Watchlist as you keep learning more about it and perhaps as you wait for a more attractive price. This advice applies to investment ideas you get from friends and relatives, too, in the form of hot stock tips.

“As soon as I make my money back on this lousy stock, I’m selling.”

Finally, another of the many dangerous investment ideas out there is a common one — waiting and hoping for a fallen stock to recover. It’s natural: Your stock plummeted, and rather than sell it now, you’d like for it to rise a little or a lot, to recoup more or all of your loss. If the company is healthy and growing and you still have great faith in it, waiting does make plenty of sense. After all, many great companies see their stocks slump now and then.

However, if the company’s problems seem long term instead of temporary, and if the stock is no longer among your best investment ideas, you’re probably best off selling it. YES, you’ll take a hit. But think of it this way: If you lose $2,000 and are left with $3,000, you can either make some or all of that loss back in the stock in which you’ve lost faith or you can sell and move the $3,000 into a stock you’re very bullish on. Your goal is to have that $3,000 grow — won’t it have the best chance of doing so in your best investment ideas and not ones about which you’re doubtful?

The more you learn about investing, the better your investing ideas will be. Stick with the good and avoid the bad ones. Your portfolio will thank you.

Published in: on June 30, 2013 at 5:09 pm  Leave a Comment  

7 Hidden Ways to Save Money When Filing Your 2011 Income Tax

Here are 7 hidden ways to save money when filing your 2011 Canadian income tax.  Most of these new measures stem from the Canadian federal budget brought down on June 6, 2011. Others are merely a result of routine indexing.

1. The Children’s Arts Tax Credit

This new credit was a budget measure that was designed to address criticism that the earlier Children’s Fitness Tax Credit (which is still in effect) unfairly left out parents who paid for programs where the kids had to do more thinking than sweating.   It provides a 15 per cent non-refundable federal tax credit on the first $500 spent on your kids’ artistic, musical, recreational or cultural development in 2011. That means the tax credit is worth a maximum of $75 per child.   Parents of disabled children can claim a 15 per cent tax credit on the first $1,000 of eligible spending, or a maximum of $150.   To get the credit, children must be under 16 at the start of the year in which the program is taken (under 18 in the case of disabled children).   To qualify, a program must be at least eight consecutive weeks in length, or, in the case of children’s camps, at least five consecutive days. Receipts are a must.

2. The Volunteer Firefighter’s Tax Credit

If you performed at least 200 hours of service as a volunteer firefighter in 2011, you can see your tax bill reduced by up to $450 – another new non-refundable tax credit introduced in last year’s federal budget.   That’s the net effect of a 15 per cent tax credit on the $3,000 volunteer firefighters’ amount.   The 200 hours doesn’t have to be entirely spent fighting fires. Attending required meetings and training also qualify.   Be aware that there’s a big wrinkle in this tax credit for those who get an honorarium for their volunteer efforts. Currently, the first $1,000 of that honorarium is exempt from tax. But if you claim that income exemption, you won’t be eligible for the volunteer firefighter’s tax credit.   No documents need to be filed, but the CRA says it may require claimants to provide certified proof that they actually do qualify.

3. Family Caregiver Tax Credit

This measure doesn’t actually take effect until the 2012 tax year, so you won’t benefit from it when filing this year. But people who will eventually benefit can file a new TD1 Personal Tax Credits Return with their employers now to reduce their withholding tax for the remainder of 2012.   This credit amounts to an increase of $2,000 in the claim when a taxpayer’s dependent is physically or mentally infirm. So the spouse, common-law partner or other eligible dependent claim becomes $12,780 instead of $10,780.   Similarly, the claim for a disabled child becomes $4,191 rather than $2,191. The caregiver amount claim for looking after an infirm relative also goes up by $2,000.

4. TFSA

Tax-free savings accounts were first unveiled in the 2008 federal budget and have continued to grow in popularity – in part because Canadians can put more money into them each year.   If you haven’t yet contributed to a “Tiff-sa,” the available contribution room rose by $5,000 on Jan. 1, 2012 and now stands at $20,000.   TFSA contributions can go into GICs, mutual funds, bonds, stocks or savings accounts and earn profit tax-free, but keep in mind they don’t work like a bank account with a maximum balance. When you withdraw funds in one year, TFSA rules don’t let you redeposit that amount until the next.   In 2009, about 70,000 people withdrew money from one of their TFSA accounts and then redeposited it the same year, so the Canada Revenue Agency levied penalties of one per cent per month on redeposits that were classed as excess contributions. The government eventually relented because of the widespread confusion, and rescinded the penalties in 2010 for people who accidentally put too much into their accounts during the TFSA’s debut year.   The amnesty is over now, however, and savers can’t expect that kind of pity from the tax collector anymore. If you want to move your money from one account or institution to another within the same calendar year, you have to use a formal transfer process that requires filling out forms and, with most banks, paying a fee.

5 Changes That Affect Students

As of the 2011 tax year, examination fees now qualify for the tuition tax credit. That is, as long as the total fees, including exam fees, amount to at least $100 and the exam is required to obtain professional status or to be licensed or certified in a profession or trade.   For students enrolled full-time in a university outside Canada, the minimum length of course that qualifies for tuition, education and textbook tax credits has been lowered from 13 weeks to three weeks.   The 2011 budget also loosened the restrictions on transferring investments held in one sibling’s Registered Education Savings Plans (RESP) to another sibling’s RESP.   Under the old rules, transferring RESP investments property from one sibling’s plan to another’s could trigger a repayment of the Canada Education Savings Grant unless the sibling receiving the transferred investment is under the age of 21. But transfers occurring in 2011 and after will not trigger grant repayments as long as the receiving RESP was set up before the beneficiary turned 21.

6. Medical Expenses And An RDSP Change

As of 2011, the maximum medical expense claim of $10,000 for a dependant relative (other than for a spouse, common-law partner or a minor child) has been eliminated. Now, there’s no limit.   The last budget also made a change to the rules governing Registered Disability Savings Plans (RDSPs). Under the old rules, all grants and bonds paid into the plans in the previous 10 years had to be returned to Ottawa if a disability assistance payment was made to an RDSP beneficiary.   Now, no repayment is necessary if a doctor certifies that a plan recipient isn’t likely to survive for five years.

7. Changes To Federal Tax Brackets And Credits

Most tax brackets and credit amounts were raised in 2011 to account for inflation. In the case of federal tax brackets, they have been raised by 1.4 per cent from 2010’s levels.   Most of the basic personal amount claims have also been boosted by 1.4 per cent. The 2011 TD 1 tax forms and all of the software and online tax programs reflect the new amounts.   Similarly, the thresholds at which some benefits begin to get clawed back (like Old Age Security payments) have been raised by 1.4 per cent. Some refundable tax credits, like the Canada Child Tax Benefit, have also been boosted by 1.4 per cent.   Many provinces and territories have also boosted their personal tax credits by indexing factors ranging from 0.8 per cent to 2.0 per cent.   But two provinces – Nova Scotia and Prince Edward Island – made no changes in their personal tax credit amounts.

Published in: on March 3, 2012 at 3:12 pm  Comments (4)  

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Top Stock Picking Strategies

To select an individual stock as an investment, investors first need a good source of prospective investments.  This is where up-to-date stock screeners and market data can prove quite useful to the individual investor.  In this article, we’ll show you how they can be used.

Don’t Underestimate the Value of Timely Market Data

Investors need as much information as possible about what’s going on in the market.  This means tapping into a variety of sources for economic, industry and company-specific information.  To be clear, investors don’t need to delve into statistics and the intricacies of every industry the same way Wall Street economists do, but they do need to have a good grasp of what is driving the market.

Therefore, listening to business reports on television, surfing financial websites and reading the latest trade journals and daily newspapers is highly recommended.  Again, savvy investors should be on the lookout for data and events that will drive the economy going forward.  Obtaining information from a wide cross-section of sources will ensure that an investor isn’t receiving a biased or incomplete news flow.

In terms of news, here are some examples of the types of information investors should tap into on a regular basis:

  • Information on interest rate trends, or the likelihood of a future rate hike or cut is extremely valuable.  Remember, if an investor can properly game (or predict) the likelihood of future rate cuts and increase his or her exposure to domestic equities, that investor stands to make a lot of money.  Again, this is why timely, thoughtful analysis of economic news is important.  Incidentally, CNBC usually does a fairly good job at not only reporting interest rate news, but also helping the public gauge the potential for a change in future Fed policy.  (To read more about interest rates, see How Interest Rates Affect The Stock Market and Trying To Predict Interest Rates.)
  • Information on OPEC oil production and domestic inventory stockpiles is equally important.  Why? The simplest answer is because our economy and future GNP depends on the ability to source oil at a reasonable price.  Therefore, the supply/demand equation is extremely important.  Again, CNBC, The Wall Street Journal and Investors Business Daily do a great job at not just reporting this news, but also helping investors forecast possible changes in supply.  (Find out more about OPEC and the GNP, in Getting A Grip On The Cost Of Gas, Economic Indicators to Know and Macroeconomic Analysis.)
  • Consider consumer sentiment numbers, housing starts and employment figures.  These data sets, while primarily lagging indicators of the economy, give investors the sense of what the broader public is thinking and how they are spending their money.  This is important data to have because it allows the savvy investor to see a trend and gauge the consumer’s willingness to spend money on certain items in the near future.  As an example of using this data, if consumer sentiment is high, housing starts are steadily increasing and unemployment is down, one might properly assume that higher-end retailers will fare better.  Conversely, when all of those indicators are flipped, a proper assumption would be that lower-end retailers would fare better.

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When Screening, Prune the Dead Wood First

The trick to proper stock selection is being able to winnow down a number of potential investments to a few viable candidates.  This can best be accomplished by knowing which types of companies to avoid.

Except in the most special circumstances, investors should generally steer clear of:

  • Distributors or Commodity-type Businesses

Because these companies aren’t manufacturers, they are merely middlemen that rarely have any unique qualities that would draw large numbers of investors.  Plus, in general, there is often less of a barrier to competition when it comes to becoming a distributor.

Examples of such businesses would be makers of children’s stuffed animals (non-electronic toys are a well-known commodity) and electronics distributors that simply ship goods to retailers.  These businesses could easily see their profits shrink if they lose even one sizable retail account, or if the manufacturer finds a different distributor to ship the goods for less.

  • Companies with Gross Margins Below 20%

The most basic reason is that there is almost no margin for error.  In fact, even the slightest downtick in business could send profits plunging.  Typically, commodity-type businesses and distributors carry low margins.  But so do certain start-ups that need to offer their goods and/or services at a lower cost in order to gain market share.  Again, all of these companies are inherently “more risky.” (To continue reading on margins, see The Bottom Line On Margins and How Does Your Margin Grow?)

  • Companies that Are Not Considered “Best in Class”

Like your parent always said, “you get what you pay for.” In other words, second tier companies often remain second tier companies unless they have the potential to one day become an industry top dog.  How can an investor tell whether a company is “best in class”? Odds are it will have the largest market capitalization in the business, the largest presence in terms of geographic footprint and will tend to be a “trend setter” in the industry (in terms of price, store format and product offerings) in which it operates; Wal-Mart, Microsoft and Exxon Mobil are terrific examples of such companies.  (To learn more about market caps, see Market Capitalization Defined and Determining What Market Cap Suits Your Style.)

  • Companies that Are Thinly Traded

Thinly traded means that these companies trade fewer than 100,000 shares per day.  The market or “spread” for these types of stocks is often extremely volatile.  In fact, investors have enough to deal with when it comes to analyzing the fundamentals.  Sharp swings in supply and demand and the potential impact on the share price is just too hard to gauge, even for a seasoned investor.

  • Companies that Have Just Announced a Significant Acquisition

Companies that take on big acquisitions often end up reporting large, unforeseen expenses that can put a big damper on near-term earnings.  Again, while such a deal could present an enormous opportunity, the downside potential is far too often overlooked.  Manhattan Bagels is a terrific example of this.  In the late ’90s the nationally known bagel chain bought one of its biggest rivals on the West Coast.  But it turns out there were accounting problems and the stores that the company bought didn’t turn out to be nearly as profitable as it (or investors) had initially hoped.  Because the acquisition was so huge, Manhattan Bagels couldn’t weather the problems, and was eventually forced to file for bankruptcy protection.

Identifying the Diamond in the Rough

There are a number of characteristics that successful companies tend to have:

  • Accelerated Sales and Earnings Growth

Look for companies that are growing their top and bottom lines in excess of 15%.  Why this threshold? It’s because this is the benchmark that many institutions look for prior to getting into a stock.  Of course, keep in mind that companies that grow at a faster pace often have trouble maintaining their growth after a few years, and are more likely to disappoint investors.  Ideally, between a range of between 15% and 25% is the most desirable.  (To find out more about this subject, see Great Expectations: Forecasting Sales Growth and Find Investment Quality In The Income Statement.)

  • Insider Buying

Insider buying is a great indicator that a company may be undervalued.  Why? Because while some senior executives may buy shares simply to demonstrate their faith in the company, the lion’s share buy company stock for just one reason: to make money.  Look specifically for companies where several insiders are buying at or near the current market price.  A terrific source for insider data is the SEC.  However, other non-governmental sources also offer good data on this subject, including Thomson Financial.  (For more insight, read Can Insiders Help You Make Better Trades? and When Insiders Buy, Should Investors Join Them?)

  • Companies Sporting a Solid Chart

While technical analysis shouldn’t be a major factor in the stock selection process, it does have its role.  Ideally, investors should be on the lookout for a company that is steadily advancing in price on higher volume.  Why? Because stocks that advance on increasing volume are under accumulation.  In other words, there is a broad-based momentum in the stock that is likely to continue to bring it to new levels.  (Picture the trajectory of an airplane taking off – that’s what you are looking for!) Another tip: Look for stocks that are making new highs.  Often companies that are breaking through, or have broken through, technical resistance have recently experienced some positive fundamental improvement that is drawing attention to the stock.

Don’t Forget Product Familiarity

Fidelity’s Peter Lynch was famous for saying that all investors should either use or be very familiar with the products/companies they invest in.  And while this may sound like common sense, many investors tend to ignore this timeless advice.  (To find out how Lynch chooses his investments, see Pick Stocks Like Peter Lynch.)

What’s the advantage of buying what you know?

Investors with intimate knowledge of the products and the companies they buy can better understand their growth potential.  Incidentally, it also makes it easier for them to predict future sales and earnings growth, and/or to compare their product offerings with those of other industry participants.

The Financials – What’s Attractive

Investors should always review the major financial statements (income statement, cash flow statement and balance sheet) of the companies they invest in.  (To learn how to read financials, see What You Need To Know About Financial Statements.)

Specifically, investors should be on the lookout for:

  • Companies with Inventory Growth in Proximity to Revenue Growth

Companies whose inventories grow at a faster rate than their sales are more likely to be caught with obsolete inventory at a later date if sales growth suddenly slows.

  • Companies with Accounts Receivable Growth in Proximity to Their Sales Growth

Companies whose receivables are growing at a faster clip than sales may be having trouble collecting debts.

  • Tangible Liquid Assets

Companies with a large amount of cash and other tangible (hard, liquid) assets tend to be more solid than those that do not.  A large amount of cash and other liquid assets will provide the company with the means to pay its short-term debts and service its longer term notes even in difficult times.

Winning Half the Battle

Knowing how to screen for stocks and specifically what to look for is a major battle for most investors that go it alone.  The above commentary should serve as a starting point for entrepreneurial investors.  If you take the initiative, you will gain insight and sharpen your skills as you go along.

Credit: Glenn Curtis

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Published in: on June 18, 2011 at 4:20 am  Leave a Comment