A Model for Education

by Matt Richey (TMF Verve)

ALEXANDRIA, VA (August 20, 1999) -- No doubt I'm biased, but I think The Motley Fool is a model for education. It was only three short years ago that I first signed on to The Fool (on AOL, back then). I didn't know much of anything about investing. In fact, I think I was attracted to the whole thing because of the allure of easy money in trading! Fortunately, I was anxious to learn.

I imagine that's why you're here, right? To learn?

Of course it is. Well, you're in the right place because within these Foolish bits and bytes, you won't run into much of anybody who isn't interested in sharing what they know and learning what they don't. That's the spirit of Foolishness: to educate, amuse, and enrich -- the order isn't by accident.

While we have a lot of educational content published by Fools, I think most of the learning that takes place on this site is on the message boards. That's where we can take advantage of the interactive nature of this medium. Questions are asked, opinions are challenged, analysis is discussed. If you haven't tried it, you're missing out. As David Gardner has often said, everyone should be following at least one message board.

Lately, the Rule Maker Beginners message board has generated a number of thoughtful questions and answers, so I thought I'd share a few of them with you tonight. In a single post, TMF Tribe offered his thoughts on the following three commonly asked questions.

Is there a minimum amount of money that I need to start with? What is the best way to divide up that amount among the stocks I purchase?

The "rule of thumb" you will usually see mentioned here on the Fool is for your transaction costs to be around 1% of the amount you are investing. Since most discount brokers charge around $10 per trade, that would mean that you should be investing about $1,000 per stock. How you divide that up amongst the stocks is a matter of personal preference, while taking into account your own tolerance for risk. I would try and keep your total number of stocks from getting much higher than 10 or 12, simply because it becomes hard to perform your "due diligence" on all of them from quarter to quarter. Above all, make sure your selections make you completely comfortable, because your investments should be working for you... not keeping you awake at night.

On the income statement, is "total operating expense" the same as "cost of goods sold," and is "cost of sales" equal to "cost of goods sold"?

Total Operating Expenses include much more than Cost of Goods Sold (COGS). I believe this figure includes both advertising/selling costs and general/administrative costs, neither of which should be included in COGS. Generally, the Cost of Goods Sold data will appear directly below the Total Revenues or Total Sales line on the Income Statement portion of the quarterly or annual report.

Cost of Sales is definitely part of Cost of Goods Sold. Depending on the company, there may be other items you need to add to the Cost of Sales figure to get the total Cost of Goods Sold. For example, many software companies have licensing revenue, and you will see a Cost of Licenses or Cost of Licensing item on the income statement, which should be included with Cost of Goods Sold.

I notice some balance statements don't list the short- and long-term debt figures. What do I do then?

Not all companies have short-term debt or long-term debt. If you can't find anything that looks like debt (Notes payable, Loans payable, Capitalized Leases, Preferred Stocks, Short-Term Debt, or Long-Term Debt), then it sounds like your company is one of the lucky ones that is debt-free! If you are using the Rule Maker Ranker spreadsheet (linked below), just plug in $0 for those two categories.

The next question is a very common one on the Rule Maker boards. "MomAtHome" did a great job in her reply.

Since there are a number of high quality companies to choose from today, wouldn't it behoove an intelligent investor to buy the company that is selling at a bargain P/E multiple compared to one that is at its all-time high?

What you will find is that in practice, there are Rule Maker (RM) investors all across the spectrum on this one. At one end, there are those who totally ignore valuation and focus entirely on an analysis of the company's financials. At the other are those for whom valuation and analysis carry equal weight. (There are also those who focus on valuation only, but I don't think they really fall under the RM philosophy.) And in the middle are a bunch of people like me who mostly don't care about stock price when they buy, but keep an eye out if a favorite company has been beaten down in price for unjustified or strictly temporary reasons. (i.e. a SALE!)

What I'm trying to say is that you will have to find the place on the spectrum that feels good for you. If you are losing sleep over short-term losses, you may want to rethink how you use the RM method to evaluate potential purchases, or even back up a step and rethink whether RM is right for you at all. Holding a stock for ten years is not sexy or exciting or something you can brag about over the water cooler. It is an autopilot-type strategy, requiring only minimal scrutiny over the long haul. But it is also a strategy that should allow you to sleep well, because you know you've bought a solid company with strong financials and good prospects. The market dips and dives unpredictably in the short term, but goes up over the long term. Keep your focus on the long term.

If you've never ventured onto the message boards, I encourage you to give one of the three Rule Maker message boards (all linked below) a shot this weekend. Fool on!