The Tech Stock Investor

Paper-trading has long been touted as an excellent way for budding investors to learn the ropes. The reality is quite different. Paper-trading involves an investor making “simulated” purchases of a stock and recording the price purchased in a notebook or on a spreadsheet. Then when the stock moves up or down according to the trader’s rules the resulting gains and losses are recorded every time the trader “trades”. There are a few problems with this methodology.

Fear and greed are much more likely to be involved in real money trades. Nothing gets the adrenaline running faster than the knowledge that you just threw ten grand at a stock hoping it will skyrocket. Well, maybe one thing will get it running faster: watching the real money traded stock tank twenty percent while realizing you had not placed a stop loss order ahead of time.

The market moves a lot faster in the real world versus the simulated one and investors who learn paper trading will be surprised at how much things change as they throw real money in the ring hoping for a score. Spreads and slippage are not usually tracked as well on paper as they are by the broker. Some newer investors also back test “strategies” on paper only to get flushed out of the market as they realize that strategy was good twenty years ago on historical data but leaves much to be desired in today’s market.

Using paper trading does have one advantage: it can teach a green trader the mechanics of the market without risking real money. He can learn about stop loss orders and good-till-canceled orders without the fear involved in real money. That is the only real benefit that I know of to using paper trading. Like any myth, paper-trading is far and wide touted as a great way to learn, just remember it is a great way to learn the mechanics of the market but it will never replace reality for the rest.

Return On Assets (or ROA) measures a company’s ability to generate profit net of expenses. If a firm’s ROA is 5 percent that means that for every dollar in assets the firm generates 5 cents in profits. Now like any ratio, this should not be used as a single deciding factor for investing in any stock, but should be compared to other stocks in the company’s sector or industry to see how it measures up to competitors. A quick look at a company’s historical ROA’s should also be in order when researching any company. Make sure the number is at least growing.

An extremely agile company with good management will deliver higher ROA’s on average than company’s who have stagnating management or are suffering from other business issues. Low ROA’s in a sector with higher average ROA’s could signal a company facing stiff competition or one that is suffering short inventories or production issues. It can also flag companies with extremely high debt.

So how do we measure ROA? It’s really simple. Divide the current fiscal year’s NET INCOME by the TOTAL ASSETS to arrive at the ROA. Now ROA can fluctuate widely during the course of a year or more and when examining a company it pay to research historical ratios to compare how the company is doing versus a past period and even against other companies past periods.

Sound off: what ratios do you use when examining a stock for investment?

As Ford continues to crumble in domestic markets and fights to stay alive in the world market, investors continue to punish the stock price. Ford has been fighting a losing battle for several years now. Facing everything from UAW contract fights, economic hardships, and even negative publicity for its continued stance in the controversial support it provides to Gay and Lesbian organizations.

The company recently signed new contracts with the UAW and has been selling plants and other assets to meet expectations. A plan to build a new plant in North America seems to have been put on hold or abandoned altogether, and the planned sale of Volvo has been scrapped since a buyer will not likely be found.

A recent scan over the number for the company at Reuters was very eye-opening. As I glanced over the ratios listed I could not help but notice something: a number of them had “NM” instead of an actual number. “NM” generally means “Not Meaningful” of course, and that pretty much sums up the action at Ford. Dividend Yield, PE Ratio, and 5 Year EPS all reflect this along with a number of the other ratios.

It’s pretty sad for Ford (and its employees) to see things going this way, but maybe management can get things back on track before shareholders decide to issue some pink slips. Of course, with the way this company has been run into the ground, pink slips may not be such a bad idea.