Investing 301

Evaluating an investment takes time and patience. Here's how to find out what you're buyingbefore you commit.

Intuition. It’s what separates the men from the boys, or shall I say, the women from the girls? Either way, intuition is vital in decision-making–something Jami Smith knows well as an avid investor. At 25, she has maintained a well-heeled portfolio since 1997 by trusting her instincts.

“I’ve learned to trust my intuition based on the literature I’ve read, and fundamental and technical analysis,” says Smith, the administrative assistant of the Money Matters for Youth Camp, in Detroit, a non-profit organization that teaches youth about investment banking. “If I get a gut feeling that a stock I own is not going to meet my goal, I am compelled to cut my losses before it significantly affects my account.”

Instinct served her well on September 7, 2001, when she decided to take the money and run from International Game Technology (NYSE: IGT), the Reno, Nevada-based maker of slot machines. Smith bought the stock at $14, and sold it at $56, gaining an astounding 300%.

But her investment choices are based on more than a gut feeling. She looks at relative price strength, which “lets me know what value the market places on a stock. So, if the market isn’t fond of a stock, it has that opinion for a reason.”

Smith also looks for earnings of 30% or more, and ROEs (return on equity) of 17% or more. She chooses such high numbers so “that I’m selecting companies in the top 20% of the industry,” she says. She admits those numbers are a bit ambitious, but, “at my age, I can afford to be more aggressive; I have confidence that the market will rebound.”

With the sluggish economy, however, she has taken a more conservative approach by holding 75% of her portfolio in fixed-income accounts, and 25% in stocks, such as Jabil Circuit (NYSE: JBL) and Coach (NYSE: COH). Until recently, her portfolio was aggressive, with 75% in stocks and 25% in fixed income.

It takes time, patience, and education to evaluate a stock. So, it’s important to uncover as many facets about a company as you can. That’s where stock analysis helps. We’ll show you how to look at the underlying business, such as its products and competitors, decipher the company’s performance via numbers, and decide for yourself if it’s a buy, hold, or sell.

KNOW FOR YOURSELF
Smith started investing at 18. But before she got into the market, she educated herself. To begin, she bought The Wall Street Journal Guide to Understanding Money & Investing by Kenneth M. Morris, et al (Fireside, $15.95) and Investing for Dummies by Eric Tyson (Hungry Minds Inc., $21.99). “I bought the books so I would be informed. It’s one thing to have a professional tell you something, but you have to validate that information by knowing it for yourself.” Smith employs an investment advisor but has her eyes wide open about all her investment decisions.

THE FUNDAMENTALS
Stock analysis may not be for everyone, but it’s important to understand what you’re investing in. Think of it as a fact-finding mission and

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