- [Philip] When I was just a newborn,
my grandmother generously gifted me a certificate
for a single share of Disney stock to celebrate.
The price? $1.40.
- [Julia] Decades later,
we fished that certificate out of our safe
and did a little research.
Turns out, that little single share had made some friends:
through multiple stocks splits and dividend investment,
we now owned over 50 shares.
On top of that, the share price had grown to about $35 each.
So, in 2007, we sold the shares for around $1,600,
which we ended up putting towards
the down payment on our first house.
- [Philip] All told, I realized a whopping 114,100%
return on that investment.
Way to go, baby Philip!
- Okay, Mr. Boss Baby, don't forget.
That was thanks to your Nana,
but now that you can tie your own shoes
and have all these fancy financial licenses,
do you have what it takes to pick a winner
like she did all those years ago?
- Not only did I learn to tie my shoes,
thank you very much.
But I have also learned that there's a lot more
to picking stocks
than following a gut instinct
or what I see on Reddit.
Today, we're going to explore the tools
you can use to become your very own baby Philip moneybags.
Mustache twirling required.
(playful upbeat music)
- Let's say a certain company has caught your eye.
Maybe they make a product you love,
maybe you keep seeing their name pop up on WallStreetBets,
or maybe you simply work for the company
and have an opportunity to become a shareholder.
Before tapping that Buy button on your trading app,
it might be a good idea to kick the tires, so to speak.
- Most methods of analyzing stocks
fall into two major categories:
technical analysis and fundamental analysis.
They're often portrayed as locked
in an eternal battle for supremacy;
same goal, different tactics.
So, which camp comes out on top?
Let's start by looking at the technician.
- If you've ever seen a day trader at a coffee shop
or those huge stock terminals on TV
with squiggly lines in red and green columns,
then you've seen technical analysis in action.
This discipline focuses on tracking price movement
and trading volume of a company's stock.
What they're looking at are historical patterns,
patterns that will clue them into opportunities
to sell or buy a stock at a profit based on the data.
This often requires extensive research
of past trends,
sophisticated trading models,
and a healthy dose of technology
to execute when they recognize
the signal they're looking for.
- These repeatable patterns
are discovered through something called back-testing.
Back-testing is a critical concept to the technician.
It suggests that specific movements
of the stock price or trading volume
will be repeated in the future.
Here's an example of the cup and handle.
Here's a candlestick
and, of course, the falling knife.
Many traders develop entire strategies
around a single pattern or a combination of multiples.
- But mapping the stock price alone
isn't the only factor they consider.
Another is the moving average.
This is a constantly updating average price
or trading volume of a stock.
One classic use of this particular indicator
is the crossover strategy.
This strategy looks for a share price
to fall below or climb above moving average,
hence, crossover.
They use these shifts as a signal
to buy or sell out of their position.
But crossovers are just the beginning.
Strategies like pennants, flags, or triangles
are other configurations analysts might look for.
(sighs)
Now that our brains are good and scrambled,
let's visit the other side,
the fundamentalists.
- Fundamental analysts aren't concerned
with all the squiggly lines
and fine details of a stock's movement.
Instead, fundamentalists focus on the overall strength
and financial stability of a company.
They ask questions like, how profitable were they last year?
Are they in a strong position
to weather an economic downturn?
Are they currently undervalued?
Obviously, you can't just set a meeting with the CFO
to get answers to these questions.
So, these investors rely on a few specific formulas.
- If you were to do an online search for any company stock,
you'll likely come across two essential,
fundamental indicators:
earnings per share or EPS,
and price-to-earnings or P/E.
EPS for a company is found
by taking the company's net income,
subtracting preferred dividends, if any,
then, dividing that number
by the number of shares outstanding.
The higher the EPS,
the more profitable the company.
Then, if you take their EPS
and divide it into the current stock's share price,
you'll have your P/E ratio.
- These ratios will allow you to compare a stock,
apples to apples
or Apple to Samsung.
For example, let's say you're interested in two companies,
Donut Dragons and Cupcake Queens.
After you run the numbers,
you see that Donut Dragons has a higher EPS
than Cupcake Queens,
suggesting a higher profitability.
Further crunching reveals that Donut Dragons
also has a lower P/E ratio than Cupcake Queens.
Meaning, it might be a cheaper buy.
Analysts use all kinds of creative ratios like this
to help measure the fundamental value
of one company over another.
- I'll admit, the idea that I can just use math
to make money is really appealing.
It gives the individual a sense of control
over something as uncontrollable as an economic market.
And even though these two analytical paths
can help you make a more informed decision,
we can't forget that there are important aspects
to company's health that are neither technical
nor fundamental in nature.
- These are known as qualitative elements.
Does the company have a durable, competitive advantage?
How's the management at the top?
What's their turnover like?
What direction does this company's industry
seem to be heading?
Even if you're able to find some of this out,
the information is going to be interpreted
through the lens of your personal feelings.
Maybe you feel that a company, while booming now,
is ultimately doomed due to climate change.
Maybe after hearing about a leadership scandal,
you decide to sell,
despite what the P/E ratio might tell you.
That's okay.
You should allow space for your excitement
and personal values
to have a seat at the decision-making table.
- So, which of these philosophies ultimately wins out?
Should you lean into technical analysis
or focus on fundamentals?
Maybe qualitative research
is ultimately the most important.
For many investors, professional and novice alike,
These different approaches
actually aren't in a battle at all.
Instead, when used in tandem,
they compliment each other.
- In 2019, Warren Buffett told his shareholders
his three general rules for choosing a company to invest in.
"First, they must earn good returns
on the net tangible capital required in their operation.
Second, they must be run by able and honest managers.
Finally, they must be available at a sensible price."
As you can see, even the Oracle of Omaha
uses a three-pronged approach.
- Now, if all this makes your head spin, that's okay.
This kind of stuff isn't for everyone
and you don't have to do it
in order to be a successful investor.
But, if solving this puzzle
and picking stocks is of interest to you and you have time,
go for it!
Start small and do your own work
to verify anything you might see on the internet.
- The point of all of this
isn't to become some sort of magical stock soothsayer
impervious to losses,
rest assured, there is no such thing.
The goal is to make you a more confident
and informed investor.
- [Julia And Philip] And that's our two cents.
- Quick! Before you go,
do you know what you wanna be when you grow up?
- No matter your answer,
we think you should check out "Future of Work,"
a new six-part docuseries on PBS Voices
hosted by Julia and me
that explores the real, big, work-related questions
that Americans are facing today.
Everything from debt and the gig economy,
to career identity and so much more.
- Check it out!
Link in our description
and be sure to tell them that Two Cents sent you.
(mellow music)
Thanks to our patrons
for keeping Two Cents financially healthy.
Click the link in the description
to become a Two Cents patron.
(playful music)