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Fire Your Analyst

Harry Domash

Sure, I found plenty of stock market books, and I read dozens of them. Many described great strategies for beating the market. Most brimmed with anecdotes describing the successes that the authors enjoyed by implementing their ideas. But they were like movies with no endings. None told me how to put all those great ideas into practice.

I wrote Fire Your Stock Analyst to fill that void. It's like a recipe book, except it's about stocks instead of cooking. It describes practical step-by-step procedures for finding, researching and evaluating worthwhile investment candidates. All the procedures use free resources that are readily available on the Web.

This is not a get-rich-easy kind of book. It reveals no magic formulas. This book is for people who know that making money in the stock market isn't about collecting tips from gurus on TV. It's a nuts and bolts resource for investors who are willing to put in the time and effort required to fund and research profitable stock investments.

I didn't come up with all of this stuff on my own.

Sure, I thought I knew about analyzing stocks when I started. I'd been teaching it, writing about it, and doing it for years. I had pored over scores of investing how-to books by famous and not-so-famous gurus and studied their teachings. I meticulously researched how I would have fared if I had followed their strategies in the past. Based on their work, I synthesized and tested my own strategies.

But writing this book turned out to be a huge educational experience for me.

Before I started writing, I interviewed 15 professional money managers and market analysts. I had never met any of them when I started. I found some because they managed best-in-class mutual funds. Others were market analysts or private money managers practicing innovative strategies that I'd heard about from other professionals or through their own writings.

Some interviews led me to academic research. I had always assumed academic research was just too, well, academic to be of interest. But I was wrong. I wound up interviewing a half-dozen college professors who had published groundbreaking and surprisingly practical research on topics ranging from picking the best value stocks to momentum strategies.

The wealth of information that these market professionals and academic researchers so kindly shared with me formed the basis for Fire Your Stock Analyst.

In a nutshell, this book shows you the use of free stock screeners to find worthwhile stock candidates, the process of quantifying overall market and stock-specific risk, and the two step-by-step stock selection strategies: one for growth stocks, and the other for value investors. Equally important, this book tells you when to sell.

Some market sages believe that value and growth investing are, in fact, similar strategies. But, in practice, they are not. The selection process for picking value stocks is almost the opposite from the strategies that growth investors follow.

That said, value and growth investors start with the same information, and this book describes 11 easy-to-use "analysis tools" common to both investing styles.

Here are the tools:

Analyze the analysts: Analyst buy/sell ratings and earnings forecasts tell you whether you have a viable value or growth candidate on your hands.

Know what a stock's valuation implies: Knowing the growth rate implied in a stock's current valuation tells you a lot about whether you should jump in with both feet or run for the hills.

Set target sell prices: The target price is the price you expect to sell a stock at if all goes well. It's the "reward" half of the risk-vs.-reward equation.

Analyze the industry: Before you spend time analyzing a stock, make sure it's in an industry with an acceptable growth outlook and not so competitive that none of the players is making money.

Analyze the company business plan: It's a dog-eat-dog world out there. Find out whether your stock has a viable product that can fend off the competition and a cost-effective way of getting it to market.

Rate the management: Does your stock's management have years of experience in the same business, or are the managers mainly executives drawn from unrelated industries recruited on the theory that a good manager can run anything? (Wrong!)

Check financial fitness: Even the threat of bankruptcy is bad news for shareholders, so you need to know if your stock is a bankruptcy candidate.

Analyze profitability: Just because a stock is reporting positive earnings doesn't mean that it's profitable enough to finance its expected growth.

Detect accounting shenanigans: Faltering growth translates to plunging share prices, which is something that no company exec cherishes. You need to know when managers are cooking the books to mask slowing growth.

Check ownership: Find out whether the smart money is avoiding your stock like the plague, or whether its shares are mostly in the hands of short-term investors waiting for the chance to dump their holdings.

Check the stock price charts: Sometimes heavy buying or selling by in-the-know investors is your first clue that something big is afoot. You need to know how to pick up clues from the charts.

Finally, Fire Your Stock Analyst tells you where to find the information needed to do the analysis and includes reproducible score sheets to aid your evaluation.

If this book is valuable, I owe it to the pros who found time in their busy schedules to describe their market-beating strategies to me, as well as the researchers who explained academic terminology and guided me through their often voluminous research reports. Also, special thanks to Standard & Poor's for providing me with historical data from S&P's Compustat database that facilitated my research.

Following the strategies that I've described won't guarantee that every stock you pick will be a winner. However doing so will certainly help you avoid making stupid mistakes and should improve your batting average. Good luck with your investing.