Automatic Income Method

This is specialized in those of you who wish to purchase individual stocks. I wants to share together with you the methods I have tried personally through the years to select stocks which i have found to become consistently profitable in actual trading. I want to utilize a mix of fundamental and technical analysis for choosing stocks. My experience shows that successful stock selection involves two steps:

1. Select a share while using fundamental analysis presented then
2. Confirm that this stock is an uptrend as shown by the 50-Day Exponential Moving Average Line (EMA) being across the 100-Day EMA

This two-step process enhances the odds that this stock you select will probably be profitable. It also provides a signal to sell Automatic Income Method which has not performed needlessly to say if it’s 50-Day EMA drops below its 100-Day EMA. It is a useful method for selecting stocks for covered call writing, yet another kind of strategy.

Fundamental Analysis

Fundamental analysis will be the study of economic data for example earnings, dividends and funds flow, which influence the pricing of securities. I use fundamental analysis to help you select securities for future price appreciation. Over recent years I have tried personally many means of measuring a company’s growth rate to try to predict its stock’s future price performance. I have used methods for example earnings growth and return on equity. I have found why these methods usually are not always reliable or predictive.

Earning Growth
For example, corporate net earnings are susceptible to vague bookkeeping practices for example depreciation, cash flow, inventory adjustment and reserves. These are typical susceptible to interpretation by accountants. Today inside your, corporations are under increasing pressure to get over analyst’s earnings estimates which results in more aggressive accounting interpretations. Some corporations take special “one time” write-offs on their own balance sheet for things such as failed mergers or acquisitions, restructuring, unprofitable divisions, failed product, etc. Many times these write-offs usually are not reflected being a drag on earnings growth but instead arrive being a footnote on a financial report. These “one time” write-offs occur with an increase of frequency than you could possibly expect. Many companies that form the Dow Jones Industrial Average have such write-offs.

Return on Equity
One other indicator, which i’ve found just isn’t necessarily predictive of stock price appreciation, is return on equity (ROE). Conventional wisdom correlates an increased return on equity with successful corporate management that is maximizing shareholder value (the higher the ROE the higher).

Recognise the business is more successful?
Coca-Cola (KO) which has a Return on Equity of 46% or
Merrill Lynch (MER) which has a Return on Equity of 18%

The solution is Merrill Lynch by measure. But Coca-Cola carries a greater ROE. How is that this possible?

Return on equity is calculated by dividing a company’s net profit by stockholder’s equity. Coca-Cola can be so over valued the reason is stockholder’s equity is merely add up to about 5% in the total market value in the company. The stockholder equity can be so small that almost anywhere of net profit will develop a favorable ROE.

Merrill Lynch however, has stockholder’s equity add up to 42% in the market value in the company as well as a greater net profit figure to create a comparable ROE. My point is ROE doesn’t compare apples to apples therefore is not a good relative indicator in comparing company performance.
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