On Research Sources and Trading Rules by David Merkel, CFA of AlephBlog

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On a letter from a reader:

In your Industry Ranks August 2014 post you mentioned that you use Value Line analytic tools. If it is not a secret, what other third-party research and analysis do you use, especially for company analysis (MorningStar, Zacks…)? Do you rely/subscribed on Interactive Brokers “IBIS Research Essentials?” If yes, do you find it valuable? In addition, if you do not mind, you said that you make adjustments to your portfolio once in a quarter. Does it mean that you do not look at market quotes during the day at all and, hence, you are not subscribed to IB real-time data (NYSE, Nasdaq, US Bond quotes?) I would greatly appreciate your answers. Thank you very much!

I don’t like to spend money on aids for research.  I can only think of two things that I pay for and actively use:

I do pay for quotes at Interactive Brokers, but because I don’t trade much, I don’t pay for the expensive packages.  I have not subscribed to Interactive Brokers “IBIS Research Essentials.”

But many of the best things in life are free.  My local library offers free Morningstar and Value Line online… I don’t have to leave my home to use it, an it is open all the time.  If I go two blocks to my library, there is a wealth of business data and books that I can draw upon.

That said, the Web offers a lot of free resources, and I make use of:

  • Yahoo Finance, which I think I have been using since 1996 — pretty close to its inception.  There is no better place on the web to get business news tagged for each corporation.  It has gotten better since removing some feeds that have questionable value.  There’s a great range of information to be had in a wide number of areas.
  • FRED, which just keeps getting better… more data series, more ways to use them… and I have been using them since it was a “bulletin board” (remember those?) back in 1991 or so.
  • Bloomberg.com is excellent in the general and business news areas.
  • Beyond that, ReutersMarketwatch, the New York Times, and the Financial Times (especially FT Alphaville) have excellent business news coverage.  With the last two, NYT & FT, you have to decide if you want to pay for it, and I don’t pay for them.
  • When I do my stock research, I generally go to the SEC website and read the documents.  Then I go to Yahoo Finance and the company’s own website for color.
  • For bonds, bond funds and ETFs, I go to the provider websites, Morningstar, and the Wall Street Journal’s Market Data section.  I can visit FINRA Trace if I need to see how individual bonds have been trading.
  • Finally there is a lot of wisdom in many bloggers out there, and I strongly recommend you get to know them.  Some of the best are expertly curated each day at Abnormal Returns by Tadas Viskanta.

Now as to your question as to whether I look at prices of assets in my portfolio: in general, I check them 3-5 times a day, usually at a point where I will be switching tasks.  I sort my stocks two ways at that time:

  1. By absolute percentage change descending — all of the largest movers are at the top of the screen, and I can look for patterns and trends, which may make me check Yahoo Finance for news.  But that doesn’t make me trade, unless it ends up revealing something that I think will get a lot better or worse, and the market hasn’t figured that out yet.  (That doesn’t happen often.)
  2. By size of positions — if a position has gotten too large, I trim some back.  If it has gotten too small, I stop and research why the price has fallen.  If I am convinced that the stock offers significant returns, and low downside risk, I add a little to the position.  (See Portfolio Rule Seven for more details.)  In a rare number of cases, about once every two years, I will “double weight” the position that has fallen.  So far, all of those have worked over the last 14 years.  But if I realize that the company is unlikely to return anything comparable to the other stocks in my portfolio, I sell it.

Portfolio Rule Seven trades maybe amount to 3-12 small trades per quarter.  More trades come when the market is trending, fewer when it is choppy.  Portfolio Rule Eight is where I do the big trades once per quarter, comparing each stock in my portfolio against a group of potential replacements.  I usually sell 2-4 companies, and then buy a similar number of replacements.  That has my portfolio turn over at a 30%/year rate.  More details available in the article Portfolio Rule Eight.

In general, it is wise for both amateur and pro investors to trade by rule.  Take as much emotion out of the process as possible, and avoid greed and panic.  It is genuinely rare that decisions have to be made quickly, so take your time, do your analysis, and try to find assets with good long-term prospects.