This section is for investors who pick stocks using heuristic evaluations of many factors and a top-down strategy. Investors using stock screens to build portfolios mechanistically should see Screening Stocks. Those of you using the DCF valuation method should see Discounted Cash Flow

You Need Context

  1. Keep up to date on the economy. Understanding the world’s economic problems is necessary for picking sectors and geographies for asset allocation and diversification. If you use a top-down selection strategy this is even more important. You don’t need a university degree – just a willingness to read and learn.
    Canadian Bond Yields – Track interest rates and changes.
    The Economist – the best source of analysis on a company, industry, and country level. Only the Business and Economy sections are relevant. The five free pages should be enough.
    Financial Post – is one of two Canadian Business papers. The Globe&Mail; is subscription.
    Business Week – good for learning who the large US companies are and what they do. Not so useful after that.
    BNN TV – the Canadian all-business TV station. Very good for tracking market sentiment and opinions. Don’t necessarily accept the opinions, though.Don’t waste time on the web versions of The Wall Street Journal, the Financial Times, the New York Times, and Barron’s. Stay away from the ‘education’ or ‘advice’ sections of the two Canadian papers. They have become a tool of the financial advice industry and propagate pure garbage. They know it and don’t care.Your investment ideas will come from a diversity of places. People you don’t respect or agree with can still be the source of good ideas. Don’t prejudge.
  2. Track market sentiment and the general consensus in the media. Remember that these players are your opponents. You have to know what they think so you can capitalize on their errors. Trend reversals are frequently preceded by market capitulation that you can ‘hear’ in the media. This is very different conceptually from listening for hot tips, under the presumption that the media is there to help you.
  3. First decide what industry sector you want. StatsCan provides quarterly data from all business in Canada (not just listed companies). The Financial Stats Report provides excellent financial metrics. Then start looking for companies within that sector. You should make it a policy to never buy a stock without first researching at least one competitor. The competitors listed by websites are never correct. But the internet now has good top-down industry searches.
    • Reuters. Let page load and reposition. Click your choice from “Sectors and Industries”. Choose the tab called “Company Ranking” for stats on the competitors
    • This SEC site allows you to drill down from SIC codes to sub-codes, to the component companies and their SEC filings.
    • MarketWatch lists the subcomponents of industries and the US companies within the divisions.
    • Canadian listed companies (TSX and Venture exchanges) are listed by industry at FPinfomart.
    • Online screening tools allow for specifying the industry. Use Yahoo Finance for US stocks. Financial Times and FinViz for Cdn, US and international stocks.
    • Screen US industry components by technical factors using EquityTrader.
  4. Keep track of the companies you have looked at, and passed up. A quick note will save you time in the future. Organize by industry so that you can find the ideas later, as well as the competitors. Try compiling your own LITTLE BLACK BOOK (in pencil for easy changing).
    • 9″ X 7″ loose-leaf binder
    • Front page index of tabbed sections for:
      • 1. Consumer Services
      • 2. Food
      • 3. Media
      • 4. Finance
      • 5. Etc.
    • Secondary index at each tab. (e.g. for Consumer Services)
      • 1.1 Telecom
      • 1.2 Garbage
      • 1.3 Education
      • 1.4 Water
      • 1.5 Etc.
    • Each page is a list of companies in three columns
      • Company Name
      • Ticker
      • Their product, competitor, whatever will jog your memory

Create a Form

The objective here is to tame the internet because there is just too much information. It is spread over many sites and much of it is contradictory. It is simply not possible to flip from page to page – reading what you find – and then make any kind of rational decision. Especially not one you will remember six months later. You need to structure the information. The structure allows you

  • to confirm the facts;
  • to make sure the information is complete;
  • to compare between alternate investments; and
  • to document for the future.

A :The following was written when detailed information was not well published on the Web. In 2012 Morningstar created a very, very good site. There are only three problems.

  1. There is no information on Shareholder Equity transactions. As you will see later, more can happen through Equity than happens on the Income Statement. You still need to reconcile the Shareholder Equity accounts, on a total$ basis and a per-share basis.
  2. There is no way to add your own comments to specific items unless you print a hardcopy of each page. This would allow you to (e.g.) highlight problem metrics, or re-name line-items, or add question marks, etc.
  3. The data is computer generated and frequently wrong. You should be prepared to go to the source Financials to check and correct.

B :You structure the information by creating a standard form to be used for all companies. Once familiar with it you can integrate all the variables at a glance – weighing the good and bad points. It is all on one page, so nothing hides or gets forgotten. There is not too much information because only the metrics you actually use for decisions are included. Companies are easy to compare because the data is in the same place on each page. You can sit back and relax away from the computer and sort through your options, and sort again.

The example here is only an idea. Develop your own and photocopy it. Don’t include every metric available. The clutter will hide your important decision criteria. When you find yourself never actually using a metric, take it off the form. Your choice of criteria is personal. The discussion at the top of the Metrics page may help you clarify your objectives.

C : Websites are now publishing detailed historical financial statements. You can use an Excel Spreadsheet to download the data and format it the way you want. This allows you to create your own financial metrics from the data itself, using your own definitions for the metric. This involves some time to set up, and may require changing every time the website you are using changes. Also beware that OFTEN the data does not agree with the company’s reports.

Here is an example spreadsheet using the Canadian company financial data from the Globe And Mail website. The benefits of the electronic version is its ease to update with additional data, and you can post your own comments flagged to individual line items. For many people though it will be TOO MUCH data.

Collect the Data On Each Company

Start your search with the data easiest to come by. As long as none of your criteria are violated continue digging for the information that takes more effort. But as soon as the company fails a preset condition stop. File the form away with a note on why it was rejected.

The ratios you document are better defined and measured straight from the financials by yourself. The computer-generated ratios posted on websites cannot be relied on. Quarterly income data are more meaningful if translated into rolling-12month numbers. E.g. in this example the year-over-year difference between the 6-month data is added to the Dec2004 12-month data to give the June2005 12-month data.

You will develop a small group of websites that give you all the information quickly. For example, start at:

  1. Morningstar
    GlobeInvestor has all the Canadian stocks.
    MSN. has 10-year historical ratios and metrics of Canadian companies.
    Stockhouse has both US and Canadian companies.
    TMX (Toronto Exchange) also publishes the last trades in the stock so you can check you got the best price if you don’t have access to Level II screens.
  2. News releases are your most likely source for up-to-date financials. It is more efficient to get these from whatever website you are using to track your own portfolio. These usually provide all the releases for your listed stocks. Some companies do not publish quarterly financials. All you get is the summary data from the news release. You may want to consider this a comment on management and bypass the company.
  3. The company’s own site will often have a 10-year history of financial statistics, and background on the company’s operations. This may also be on the last few pages of the annual report
  4. No matter your strategy, all investors will look at graphs of the stock price. Review them for major price movements. Try to find the reasons as you review the management discussions and press releases. There are two sites with advanced graphing : BigCharts – Set up your preferences to show Rolling Dividends, Rolling EPS and PriceEarnings. StockCharts has good comparison ability and a more technical slant.
  5. Once you have completed the financial numbers on the form, you are ready to read the chatty part of press releases and the Annual Report. You will find that most dialogue can be ignored because it simply repeats the (cherry-picked) data.
  6. The Sedar and Edgar sites are not very timely, but eventually they will have the financials. Before buying any Preferred Shares or Structured Products you MUST read all the fine print of the Prospectus on these sites.



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