Did you ever play 20 Questions with friends or family when you were a child? I have another way of playing the game that doesn’t involve guessing whether the answer is animal, vegetable or mineral.
Instead, here are 20 questions your club should be considering whenever they’re thinking about buying a stock for the club’s portfolio.
1. Has the company grown its sales and earnings per share consistently in the past?
2. Has the company grown its sales and EPS strongly relative to its size?
3. Are you confident that the company can grow sales and EPS at an acceptable rate over the next five years?
4. What are the primary drivers of growth (tailwinds)?
5. What are key obstacles to growth that should be monitored (headwinds)?
6. Are the company’s pre-tax profit margins consistent or growing?
7. Are the company’s pre-tax profit margins above average compared with its industry and peers?
8. Are you confident the company can maintain or expand pre-tax profit margins over the next five years?
9. What are the primary drivers of margin expansion (tailwinds)?
10. What are problems that would cause margins to contract (headwinds)?
11. What competitors should be reviewed and monitored?
12. Is the company’s stock price currently selling below or close to its average price-earnings ratio?
13. Is the company currently selling below or close to its projected average P/E ratio?
14. At its current price, can a stock purchase support a potential 15 percent total return with more than three times the upside to downside?
15. How will the current and near-term economic climate affect this company’s business?
16. How stable and competent is the company’s board and management team?
17. Are there poorly performing holdings that should be sold or replaced in your portfolio?
18. How does the size of this company fit with the other holdings in your portfolio?
19. How does the industry group of the company fit with other holdings?
20. Would buying this company improve the overall quality and return of the club’s portfolio?
More information about ICLUB’s suite of products for investors and investment clubs can be found at www.ICLUB.com
Doug Gerlach is the President of ICLUBcentral Inc., makers of software for individual investors and investment clubs. He is the author of six financial books, including the Investor’s Web Guide, The Complete Idiot’s Guide to Online Investing, The Armchair Millionaire, Investment Clubs for Dummies, BetterInvestings’s Guide to Direct Stock Investing and the Internet and The Pocket Idiot’s Guide to Direct Stock Investing. He writes the “Clubhouse” column in BetterInvesting Magazine and has also written articles for publications such as Individual Investor, PC World and ComputerLife.
Ideally, you should at least do 6% if you have a company match. My approach is to diversify to avoid overexposure to the market. I put 6% in stocks and mutual funds, 6% in rentals and 6% in notes. That way when the economy goes through cycles every 7 or 11 years I don't lose a big chunk of my money in the market. I stop buying rentals when prices go up and buy more notes to maximize my cash flow and returns. Right now I'm making 23.77% on notes, 15-25% long term on rentals and an additional 30-76% the first year in instant equity. The nice thing about notes is that I have enough of them in $25 increments that my interest is compounding daily. Assuming a net annual return of 14.4% simple interest after defaults, that turns into 36.94% compounded daily. I would not buy gold right now. Gold prices are motivated by fear and its already very high. As the market value of homes increase, I'll buy fewer rentals to avoid risk from another bubble or market cycle. I use spreadsheets to maximize my returns on mutual funds and fundamental and technical analysis combined with a good working knowledge of operational efficiency and competitive advantages to pick stocks.
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