Securities Analysis for Dummies

By: Marygwen Dungan | Thu, Feb 19, 2009
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Start with Dumb Questions

You might remember that I burst onto the economic-commentary scene in January having been inspired by the dumb questions asked by my dumb friends about the advice of that dumbbell, Suze Orman. You'll remember that I smote her with an Excel spreadsheet and finished up with a trailing-12-month Dow chart. She has recanted and is now lying through her teeth on PBS, so I'm told.

Word of my victory has gotten out and almost every day I'm asked more dumb questions from more dumb people. Here are a few that address the universal plight of modern man.

  1. Should I stay in the stock market; prices always go back up don't they? No

  2. Will the economy recover later this year? No

  3. Are we in a recession? No

  4. Really, we aren't? That's such a relief; I thought we were. What are we in then? A depression.

  5. A friend told me to cut back and save money. I don't see the point of this, do you? Not in your case.

Let the NASD's rules on Communication with the Public be your Guide

When I suggested to a friend that she sell her stocks a thousand points or so ago because the market was going to fall further, she asked me in a haughty tone, "How do you know that?!" It took me up short for a minute. How do I distil 25+ years of Wall St. experience and a Wharton education into something that makes sense? I've never been asked to do this before.

Well, I said, the stock price of companies goes up when earnings go up and goes down when earnings go down. Earnings are going down.

Trend Analysis

All you need to know about the trend, like most things in life, can be boiled down to whether it's your friend or enemy. But we all know that friends can be faux. Here's how to tell the difference. You can use an approach something like this:

Based on this formula:

(Whoops, that's to determine the efficacy of tax cuts on consumption. You caught that immediately, right?)

Or you can use my fav, the trailing 12-month Dow chart:

  1. Ok, the Dow is falling so it's the enemy, right? Yes.

  2. But if I sell my stocks, I'd have to take a loss. You already have a loss unless you own your stocks in a SIV. In that case, everything's fine.

Stock Selection

Go to the mall. Are there the vacancies? Don't buy the stock of commercial real estate companies. Are the stores crowded with shoppers? Don't buy the retailers. This is a little personal, are you late with your credit card payment? Don't buy the financials. How about your mortgage or car payment? More reasons not to buy the financials. Or the autos. How about your other bills like utilities, phone, heat. They've been shut off? Well, people still have to eat. You say there're long lines at the church food pantry? And the people are barefoot? That would be retail and we're not buying those stocks anyway.

One Last Thing

This is not investment advice. Do your own due diligence. Past performance is not an indicator of future results and all that.



Author: Marygwen Dungan

Marygwen Dungan

Marygwen has worked in banking and securities for 25+ years. Her first job after the University of PA undergrad and Wharton grad was as an investment banker at Paine Webber. After a stint in international commercial banking, MG returned to Wall St. as a risk-arbitrage sales trader, initially working for Merrill Lynch.

For the last ten years MG has been a supervisory analyst and editor of institutional equity and economic research for several multi-national financial firms including Banco Santander, Credit Lyonnais and Fox-Pitt, Kelton, a subsidiary of SwissRe. She currently writes for BlownMortgage and contributes to other top-rated blogs. Personal interests include historic restoration and organic farming.

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