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Investment Tools
August 02, 2007

My recent articles on Power Investor got people writing to tell me about their favorite tools.

Ron Fisher likes AAII.com's Stock Investor Pro and recommends a membership in AAII because it comes with a "nice website with a lot of good information and free screens based on all the major investing gurus. The cost of a regular membership to AAII is only $29." However, the Stock Investor Pro software runs members an additional $198.

Mike Eremenko in Israel has been using tools at E*Trade, specifically its MarketTrader and Power E*Trade Pro for a while, and says he's "very impressed so far."

Dale Stamps swears by MSN Money's Deluxe Stock Screener, hidden away deep inside the crowded site. You have to go to Stock Research > Stock Power Searches and then click the Deluxe Stock Screener link inside a shaded blue box showing a telescope icon at the top of the page. Oh, and you have to be using Microsoft Internet Explorer to see the shaded blue box. What a shock -- Firefox isn't compatible. If you follow the path above in your Firefox browser, you'll see white space at the top of the "Fundamental Screens" column where the blue box appears in IE. The link above, however, will take even Firefox users to the download page.

Dale writes, "The deluxe screener is much more versatile than Yahoo! or any other free screener. Once I used it, all others were like children trying to play in an adult's game. The ability to put multipliers in the 'Value' field is extremely useful to me. Additionally, there is an 'Advisor FYI' selection that offers many unique selections."

The big question this morning came from Jeff Astor in New York who sent this stock trader's lament:
In the attempt to shorten my learning curve I have been delving full force into some of the resources you mention in your book (as well as others you don't). I am having a difficult time, though, sifting through it all and moving forward in the most beneficial manner.

For instance, I signed up for a free 2-week subscription to IBD. It's quite interesting, but more than a bit overwhelming. They have sections for reader education, but as a whole the system is quite complex to grasp at a basic level, to say nothing of mastering it. I'm thinking of paying for a one-year subscription (not less than $189; cancellable at any time). But I don't know if I will really grasp their approach, or if it is the best approach for me if and when I do.

I checked out the Morningstar site (after reading about its screener in your post on alternatives to Power Investor) and am intrigued by their system. They have a lot of different services you can pay for but I don't know if it is best for me. You barely mention Morningstar in your book, other than a paragraph on one of their newsletters. Do you recommend it? How does it compare to the other resources you mention?

I've considered a short-term subscription to Value Line (only $75 for 13-weeks) to check it out. Your book mentioned we can get their free reports in the library. But I thought for $75 I could have them sent to my home
(it's not convenient for me to go to my local library) and have access to their website for the purpose of learning about the Value Line method of investing.

And there are other publications/organizations you mention in your book vying for my attention and my dollar. SmartMoney, Wall Street Journal, Motley Fool, TheStreet, MarketWatch, and others -- all offer excellent free material, such as articles and investing tools, as well as intriguing for-pay ones. I've been tempted more than once to subscribe to them all and/or try out one of their other for-pay services.

I've not spent much money yet, nor do I feel I necessarily have to. But, on the other hand, I don't want to sell myself short. I am willing to invest to advance my knowledge and shorten the learning curve. The problem is that the field is filled with so many choices. And so many seemingly good choices too. I'm having a very difficult time sorting all this out. I was wondering if you could provide me with some perspective and advice how best to focus my energies and move forward.
Jeff's plight is a common one not just for beginners but for everybody in this business. The constant goal is to reduce the noise to a minimum and expose ourselves to just information that works. I'll respond to each of the tools he mentions.

IBD is an excellent investment paper. I spend a great deal of time exploring its SmartSelect Composite Ratings system in my book. However, you must keep in mind that the paper was created by Bill O'Neil, a dyed-in-the-wool growth trader who insists on stopping out of any position that declines a mere 8%. I feature Mr. O'Neil as one of my master investors in the book because he's one of the best-known traders in the business.

However, his methods are not mine. I'm more in tune with the approach of Bill Miller, another of my master investors, who says that "lowest average cost wins." Declining 8% is not a big deal for a stock that's well-researched, healthy, and in the process of recovering or otherwise reaching for greater future earnings. In fact, a price decline is a chance to buy more and lower the average cost. I do this religiously in The Kelly Letter.

So, while IBD is packed full of interesting measurements, angles, ratings, and other tools of the trader's trade, you need to remember that most of it is for short-term trading. I have to admit that it's not a mainstay of my research program.

Morningstar, however, is quite good for the long-term investor. It's a fantastic research organization, and the name it made for itself first in print publications for mutual funds and later in stocks has held up well online, too. I like its site content. Some of its tools such as screeners and X-Ray are nice. For me, however, only the analysis matters. I couldn't care less what some portfolio slicer 'n' dicer says about my having too much of my capital in, say, the tech sector. I had all of my capital in a single sector once and did spectacularly well with it because (A) I know the rules; (B) I know when it's time to break the rules; and, (C) that was just such a time.

I consider Morningstar's analysis to be the poor man's version of Value Line. In fact, it's obvious when looking at Morningstar's one-page summaries of stocks that they copied the format from Value Line. Nonetheless, they've added a few innovations of their own over the years and their analysts are pretty good. For instance, I think a new investor could provide a bit of a safety net below by restricting his or her stock universe to just Morningstar's 5-Star lineup.

Now we come to Value Line. It's expensive, but it's phenomenal. It pioneered the one-sheet analysis approach and has it down to a science. Its binder system is endlessly fascinating to those of us who have this business in our blood. There's a weekly update that takes about a week to get through. Having its entire database on hand provides the quickest way to get the straight skinny on a stock you're curious about. I keep a notebook with me at all times and write the names of stocks that interest me, whether from a conversation or a seminar or an ad or just a thought I had while looking at the ocean. Later, I can make quick work of that notebook with Value Line in front of me.

Note that Value Line is not flawless. It makes mistakes. After a while, though, you can get good at beating it at its own game. For instance, its analysts tend to jump the gun a little on buying undervalued stocks. They buy about 20% above the bottom point. Waiting a little longer than they on a buy can save you a little on your entry price. Most of their long recommendations eventually make money, but the patient reader can make more by getting in more cheaply.

Value Line's online service is not much cheaper than its print service, but it's what I use because I live in Japan and the mail takes too long, but also because it's fast to call up printable one-sheet profiles by just typing in a stock symbol. The site's good, too, much less frilly than Morningstar's, which I like. Value Line is a relatively humorless company, sticking with the relevant facts, and presenting everything efficiently and seriously.

Despite Jeff's being unable to get conveniently to a library, I recommend to most people that they cut their teeth on the local library's edition of Value Line. Save yourself $600 and enjoy some time around the reference desk. That same notebook I mentioned earlier along with a pocket full of photocopy machine money will get you pretty far in a public library. Take advantage of living in America!

As for some of the other resources Jeff went through, I think a good magazine like SmartMoney is an easy decision. It's only $25 a year and has some good long-term ideas.

I should add that there's a whole other tier of research beyond these consumer publications discussed above. For instance, BCA Research has an excellent track record. Its various services cost thousands of dollars, so are not feasible for most individual investors.

I can tell you firsthand, though, that you're not missing much. Their material is good but when I look back over the most recent six months or one year that I followed them, I find almost no actions taken as a result of what I read. They are all about forecasting rain but not much about building arks. They are all about creating train departure schedules but not much about buying tickets.

Ultimately, you'll find that the longer you spend in the world of stocks, the more you can do on your own. All you really need is access to earnings data, a good news resource, and a price history chart.

Before you get there, though, I suggest starting with something data driven, like Morningstar or Value Line. Don't start with something trade driven or momentum driven. Learn how to value companies and recognize what turns the listing ship of an undervalued company into a fully valued one again. That approach is what all the greats have done and continue doing. When such opportunities are not present, you just wait. A huge part of succeeding at this is waiting, and you don't want to subscribe to something that's urging you to buy, sell, buy, stop, sell, buy, buy more, and so on every hour on the hour. That generates a lot of business for the service, but little profit for the customer.

Try one publication per year until you find what works for you. Some you can rule out almost immediately. Others will become lifelong friends. It never hurts to find an inexpensive publication that gives you indirect access to all the expensive ones out there through a trusted editor. I've heard there's one like that nearby.

In the end, it comes down to what helps you create a style of investing that's consistent with the way you view the world, where you find value, what you think is good for the future, and how you want to live. Investing is a funny business in the sense that it can literally ruin your life or make it great, depending entirely on how you approach it.

Approach it right and it will treat you right. Approach it badly and it will strip you of your leisure, distance you from your family, vaporize your assets, and hang you by your neck.

I suggest approaching it right.

Tomorrow: Panera Bread.

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Power Investor's Publisher Responds
August 01, 2007

I wrote an article on July 23 withdrawing my recommendation of Power Investor software. It appeared in the previous two editions of my stock book, but will not appear in the newest one out later this year. In the article, I wrote:

"Starting a few years ago, I began receiving complaints from readers who followed my advice to buy [Power Investor]. The data set was old or incomplete. The calls to customer service weren't answered. Emails went unreturned. Finally, the organization behind Power Investor looks to be folding, because the latest is that it's no longer accepting new subscribers."

Yesterday, the president of Investors Alliance, Frank Lardino, sent me the following email:
Investors Alliance is not "folding" as you have reported incorrectly on your website. Calls to our 800 number ring in our office, and are picked up usually on the second or third ring from 9 am to 6 pm EST M-F. We have a phone number (regular & toll free), email address, and street and P.O. box addresses (in the United States) on our website for members and other people to contact us. We answer phones calls, and we return calls as well as emails and letters. Feel free to call me if you wish.
I replied with this:
I'm happy to finally hear back from you. I've tried contacting you several times by email but never received a reply.

Starting about two years ago, I began receiving an increasing volume of complaints about Investors Alliance and Power Investor. People read my book, took my advice, signed up, and then could not get current data in the program, nor any help from IA. I didn't create the impression that you're folding out of thin air. The evidence from your customers made it look that way.

It's too late for IA to get into the new edition of my book and, frankly, Power Investor no longer shines above the competition, particularly since so much of the competition is completely free.

However, I used PI for years, spoke with you in the past, respected your operation, and recommended PI in the two previous editions of my book. Therefore, I'd be more than happy to run your side of the story on my website, along with a link to your site.

I hope that you can streamline the functionality of PI so that it doesn't require data downloads, for example, and that you can create a better customer experience for subscribers. I would like to one day be able to recommend PI again.
Mr. Lardino replied with this:
We continue to service members and make improvements to the services we offer members. We provide refunds to people who are not happy with the service and we cover the vast number of companies with complete data.

Our analysis is far more powerful than free web offerings. The free offerings generally allow you to screen a few criteria at best and usually they omit screens like ROE or ROA. Screening for data going back more than a year is usually not included.

In addition, for $99 people get a monthly journal, powerful asset allocation models, a free online investing course, other member services and one of the best technical analysis programs available. The methods we provide including Triple Test are outstanding and are included with the $99 membership. The dynamic asset allocation models are worth $99 by themselves. They have been proven to members in real time from 1998 to 2001 in vastly reducing equity allocations to no-load LT govt bond funds -- going to zero coupon no-load funds at the end of the bear market and back to equities in 2002. Most recently, the models have decreased their exposure to equities at the start of July. This is all part of the $99 membership.

We will be offering a web-based version with fundamental analysis and screening in the near future. As far as improving the customer experience by web enabling all of our services, we think application software is superior for charting. Web-based charts are weak, even when using newer technologies like Java with Ajax or .net with one-click. The web charting lacks suitable user control. Power Tech also offers superior technical screening and proprietary screening that is unavailable in other programs. In addition, we also offer our Sector, RS & Delta models with the premium memberships which have been used by members for the past eight years in real time with excellent results.

Members receive our 34-page ejournal each month as part of the $99 membership. The journal includes educational, research and other articles, including how to use the software programs.

Power Investor also includes valuation models and management ratings on the stocks which are not available on free sites. These tools have been used by members since our old DOS software in 1990 as well as Power Investor. The models and ratings quickly help members find very well managed companies as well as potentially under and overvalued companies. The 4- and 5-Diamond rated stocks have consistently done very well over the past 17 years.

No need to provide an update with our side of the story just modify the part about us folding up. If you need to call me, our phone number is on the web site. We are always available.
There's the latest straight from the president of the company. His presentation makes membership in Investors Alliance and use of Power Investor seem worthwhile. It's hard to know why customer reports were so very different from his report.

In the interest of getting to the bottom of this, I invite anybody who has joined Investors Alliance to email me with their experience, good or bad. If you emailed me before about your experience with IA or Power Investor, please send me your story again.

I'll present the reader stories to Mr. Lardino, give him a chance to reply to each one, and then run the whole sequence here in the future.

As promised, here is a link to Power Investor.

Tomorrow: Other investment resources.

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Power Investor
July 23, 2007

In the first two editions of my stock book, I recommended Power Investor software. I also linked to it from various places on this site. The $99 price for such comprehensive research software was a bargain, in my view, and supported much of my stock research for years.

Not anymore.

Starting a few years ago, I began receiving complaints from readers who followed my advice to buy the software. The data set was old or incomplete. The calls to customer service weren't answered. Emails went unreturned. Finally, the organization behind Power Investor looks to be folding, because the latest is that it's no longer accepting new subscribers.

More than any of that, though, the reason I stopped recommending the software in the third edition of my stock book, due out later this year, is that it's no longer necessary to pay for stock research databases. There are excellent, free ones available online that have become good enough to rival the paid versions. They are the ones I profile in the new edition of my stock book.

For my many readers coming here each day, however, the new information can't wait. Below, free of charge, is the entire Stock Screeners section from the third edition of The Neatest Little Guide to Stock Market Investing:

Stock Screeners

Since the earlier editions of this book, it's become easier and cheaper to find good stocks. As recently as a few years ago, stock databases came on CDs. You had to install the programs, then get data updates by downloading files from websites or receiving new CDs every month. The programs were expensive, too. Some cost more than $500 per year.

Free online stock screeners have changed the rules. Pros used to scoff at pared-down tools from places like Yahoo! Finance, and some still do. The thing is, free tools are no longer pared down. They do everything an individual investor needs them to do. Much as I've looked -- and I've looked a lot -- I can't see any compelling reason to pay for stock software anymore.

All you want from a stock screener is quick, easy research that allows you to make your own best decisions. With that directive in mind, let's look at three screeners.

Yahoo! Finance Stock Screener
This is what I use every day. It provides fast results that you can sort by any criterion. If you get too many companies, just add more criteria to whittle the list down, or make your parameters stricter.

For instance, in March 2007 I was interested in companies that had a price-to-sales ratio (P/S) below 5, a price-to-earnings ratio (P/E) below 20, and projected earnings-per-share (EPS) growth in the year ahead of more than 25 percent. I typed those criteria into the screener, and received 184 results.

That was too many, so I increased the growth rate to 50 percent. That still left 68 companies. Next, I dropped the P/E to 10, and got a tidy list of 20 companies. I clicked the "Growth" criterion header in the results table twice to re-sort the list in descending order from highest growth rate to lowest. The whole process took less than two minutes.

The fastest grower was LaBranche & Company (LAB $7.50), a New York City broker-dealer. It had a P/S of 1.1, a P/E of 3.5, and projected one-year EPS growth of 950 percent. I clicked to its key statistics page and found that the company had a healthy 31 percent profit margin, was 12 percent insider-owned, and that its $7.50 price was its 52-week low. That was down about 58 percent from the almost $18 it had fetched in April 2006.

I was curious to know what had happened. I clicked to its news page and discovered that the firm used to make its money by offering floor trading services on the New York Stock Exchange. As the exchange became electronic over the years, few people needed floor traders anymore, so LaBranche's earnings tumbled. Its market-making business was down 24 percent in the previous year. CEO Michael LaBranche said that his firm was slashing expenses and looking for ways to prosper in the new electronic marketplace.

Whether or not LaBranche succeeded (see for yourself by typing "LAB" into Yahoo! Finance and checking its current price) is not our concern here. What I want you to appreciate is how quickly I was able to find this potentially profitable recovery story using Yahoo! Finance Stock Screener, and how easy it was for me to conduct additional research with just a few mouse clicks.

The basic HTML screener is usually fine for me, but Yahoo! also offers a Java screener that's fancier. It has a regular desktop software-like interface instead of a webpage interface, and offers more screening criteria. It, too, is free.

For $14 per month or $132 per year, Yahoo! offers an even more deluxe screener with real-time data. I don't see why you would need that unless you're
daytrading, which is stressful, costly, and ineffective. Why pay for tools that encourage that lifestyle?

Stick with what's fast, free, and very helpful.

Contact: screener.finance.yahoo.com/newscreener.html

Morningstar Stock Screener
Morningstar's screener is another good alternative. It taps into the firm's helpful analysis tools like its stock types, equity style box, and grading system.

In March 2007, I screened for aggressive growth companies with "A" grades for growth, profitability, and financial health. That turned up 51 companies. I then clicked the "Score These Results" button and went to a score card where I could specify the importance of each criterion by clicking radio buttons between 1 and 10 beneath it.

The list of the top ten scoring stocks appeared to the right of the criteria and was updated on the fly as I clicked away. Consistently leading the list in this example were American Oriental Bioengineering (AOB $10) and Chico's FAS (CHS $22).

Contact: screen.morningstar.com/StockSelector.html

MSN Money Screener and StockScouter
MSN Money's screener takes a different approach. Its interface is simple with dropdown menus that keep searches focused on basic notions rather than specific data.

For example, the choices for P/E are just "Any," "As high as possible," and "As low as possible." The idea is that you probably don't care specifically if the P/E is 9.7, but just that it's low. The data set returned is usually small, but unfortunately it can't be sorted. I find myself feeling that something is being missed with this screener. It's just a little too basic, but could be handy for quick ideas.

A more useful tool to me is MSN Money's StockScouter. It's a rating system that assigns some 5,000 stocks a number from 1 to 10 on a bell curve, with 10 being the best potential for beating the market. In March 2007, there were 148 stocks rated 1, 670 rated 5, and 148 rated 10. I clicked on the group of 10-rated stocks, wondering as I did so why anybody would go anywhere else.

The group came up in a table with sortable column heads, and I could add columns to the table by checking boxes next to additional criteria. I sorted the table in descending order from highest to lowest expected six-month return. The top 42 stocks were projected to gain 15.17 percent in six months, and included Audible (ADBL $11), Freeport-McMoRan Copper & Gold (FCX $56), and Oceaneering International (OII $39).

Finally, MSN Money offers a deluxe screener via download. Personally, I prefer keeping everything online.

Contact: moneycentral.msn.com/investor
Best of luck with these free resources!

Don't buy Power Investor or any other databases. Use these free ones.

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