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?

General Motors was once used as faithfully as the DOW as a barometer for the entire US economy. If GM dipped so followed the market. Lately, GM has suffered from several angles. Earlier in the year, GM was outsold by Toyota. This was the first time the company had been outsold globally, albeit by a narrow margin. Mounting health care costs and a beneficiary burden (which some estimate at 1 worker supporting 2.6 retirees) is slowly grinding away at GM’s ability to compete in North America.

GM’s other woes have usually followed prolonged strikes by labor unions. This has led to reduced sales and crippling some operations for weeks at a time. Management has cut jobs, closed plants, and done everything short of merge with another company to prevent the continuing crumble of the company. A preliminary agreement seems to have been met today and it looks like the strike may be over very soon. This pushed GM shares up a bit and tugged Ford’s shares up with it. Is the long term solution for GM a merger? Some have speculated once in a while that a merger with Ford could produce a more dynamic company since they both share a lot of suppliers and vendors in the supply chain.

Personally, I feel that the days of the multinational conglomerates which were formed in the US are numbered. Regulatory problems keep them from competing globally and domestically with foreign competition which has free reign and little regulation in their home countries. Keep yourself diversified and consider your portfolio warned.