Investment Tools

My recent articles on Power Investor got people writing to tell me about their favorite tools.

Ron Fisher likes’s Stock Investor Pro and recommends a membership in AAII because it comes with a “nice website with a lot of good information and free screens based on all the major investing gurus. The cost of a regular membership to AAII is only $29.” However, the Stock Investor Pro software runs members an additional $198.

Mike Eremenko in Israel has been using tools at E*Trade, specifically its MarketTrader and Power E*Trade Pro for a while, and says he’s “very impressed so far.”

Dale Stamps swears by MSN Money’s Deluxe Stock Screener, hidden away deep inside the crowded site. You have to go to Stock Research > Stock Power Searches and then click the Deluxe Stock Screener link inside a shaded blue box showing a telescope icon at the top of the page. Oh, and you have to be using Microsoft Internet Explorer to see the shaded blue box. What a shock — Firefox isn’t compatible. If you follow the path above in your Firefox browser, you’ll see white space at the top of the “Fundamental Screens” column where the blue box appears in IE. The link above, however, will take even Firefox users to the download page.

Dale writes, “The deluxe screener is much more versatile than Yahoo! or any other free screener. Once I used it, all others were like children trying to play in an adult’s game. The ability to put multipliers in the ‘Value’ field is extremely useful to me. Additionally, there is an ‘Advisor FYI’ selection that offers many unique selections.”

The big question this morning came from Jeff Astor in New York who sent this stock trader’s lament:

In the attempt to shorten my learning curve I have been delving full force into some of the resources you mention in your book (as well as others you don’t). I am having a difficult time, though, sifting through it all and moving forward in the most beneficial manner.

For instance, I signed up for a free 2-week subscription to IBD. It’s quite interesting, but more than a bit overwhelming. They have sections for reader education, but as a whole the system is quite complex to grasp at a basic level, to say nothing of mastering it. I’m thinking of paying for a one-year subscription (not less than $189; cancellable at any time). But I don’t know if I will really grasp their approach, or if it is the best approach for me if and when I do.

I checked out the Morningstar site (after reading about its screener in your post on alternatives to Power Investor) and am intrigued by their system. They have a lot of different services you can pay for but I don’t know if it is best for me. You barely mention Morningstar in your book, other than a paragraph on one of their newsletters. Do you recommend it? How does it compare to the other resources you mention?

I’ve considered a short-term subscription to Value Line (only $75 for 13-weeks) to check it out. Your book mentioned we can get their free reports in the library. But I thought for $75 I could have them sent to my home
(it’s not convenient for me to go to my local library) and have access to their website for the purpose of learning about the Value Line method of investing.

And there are other publications/organizations you mention in your book vying for my attention and my dollar. SmartMoney, Wall Street Journal, Motley Fool, TheStreet, MarketWatch, and others — all offer excellent free material, such as articles and investing tools, as well as intriguing for-pay ones. I’ve been tempted more than once to subscribe to them all and/or try out one of their other for-pay services.

I’ve not spent much money yet, nor do I feel I necessarily have to. But, on the other hand, I don’t want to sell myself short. I am willing to invest to advance my knowledge and shorten the learning curve. The problem is that the field is filled with so many choices. And so many seemingly good choices too. I’m having a very difficult time sorting all this out. I was wondering if you could provide me with some perspective and advice how best to focus my energies and move forward.

Jeff’s plight is a common one not just for beginners but for everybody in this business. The constant goal is to reduce the noise to a minimum and expose ourselves to just information that works. I’ll respond to each of the tools he mentions.

IBD is an excellent investment paper. I spend a great deal of time exploring its SmartSelect Composite Ratings system in my book. However, you must keep in mind that the paper was created by Bill O’Neil, a dyed-in-the-wool growth trader who insists on stopping out of any position that declines a mere 8%. I feature Mr. O’Neil as one of my master investors in the book because he’s one of the best-known traders in the business.

However, his methods are not mine. I’m more in tune with the approach of Bill Miller, another of my master investors, who says that “lowest average cost wins.” Declining 8% is not a big deal for a stock that’s well-researched, healthy, and in the process of recovering or otherwise reaching for greater future earnings. In fact, a price decline is a chance to buy more and lower the average cost. I do this religiously in The Kelly Letter.

So, while IBD is packed full of interesting measurements, angles, ratings, and other tools of the trader’s trade, you need to remember that most of it is for short-term trading. I have to admit that it’s not a mainstay of my research program.

Morningstar, however, is quite good for the long-term investor. It’s a fantastic research organization, and the name it made for itself first in print publications for mutual funds and later in stocks has held up well online, too. I like its site content. Some of its tools such as screeners and X-Ray are nice. For me, however, only the analysis matters. I couldn’t care less what some portfolio slicer ‘n’ dicer says about my having too much of my capital in, say, the tech sector. I had all of my capital in a single sector once and did spectacularly well with it because (A) I know the rules; (B) I know when it’s time to break the rules; and, (C) that was just such a time.

I consider Morningstar’s analysis to be the poor man’s version of Value Line. In fact, it’s obvious when looking at Morningstar’s one-page summaries of stocks that they copied the format from Value Line. Nonetheless, they’ve added a few innovations of their own over the years and their analysts are pretty good. For instance, I think a new investor could prov
ide a bit of a safety net below by restricting his or her stock universe to just Morningstar’s 5-Star lineup.

Now we come to Value Line. It’s expensive, but it’s phenomenal. It pioneered the one-sheet analysis approach and has it down to a science. Its binder system is endlessly fascinating to those of us who have this business in our blood. There’s a weekly update that takes about a week to get through. Having its entire database on hand provides the quickest way to get the straight skinny on a stock you’re curious about. I keep a notebook with me at all times and write the names of stocks that interest me, whether from a conversation or a seminar or an ad or just a thought I had while looking at the ocean. Later, I can make quick work of that notebook with Value Line in front of me.

Note that Value Line is not flawless. It makes mistakes. After a while, though, you can get good at beating it at its own game. For instance, its analysts tend to jump the gun a little on buying undervalued stocks. They buy about 20% above the bottom point. Waiting a little longer than they on a buy can save you a little on your entry price. Most of their long recommendations eventually make money, but the patient reader can make more by getting in more cheaply.

Value Line’s online service is not much cheaper than its print service, but it’s what I use because I live in Japan and the mail takes too long, but also because it’s fast to call up printable one-sheet profiles by just typing in a stock symbol. The site’s good, too, much less frilly than Morningstar’s, which I like. Value Line is a relatively humorless company, sticking with the relevant facts, and presenting everything efficiently and seriously.

Despite Jeff’s being unable to get conveniently to a library, I recommend to most people that they cut their teeth on the local library’s edition of Value Line. Save yourself $600 and enjoy some time around the reference desk. That same notebook I mentioned earlier along with a pocket full of photocopy machine money will get you pretty far in a public library. Take advantage of living in America!

As for some of the other resources Jeff went through, I think a good magazine like SmartMoney is an easy decision. It’s only $25 a year and has some good long-term ideas.

I should add that there’s a whole other tier of research beyond these consumer publications discussed above. For instance, BCA Research has an excellent track record. Its various services cost thousands of dollars, so are not feasible for most individual investors.

I can tell you firsthand, though, that you’re not missing much. Their material is good but when I look back over the most recent six months or one year that I followed them, I find almost no actions taken as a result of what I read. They are all about forecasting rain but not much about building arks. They are all about creating train departure schedules but not much about buying tickets.

Ultimately, you’ll find that the longer you spend in the world of stocks, the more you can do on your own. All you really need is access to earnings data, a good news resource, and a price history chart.

Before you get there, though, I suggest starting with something data driven, like Morningstar or Value Line. Don’t start with something trade driven or momentum driven. Learn how to value companies and recognize what turns the listing ship of an undervalued company into a fully valued one again. That approach is what all the greats have done and continue doing. When such opportunities are not present, you just wait. A huge part of succeeding at this is waiting, and you don’t want to subscribe to something that’s urging you to buy, sell, buy, stop, sell, buy, buy more, and so on every hour on the hour. That generates a lot of business for the service, but little profit for the customer.

Try one publication per year until you find what works for you. Some you can rule out almost immediately. Others will become lifelong friends. It never hurts to find an inexpensive publication that gives you indirect access to all the expensive ones out there through a trusted editor. I’ve heard there’s one like that nearby.

In the end, it comes down to what helps you create a style of investing that’s consistent with the way you view the world, where you find value, what you think is good for the future, and how you want to live. Investing is a funny business in the sense that it can literally ruin your life or make it great, depending entirely on how you approach it.

Approach it right and it will treat you right. Approach it badly and it will strip you of your leisure, distance you from your family, vaporize your assets, and hang you by your neck.

I suggest approaching it right.

Tomorrow: Panera Bread.

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