“Quick, hide them before Mrs. Hoffman comes in!”
If Mrs. Hoffman caught us, she would’ve taken away all our baseball cards and sent us to the principal.
Those were the rules. She’d already followed through with her threat. My friend Steven had 50 baseball cards taken away the prior week … including Tom Seaver’s rookie card!
Mrs. Hoffman was my fourth grade homeroom teacher. And when I was 10 years old, trading baseball cards was big business.
I didn’t only build a great collection. I remember banking more than $120 over the baseball season — big money back in the early 1970s for a 10-year-old kid.
I didn’t realize it then, but trading baseball cards was the beginning of my learning experience in how to make money in the stock market.
I learned to ask myself a crucial question before I bought a baseball card. Years later, I learned to use that approach before I made an investment in a stock.
And I know this approach will strengthen your investments.
The 1 Question to Ask
I learned early on that the other kids would make trades based on emotion.
If a certain player had a great game the day before, his trading value would rise. If he played terribly the day before, his value would plunge.
I too traded baseball cards like that for a while … until I found a better way.
Every Monday during the baseball season, I’d run to the corner luncheonette. At the front counter, right near the muffin showcase, was where they sold Topps baseball cards. A dime bought you a pack of 10 cards, and a stick of gum.
While waiting to pay, I noticed Beckett’s Baseball Card Price Guide in a nearby magazine rack. Flipping through it, I felt as if I had just discovered the Rosetta Stone. The guide listed prices that collectors would pay for baseball cards.
This was a game-changer. Instead of judging the value of a card based on a player’s recent performance, I could now base it on the price collectors would pay for it.
If my classmate was offering me a baseball card for $0.20, I would tell him to hang on for a minute. And I’d go off to a corner and check the price in the guide.
If the guide said he was worth $1.00, I was getting a steal. If the guide said it was worth $0.10 … I’d walk away.
All I needed to know about baseball cards was one thing: Is the price I’m paying below the guide’s price? If it was, I was a buyer.
Focus on the Business’ Earnings
Today I know that all I have to do when buying a stock is refer to the underlying worth of a business.
If a stock is trading well below my estimate of the underlying worth of the business, I buy it. If not, I’m not interested.
That’s it. I don’t look at moving averages, draw trendlines or figure out what next quarter’s gross domestic product is.
Since there wasn’t a guide to figure out the underlying worth of a business, I learned how to come up with a value on my own.
In a nutshell, I came up with a valuation based on several variables. It didn’t have to be an exact number, just a general estimate.
For example, there isn’t a daily ticker on your house, yet most homeowners have a pretty good idea how much their house is worth. If I can buy a stock at the current price and double my money in four years, I consider investing in it.
I also don’t have to figure out the underlying worth of every company on the stock exchanges. Just the ones I can understand. Those are the ones where I understand the industry and the company’s market share.
Trying to understand McDonald’s or Costco isn’t difficult at all. Some businesses, however, I just can’t figure out, such as biotech companies. And if I don’t understand them, I can’t come up with the underlying worth, and I walk away.
Emotional Trading: The Stock Market’s Volatility
Only in the stock market do asset values swing so wildly in a 52-week period.
Nvidia Corp. is a technology company that specializes in designing graphics processing units for the gaming market.
The company has a market cap of $92 billion and is a leader in the field. Yet, just over the course of 52 weeks, the stock price ranged between a low of $124, a market cap of about $75 billion … and a high of $292, a market cap of $180 billion. That’s more than a $105 billion swing!
This swing happened in less than six months, as you can see in the chart below:
Nvidia Corp. Price Movement
Most traders had no idea what the underlying worth of Nvidia was when they either bought or sold the stock.
Instead, they were buying or selling based on other traders’ emotions.
Those wild swings give sensible investors a huge opportunity. Instead of guessing, we spend our time trying to figure out the underlying worth of the business.
And then we ask one question: Is the stock price trading below the underlying worth of the business? Nothing more complicated than that.
Each month in my newsletter, Alpha Investor Report, I recommend a stock that is trading way below the underlying worth of the business.
In February, semiconductor stocks were taking it on the chin. Since my analysis determined that Nvidia wasn’t trading at a good valuation, I recommended my readers buy another chipmaker.
Not only is it a great company and a leader in the field — the stock’s price was trading far below my estimate of the underlying worth of the business. And the company was firing on all cylinders.
So far, the stock is up more than 24%.
Now, there is one sector that is trading at a bargain price compared to the underlying worth of the business: the semiconductor industry.
Following my approach, this is an excellent time to get exposure to this sector.
Semiconductors: Get Exposure With PSI
The semiconductor industry should continue to grow over the next several years.
It has several tailwinds pushing demand higher each year. The growth of artificial intelligence, 5G and data centers will provide a long runway for demand.
The Invesco Dynamic Semiconductors exchange-traded fund (NYSE: PSI) is a smart way to invest in this sector.
The exchange-traded fund (ETF) holds 30 U.S. semiconductor stocks. The top four holdings are Broadcom Inc., Analog Devices Inc., Intel Corp. and Texas Instruments Inc.
Instead of simply owning a diversified group of semiconductor stocks based on market caps, the ETF does something a bit different.
It evaluates companies and adds them to the ETF’s holdings based on several quantitative criteria such as price and earnings momentum, and the company’s management. Back in February, I wrote about the importance of knowing a business’ management.
Over the long term, PSI should outperform the stock market and continue to move higher. And the ETF is currently trading at a bargain valuation.
Don’t miss out on this opportunity. And if you’d like more guidance on my strategy, you can learn more about it here, and join my readers for stellar returns.
Editor, Alpha Investor Report