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Want To Beat Wall Street? - First You Need To Know Who Is Wall Street

You know when I graduated from The University of Chicago with my MBA in the early '90s.  I had a decent feel for what most of my classmates were pursuing as careers.  Many worked in consulting, many worked for large corporates, and many worked on "Wall Street".

Interestingly enough, while the consulting and corporate jobs seemed pretty straightforward. It took me years to really understand what the Wall Street jobs were and how they related to each other in the big scheme of things. I guess you just chalk it up to experience.  Even to this day, many of my classmates really don't know what my job entailed as a "Project Finance Banker".  It's bank lending for very large worldwide infrastructure projects, that take years to complete and almost never cost less than $100 million.  Just like a when buying a house, the owner puts up 20% and the bank (at this scale "banks") puts up the 80%. Yeah, it was complicated - the total documentation for a single deal on average probably stacked 2 to 3 feet high - but it was also a lot of fun.

Right now I am in Act 2 of my career - investment management. Specifically, stock investing - a long time hobby of mine that I always took quite seriously.  As time passed, and the more deals I became exposed to, the more fascinated I became with the opportunities stock investing offered. While there are plenty of areas to put capital to work - I don't know of any other investment opportunity that can readily match your personal risk appetite.  Want want to invest in a stalwart day-in day-out low-risk dividend paying company? - done.  Want to invest in a high flying biotech unknown company with a Vegas style payoff? - done.   Additionally, the stock market gives an individual incomparable liquidity - generally, someone is always there to take you out of a position. If you ever tried selling real estate, you know you can wait for months, if not longer, to find someone to pay you the "fair" market value for an investment property.

My focus is now investing other's money for gain and to become an inspiration to a ton of uninspired investors.  I've found that many people believe that the markets are rigged, that their investment options are limited, and that their retirement accounts are only a bit better than savings accounts. Well, based on my experience, the markets are not rigged (at least not significantly) - you just need to know who to listen to on Wall Street.  While understanding the basics of investing, which you can find out with many a nice primer at amazon.com, after you do all that, just who do you listen to and not listen to for general advice?

Well, all the self education is a waste, if you get swayed and worried as soon as you read or hear news about the latest financial "pending catastrophe" - that more times than not is about driving advertising revenue to a particular media property.  People need context regarding who to listen to and they need to remember that first and foremost Wall Street is about SELLING. 

Pardon my Star Trek geek reference, but as far as Wall Street is concerned, they are The Hirogen, and you are their starry-eyed Prey. In non-geek parlance, at game time if you don't know who the sucker is at the poker table, it's you.

While I am pursuing the conventional avenues of growth for a new investment management firms - approaching individuals, hedge funds and other funds for allocations - I am a big believer in establishing an online presence to both share and learn.  The connection between the internet and the democratization of power is obvious - it is foolish to ignore it.  

I am not a writer.  I am a veteran deal guy, that has at times laughed out loud at counter proposals at the big conference table.  Knowledge and information is power.  Opportunity is available for those with the assertiveness to make that knowledge and information work for them on any level.  I am a strong believer in capitalism. I am a strong believer in self-determination.  I am a financial insider. I know what moves capital.  I am here to build a valued business. I am here to share red pills for those that want them. 

Why am I so confident about my ability to make a difference? Mostly due to the sheer volume of mediocrity I have witnessed in my career, and the past success of Wall Street to dupe the common man into submission.  There are without a doubt, many talented people on Wall Street, but by and large they are a minority.  Many times, than not, their brilliance is really attributed to the best lawyers and accountants money can buy. After all, everyone by definition cannot be above average.  I figure I can help you identify the above average types.  By the way, here is a tip, throughout my engineering and business school education and career experience, the smoothest talking, most confident person you talk to is never the best - he she may be above average, but trust me - never the best.  I've found the best knows that staying on top is a competitive never ending game.  The best, usually when pressed, can always rattle off details of some esoteric report or journal to support their point of view. 

Stocks? Yes I do believe they are the way to go - despite the trend of fewer people now investing in individual stocks versus 20 years ago.  In addition to the reasons I've already listed, look at the evidence, Who have been the biggest business moguls over the past 20 years? Even including the tech wonder-kids (Gates started as a kid), they have been stock investment managers (Buffet, Templeton, Lynch) and hedge fund managers, not real estate tycoons (although more than a few respectably held their own).  And now with information and data now widely available to the masses at free or very affordable rates, active stock investing is an overlooked activity that is due for a resurgence.

My now  ready understanding of "How Wall Street Work", gives me a calmness because I understand the playing field.  I understand perspectives, strengths, weaknesses, and motivations of the different players.  To someone who doesn't know, when someone who works on Wall Street says "so-and-so", it can be intimidating.  After all.... they must be on the inside right? Well..  you have to keep in mind Wall Street is a sales machine first, and value-add provider second. Its role truly is critical to the worldwide economy.  When it comes to you getting ahead, there truly are opportunities out there every day.  You just have to be proactive about pursuing them, and not just follow the hottest tip from the latest "guru".

And for the record.. yes Wall Street has "gurus", but the truth of the matter, they are extremely few in number.  The majority simply gain their expertise through experience like most people do in their careers.  This is also why I am such a big proponent of Peter Lynch's (and others) philosophy of investing in what you know. Your exposure to a particular industry for just 10 years, can give you just as much insight into industry trends as anyone on Wall Street.

In sports, when you are getting ready for the competition, you look out at the field.  You quickly run through what is a factor to pay attention to and what is a factor to dismiss. You and your investment dollars are no different.  The funny thing is, when you do a Google search on "How Wall Street Works", you find no play books out there telling you, these are the "field positions" on Wall Street.  You find no play books telling you "THIS is what these people do well" and "THESE are their motivations".  Think about it - if you don't know these few things, then it is very difficult to know when and who to listen to. So,  I'm going lay it out for you.  No doubt I will leave out some group, but I'm sure I'll catch most of them.

So someone tells you about an investment opportunity, and he/she is "connected".  Unless you understand the context of the conversation and the role of the "connected" person, then you're making emotional judgments, not sound logical ones.  Ok, so here are the players that are known as Wall Street.  One thing to keep in mind, the largest financial firms (Chase, Bank America, Goldman Sachs, etc.) have most of these players listed below in different departments.

                     

Financial Advisers:  These are the folks you will most likely encounter in daily life.  The role of the financial advisor is two-fold.  1. Sell you resources for financial planning and protection.  2. Direct you to other professionals that specialize in investing your money. They can find you quality investment managers, but without going into details, not necessarily the best.  If you know one, he/she can tell you how their hands are tied due to their likely contractual ties to a "platform".  Their strength: especially resourceful for finding niche specialist to address your personal situation. 

Bankers / Lenders: Bankers are lending specialists to different parts of the economy. Bankers are usually in-tune with general economic trends.  For their industry of specialty, they are especially resourceful about industry challenges and trends.  In addition to serving basic needs of small and medium sized businesses, their role is usually critical for making the numbers work for those multi-billion dollar transactions you hear about.           

Brokerage Firms: These firms are often best thought of as middlemen - transaction facilitators.  They make security transactions happen.  Think E-Trade, Charles Schwab, TD Ameritrade.  Strengths - They are exposed to market trends and see general market sentiment first hand.  You really have to take recommendations and research from brokerage firms with measured consideration.  They're livelihood depends on creating transactions (from which they receive a commission), not providing you the best research.  Additionally, be very very careful of the brokerage firms that sell penny stocks - better yet, just avoid them. I personally think you're better off going to Vegas than "investing" in penny stocks.  And if you keep reading this blog, I'll show you how to make just as big, if you want, and much safer bets by buying options on mainstream blue-chip stocks.

Professional Traders: Traders also facilitate transactions.  You can also think of them as middlemen as well. However since they are usually providing these services to corporate clients, they are also in positions to create at times, substantial marginal income for their employers.  In my opinion the commodity traders role is first or second of importance to the economy among the Wall Street players.  The traders allow corporations to buy all kinds of commodities in bulk at fixed prices, in turn allowing these companies to maintain steady prices to retail consumers - from paper, to orange juice, to gasoline.

Investment Bankers:  These are the folks that help companies raise money for expansions and acquisitions.  Their analysis skills are above average. They are required to be high quality salesman with deep knowledge of both finance and accounting. Caution: Their required sales role doesn't necessarily make them the most reliable source of information. Also of note.  The smartest guys I knew who worked on Wall Street worked in investment banking or research.

Researchers: As mentioned, the smartest Wall Street guys I've known tended  to be researchers or investment bankers.  Researchers need to have a very deep level of understanding accounting, economics, and finance, and at the same time be capable of summarizing the impact of all those details quickly and succinctly.  Among other things, they perform various kinds of valuation to determine an acquisition price, sales price, or future stock price.  If you get a chance to talk to or receive the services of a trustworthy researcher for a particular industry, cherish it.  While no one is right all the time, they have the best batting average as a group.  Unfortunately, the problem with researchers, is trusting their advice when they work in a department of a large financial institution.

Financial organizations with investment banking groups regularly earn multi-million dollar commissions in exchange for raising capital for other firms.  Consequently, the organization is not going to allow its research department to say anything bad about a high commission paying client. Yeah.. they are suppose to be independent, but trust me, they really aren't.   If you don't have access to any researchers, follow my lead here. Get a subscription to ValueLine.  They offer multiple subscription levels depending on what you are looking for, without the conflicts of interest (I suggest starting here (http://www3.valueline.com/sup_howtoinvest.aspx). There are others, but ValueLine is the best in my opinion.  Warren Buffet and Peter Lynch have publicly endorsed Value Line, in case my opinion is not enough.

Investment Management Firms: These are Private Equity Funds, Hedge Funds, Mutual Funds, and  Money Managers.  Private equity funds are the guys that invest money in relatively small companies before they go public. Their success and ability is driven by their sector expertise and access to deal flow (opportunities are usually first shared among a shortlist of firms that know each other).  Hedge funds are  suppose to be run by the gurus of Wall Street.  These guys earn the highest fees, although there are more and more cases of their expectations not quite meeting performance as of late.  They invest in public and private companies, commodities, derivatives, and real estate - the entire gamut, all in hope of attaining the best returns possible. Mutual funds, are the most commonly understood financial product - usually consisting of stocks and/or bonds. My biggest beef with mutual funds is that the average number of stocks they invest in is around 150. Just how do you expect to beat really beat the market, when you diversify so much, you basically are representing the market. Furthermore, why don't you just try to find out what these 150+ stock holdings are.  It's never easy - never - and I wonder why.  If this is the average level of diversification of your typical mutual fund, you are better off cutting your annual expense to these actively managed funds and simply buy a passive index fund.  Money Managers is the catch all term for the remaining active investment managers.  They usually take a more personalized approach to serving their clients. Their scope of investment service may be narrow, say stocks only, or broad like a hedge fund manager.

So.. now you know Who is Wall Street. You now know a bit about the leading players.  The next time you hear about a hot stock tip, or a fast talking Jim Cramer segment stop and listen.  But now listen with context and think about being a competitor out on the playing field. Think, 1. What Player Is Talking?  2. How Deep Is His Knowledge?  3. What Is His Motivation?  Different players do different things well, but first and foremost, remember, their common job function is to SELL.  

Want to beat Wall Street?  You can and we can help (Get our free newsletter here, http://www.cmgstockpicks.com/newsltr/ ).  Just do some homework, use your knowledge, use your instincts. Become Hirogen - and be not the Prey.

'Nuff Said.