So Many Stocks; So Little Time

WALL STREET SMARTS, THE BLOG, IS NOW WALL STREET SMARTS, THE BOOK.  FULLY EDITED AND REVISED WITH NEW MATERIAL ON AMAZON

If an individual investor decides to put together a portfolio based on value investing, the books reviewed in the last few blogs can provide the strategy and rules for analyzing stocks that meet the investor's requirements.  To continue the "gold miner" analogy, the value investor will have the necessary information to separate real nuggets from fool's gold.  The remaining question is how to find them.

In the bad "good old days", the individual investor had to almost take on a second job, i.e., the job of a securities analyst, poring over thousands of company communications, balance sheets, income statements and the like.  Since this is a full time job for the analysts on Wall Street, the individual investor would be faced with the almost impossible task of finding the time in his or her busy life to devote to identifying companies which could prove to be a good investment.   

In several of the biographies about Warren Buffett, it is reported that, for many years, he devoted substantially all of his waking moments to stock analysis.  Apparently, his family understood or, at least, put up with his single minded devotion to finding good stocks.  Given his financial success, it obviously paid off.  Not many individual investors will be able to convince their spouses and families that they can give up the day job because they will be able to do the same. If faced with such a proposal, most spouses would probably suggest their partner take up psychological analysis, not financial.

There are almost 5,300 companies traded on the NYSE (New York Stock Exchange) and the NASDAQ (the exchange formerly known as the National Association of Securities Dealers Automated Quotations).  The total universe of stocks increases significantly if you include the stocks traded on exchanges affiliated with the NYSE and all other exchanges around the world.  Reviewing all of the available information on all of these companies would be a daunting task, even for a full time Wall Street analyst.  Many analysts specialize in one or two industries, which greatly reduces the number of companies they must follow.

Before computers became ubiquitous, analysts and individual investors had to plod through volumes of material to find attractive candidates for purchase.  One method was to review the monthly Standard & Poors (S&P) Stock Guide, a small, thick pamphlet with financial information printed in very small type for all traded stocks.  An analyst or an individual investor could spend hours combing through the lists of statistics for each company looking for a stock which met some or all of his or her financial metrics.  As the computer took over Wall Street, this arduous task was taken over by computerized stock screens which quickly identified stocks with the analyst's desired financial ratios.  The computer accomplished in seconds what had previously taken many hours.

The home computer now allows individuals to also screen for investments.  The screening of thousands of stocks is the first step for an individual investor putting together his or her portfolio.  In the next blog, we will examine this investment tool in greater detail.

Comments are always welcome.