Muscle Memory for Your Money

I recently spent some time at a family gathering, and at one point, found myself marveling at two cousins, one in her 20s and one in her 40s, who were playing an advanced form of pattycake. The older one, who hadn't done the routine since childhood, was teaching the younger one. Before long, both had it memorized.

The secret to the game's success is muscle memory. The older cousin was still proficient after decades of hardly playing it at all, and the younger cousin practiced over and over until the routine became automatic. You could see in their faces that they weren't thinking hard about the next move. Their hands were just moving -- fast.

Money memory
This sort of muscle memory can work for our investments, too, making some processes so automatic that we don't even need to think about them:

  • Set up automated transfers to and from certain accounts each month. For example, you could have $500 automatically transferred from your savings account to your brokerage account.
  • Establish a regular learning routine. Subscribe to a few periodicals, perhaps a Fool investing newsletter or two, and bookmark a few informative websites for regular reading. Once this becomes a habit, you'll be automatically keeping up with your investments and running across new ideas.
  • Brush up on financial reports. You don't need an accounting degree -- just learn enough to be comfortable scanning a balance sheet, income statement, and statement of cash flows. Develop a list of one or two dozen metrics that will give you a handle on a company's health and growth, such as profit margins, debt and inventory levels, cash flow, share count, etc. Once you get used to running through your list and crunching a few numbers, the thought of doing so will be much less intimidating, and you'll find yourself more likely to give potential investments the due diligence they deserve.

Once you've got those metrics, you can use them to screen for stocks. Here's what popped up when I sought companies with net profit margins of at least 25%, estimated five-year future revenue growth of at least 10%, and P/E ratios under 25.

Company

Net profit margin

Estimated 5-year future revenue growth

P/E ratio

Analog Devices (NYSE: ADI  )

27%

19%

14

Charles Schwab (Nasdaq: SCHW  )

47%

20%

11

Diamond Offshore (NYSE: DO  )

33%

27%

19

Qualcomm (Nasdaq: QCOM  )

36%

16%

22

Garmin (Nasdaq: GRMN  )

26%

15%

12

Linear Technology (Nasdaq: LLTC  )

33%

16%

21

IntercontinentalExchange (NYSE: ICE  )

42%

27%

23

Source: Yahoo! Finance.

(Should you snap up these shares? Not without learning more about them! You can start that process in our CAPS community.)

Train yourself
I recently an article about the four stages of learning how to swing dance: unconscious incompetence, conscious incompetence, conscious competence, and unconscious competence. Basically, you go from not knowing anything, to knowing how much you have to learn, to getting good by working at it, to just being good without thinking about it. Sound familiar? It's the same way you learn how to be a better investor.

Garmin and Charles Schwab are Motley Fool Stock Advisor recommendations. Learn more about the stocks Fool co-founders David and Tom Gardner believe will outperform the market. A free 30-day trial is yours for the taking.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. Garmin is also a Motley Fool Global Gains selection. Try our investing newsletters free for 30 days. The Motley Fool is Fools writing for Fools.


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Related Tickers

11/26/2014 11:03 AM
ADI $53.79 Up +2.08 +4.02%
Analog Devices, In… CAPS Rating: ****
DO $32.90 Down -3.26 -9.02%
Diamond Offshore D… CAPS Rating: ***
GRMN $57.02 Up +0.08 +0.14%
Garmin CAPS Rating: *
ICE $219.69 Down -1.40 -0.63%
IntercontinentalEx… CAPS Rating: *****
LLTC $45.09 Up +0.75 +1.69%
Linear Technology CAPS Rating: *****
QCOM $72.23 Up +0.38 +0.53%
Qualcomm CAPS Rating: *****
SCHW $28.31 Down -0.06 -0.21%
Charles Schwab CAPS Rating: ***

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