Printer Friendly Version
Stocks Under Surveillance
A Down Market May Be the Time to Grab Those Choice Shares You’ve Been Eyeing
Each month, investment clubs across the country review thousands of stocks as candidates for their portfolios. Most of those stocks will be eliminated by these clubs because they don’t meet minimum criteria of management quality — they’re simply not “good” stocks. Some will be eliminated because they don’t fit with the club’s portfolio diversification plan. But many other stocks will be abandoned, not because they’re poorly managed, or because they fail other tests of growth or quality, but merely because they’re not considered by the club’s members to be fairly valued at their current prices.
Once eliminated by the club, these stocks are usually lost and gone forever. No matter how much research has gone into the study of the company and its industry, all that work is for naught as the stock disappears into the deepest recesses of the members’ memories.
At the next club meeting, the cycle is repeated. Stocks are studied, stocks are rejected, and if the stars align, a stock may actually be determined to be of suitable quality and to be reasonably valued and the club elects to purchase it.
As investment clubs mature and work their way through the pool of stocks that might conceivably be considered in a buy-and-hold growth stock portfolio, they begin to run out of candidates to study!
The lament arises in the club that “we can’t find anything to buy!” From their perspective, these clubs have run out of stocks to study. But there are always high-quality companies selling at reasonable prices that could be purchased by investment clubs.
In the Market for Bargains
As investors seek out opportunities in the market, they soon learn that as stock prices fluctuate and company earnings grow, a stock that was richly valued by the market may occasionally become undervalued and thus become a prime prospect for purchase. Overall market corrections or downturns may also cause a stock to become reasonably valued and factors that affect an entire industry group may depress the prices of its stocks in the short term without having much impact on the long-term potential of those companies.
Near-term problems may drive a company’s share price down as well, sending prices into the buy zone on your stock studies.
All these potential opportunities are useless to the club unless members are ready to seize the opportunity to buy when good stocks become available at cheap prices.
The best way to be prepared for this eventuality is to maintain a watch list of companies that the club had previously studied and rejected due to overvaluation. Then, when the price is right, the club already has some familiarity with the company and can move quickly to conduct some additional updated research and if appropriate, buy the company.
The Care and Maintenance of a Watch List
Here are some ideas for incorporating the maintenance of a watch list into the club’s regular operations.
• Designate one member of the club as the “Watch List Watcher.” The Watcher’s responsibilities are to follow the prices and fundamentals of companies on the watch list and regularly update the club on opportunities that may be available.
• Place “Watch List Review” on the agenda of each club meeting. The Watcher should alert the club if any of the companies on the watch list are in or close to the buy range or whether there are stocks that should be removed because of fundamental problems.
• Regularly refresh the stocks on your watch list. Each time a stock is rejected for purchase, ask whether the club wishes to place that stock on the watch list. Each time a stock is sold because it appears to be overvalued, that stock should be added to the watch list. When a highly appreciated stock is transferred to a departing member, that stock should be added to the watch list.
• Use the watch list feature in your club’s myICLUB.com website. Club members can enter their own picks here and a member with appropriate privileges can edit and maintain the list. (The club’s administrator can set the privileges for the member who’s assigned to manage the watch list.) Each month, as the prices are updated, you can quickly see which stocks have gone up in price and which stocks have declined.
• Create a watch list portfolio in Toolkit 6. The club’s Watch List Watcher can create a portfolio in his personal copy of Toolkit 6. Don’t enter any shares; this will ensure that the portfolio won’t be flagged in the Portfolio Report Card as “requiring attention.” Then, refer to the Portfolio Summary Report to quickly identify companies that are rated potential buys by the program. There are other websites that could be used to maintain a watch list portfolio or a member could use Excel, but Toolkit is unique in providing the means to view and manage company fundamentals and quickly create a stock study to review the stock’s attractiveness at the current price.
Don’t Be Scared of Bears
Investors should never automatically purchase a stock based on an older study simply because the price has fallen since the study was conducted. Instead, always prepare an updated stock study and conduct your regular due diligence to become familiar with all the news available on the company’s activities.
When appropriate, you should challenge existing holdings with watch list candidates using the BetterInvesting Challenge Tree and other tools.
Bear markets are often seen as “opportunity markets” by long-term investors, since they provide the means to invest in high-quality companies when their share prices are at historic lows.
Keeping a watch list can help the club to be nimble and efficient, and boost the quality and total return of their portfolio over time.
Douglas is ICLUBcentral's product manager, helping develop the company's programs including Toolkit 6, myICLUB.com, and the Investor Advisory Service. He is also the author of several investing books, including The Pocket Idiot's Guide to Direct Stock Investing, The Complete Idiot's Guide to Online Investing, The Armchair Millionaire, and Investment Clubs for Dummies.