Nine Basics of Sound Investing

Sales growth. Dividend yields. Investment rates in fixed and working capital.

Wall Street is awash in numbers, and sometimes all of these figures can make it hard to see the forest for the trees. If you occasionally feel lost in the woods, here are some ideas from my book It's Earnings That Count that can improve your investing results and give you some peace of mind.

Get your financial house in order. Your first step is to take care of basics such as insurance, savings, wills, guardianships, trustees, estate planning and college tuition. If you are a procrastinator, seek assistance from a professional. You'd be surprised how many intelligent, well-educated people neglect this important responsibility.

Save and invest regularly. This is more important than picking stocks shrewdly. To illustrate, consider two neighbors: Peter Plodder saves $3,000 a year and earns a 10% rate of return. Hank Hotshot makes 15% every year on his investments, but he also salts away just $1,000 a year. That's too bad, because while Hank has $245,000 at the end of 25 years, Peter has $345,000.

If you are like Hank Hotshot and don't save enough, consider a few cost-saving steps. Take your lunch to work, for instance, and drive your car for a few more years before trading it in.

Formulate a business plan. Devise an investment strategy and write it down. This is your business plan, and it will help you zero in on the kinds of companies you want to own most and avoid getting distracted by situations of peripheral interest. Naturally, your business plan should reflect an investment strategy that suits your personality.

My goal is to find conservative growth stocks, so I have a checklist of 38 items to look for. Some of the items on my list include growing levels of free cash flow, high returns on capital, more cash than debt and a low ratio of goodwill to assets. No company will get a perfect score in your business plan, but the more positive factors, the better.

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Hewitt Heiserman conceived the Earnings Power Chart, Earnings Power Box and Earnings Power Staircase. A financial analyst for the past 15 years, Heiserman is a member of the Boston Security Analyst Society and the CFA Institute. He also authored It's Earnings That Count, a book published by McGraw-Hill. For additional information, please visit www.earningspower.com. At the time of publication, Heiserman had no positions in any of the securities mentioned in this column, although positions may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Heiserman appreciates your feedback and invites you to send it to [e-mail].

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