Few will deny that financial markets are complex and, for an inexperienced investor, difficult to understand. Investing is risky, but taking a proactive approach to managing your portfolio and making informed decisions can increase your margin of safety should one of your investments go in an unplanned direction. In a Seeking Alpha article, Omar Farooq, a relatively new investor, detailed how he is managing his portfolio. He is very active in researching stocks and keeps the following points in mind when developing his next market decision:
- Consistently-growing dividends – The author wrote that although he would prefer to see a business maximize its return on capital, he also appreciates how dividends provide him "with the option of cash or re-invested ownership in the company." In addition, no dividend indicates that an investor will only make money when they sell the stock, meaning that one would have to time the market. While Farooq seemed to imply that keeping a watchful eye on the markets was a chore, this can easily be done through either the assistance of a financial advisor or market risk alert software.
- Diversity – Ideally, a well-managed portfolio would contain stocks covering the entire market, but Farooq concedes that because he wants to thoroughly research every company in which he invests, he has limited his focus to a few industries. The author is an engineer by trade and has found that he can make more informed decisions about semiconductors, software, telecom automobiles, heavy equipment and medical devices.
- Moderate price-to-earnings (P/E) and price-to-book (P/B) ratios – The P/E ratio is defined as the market price per share of a stock divided by a company's annual earnings per share. P/B is the ratio of a stock's current market price against its value on paper. The author considers a P/E ratio below 20:1 and a P/B ration below 3:1 to be moderate. To him, this means that his stocks are accurately valued.
- Profitability – Unlike many investors, Farooq will only invest in companies that have proven their profitability. This eliminates many newer tech stocks such as Facebook and Twitter, in addition to more well-established companies like JC Penney that are in the process of restructuring. While acknowledging that he may be missing out on a great deal, Farooq said that he is more interested in contributing to the current success of a business rather than financing something that may or may not be profitable in the future.
So what is the author's perfect stock? He offered Intel as an example. The company has been profitable for the past 10 years, has a dividend of 3.57 percent, P/E of 13.61 and P/B of 2.36.
While Farooq has taken a more cautious approach to investing, an important takeaway from his system is how involved he is with the process. With SmartStops's portfolio management software, you too can adequately protect your investments. Explore our website to learn more.
Categories: Risk Management, Trading & Portfolio Strategies