Knowledge is power on Wall Street, and investing pros have the reputation of being the most knowledgeable. But if you’re not a pro? Well, individual investors can still take advantage of many of the pros’ top techniques and turn some of their own knowledge into real investing success.
Individual investors have many advantages over the big institutional investors – especially the ability to invest with a long-term mentality and to buy out-of-the-way hidden gems. But they can also leverage information to identify some potentially high-flying stocks, too.
Here are a few of the best ways for individual investors to research stocks and get a leg up on their professional counterparts, as well as one way they can keep more of those gains.
5 ways to research stocks like the pros
Between 20% and 40% of property owners will challenge and win lower assessments and lower property tax bills.
If your property tax bill has
increased significantly, you
may have grounds for an
appeal, particularly if the
increase seems out of
line with overall
appreciation
in your area.
Most jurisdictions give
you 90 days after you
receive a new assessment
to appeal, although some
close the appeals window
after 30 days, says Pete Sepp,
president of the National
Taxpayers Union. Some lawyers
handle property tax appeals on a contingency basis, but most homeowners can appeal on their own, Sepp says.
5 ways to research
stocks like a pro
Some set the tax assessment at a percentage of market value—80%, for example—so don't be smug if you
get a $90,000 assessment on
a home you think is worth at least $100,000.
Some set the tax assessment at a percentage of market value—80%
How to minimize taxes on your Social Security
Even if a financial institution fails, money that’s insured by the federal government is protected. A press release from the FDIC says that since its founding, “no depositor has ever lost a penny of FDIC-insured funds.”
The chance of your bank failing is also highly unlikely. FDIC data shows that so far, in 2020, only one bank has failed. In contrast, a decade ago in 2010, around 160 banks failed between the beginning and end of the year.
“If we’re just talking about green money in your hands versus in the bank, there’s no reason for people to think that they need to hold onto physical dollars because there’s any sort of threat of a collapse to the banking system or the liquidity in the market,” McKenna says. “The government is making sure that the plumbing, the banking system, can continue to run smoothly.”
Some states allow anyone who owns and lives in a primary home to shield a portion of its value from taxation, or you may be eligible for credits based on your income or status as a senior citizen, veteran or disabled person.
Use a stock screener
Withdrawing too much cash is risky to an extent.
Not only is the cash in your home not insured by the federal government, but when it’s in your apartment rather than in a high-yield savings account or CD, you’re not earning interest on those dollars. In the short-term, that doesn’t mean much. But in the long-term, you’re potentially missing out on a big chunk of change, depending on how much money you’ve taken out.
Outside of a bank’s secure facilities, money at home is also at risk of being stolen. Similarly, you’ll probably be out of luck if something happens to your home.
“If you have $100,000 hidden
under your bed and your house
burns down, there’s limits on
what insurance will cover, ”
McKenna adds.
Of course, it never hurts
to have some cash on hand,
just in case you’re making an
in-person payment and the
retailer isn’t able to process
cards temporarily or you’re
dealing with someone in the service
industry who only accepts cash.
Otherwise, if you’re stuck at home,
having a bunch of cash isn’t going to
be of much benefit, McBride says.
There’s nothing wrong with having access to some
cash. But for any bills you choose to keep at home,
just make sure it’s in a secure, fireproof safe, says Michael Foguth, president and founder of Foguth Financial Group.
How to really let your money compound
Pull up property cards of several homes of similar age and square footage and with the same number of bedrooms and bathrooms to see how their assessments line
up with yours.
Step
1
Step
2
Step
3
Step
4
Step
5
Here are five techniques that pros use to figure out what’s really going on in the market. Often these methods require a little more hustle than just reading the numbers on a screen or balance sheet, but you can also find out more that way than you could otherwise.
At the end of each year the Social Security Administration will send you a benefit statement that shows what you received during the year. You can use that to figure out how much of your benefit is taxable and what you might need to do to minimize your taxable income in the year ahead.
While Wall Street has a reputation for being knowledgeable, success is not all about having the most info. The best investors really know how to minimize taxes and keep more of their money. So you’ve researched and found a great stock – here’s how to keep your gains compounding.
You may have found an undervalued stock that should go up to fair value and then you’ll sell. Or you may hunt for compounders, stocks that can grow for years, even decades. Think of PayPal (PYPL), Amazon (AMZN), or Starbucks (SBUX), for example. It’s a classic dilemma between growth and value investing.
But whether you’re a value or growth investor, it’s important to realize that if you sell a winning investment, you’ll be liable for taxable gains (at either the short- or long-term rates). So every time you sell a winning investment, your wealth is going to be reduced by the taxman’s cut.
Instead, by not selling, you’ll defer any taxes, meaning that the wealth remains yours. But not only do you avoid the taxes, you’ll be able to compound on the full pre-tax amount each year.
For example, imagine you invested $10,000 and gained 20 percent annually but sold right at the end of the year, incurring a tax rate of 20 percent. In five years you’d turn $10,000 into $21,000, and average about 16 percent annualized gains, since the government took its cut each year.
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Is that new product getting shelf space at your local grocery store?
Is the product getting more space over time or less?
Is the parking lot at that hot new chain restaurant or retail shop getting even more crowded?
Or maybe the restaurant is getting less crowded or getting poor reviews?
If your Social Security benefit is relatively fixed, albeit with small annual increases, you really have only two avenues left to get into that tax-free zone: reducing tax-exempt interest or adjusted gross income. And since most people don’t have tax-exempt interest, you’re left with one option.
“Therefore, the secret is to reduce your adjusted gross income in order to prevent provisional income from triggering a tax on Social Security,” says Kelly Crane, president and chief investment officer at Napa Valley Wealth Management in St. Helena, California.
Here are a few ways to reduce your adjusted gross income to get into the tax-free zone:
1
A stock screener is a great place to begin for investors on the hunt for new ideas. With a good stock screener, you can find stocks that are hitting 52-week lows, if you’re a value investor, or new highs, if you’re looking for momentum stocks that could continue their trend.
You can pair this information with other financial details that are available in the screener, such as a company’s revenue growth, profit margins, debt and many more. You’ll want to look for a high-quality screener so that you can get highly granular – and fully up-to-date – information.
You can find stock screeners at some of the top brokers, but you may want to hunt around for one that fits your exact needs and process best.
For example, if you have a bond in a taxable account and a growth stock in an IRA, you could sell those and buy the bond in the IRA and the stock in the taxable account. You’ll reduce your taxable income without reducing your total income.
That said, if you make the switch, you’ll want to be sure you’re not incurring any unnecessary capital gains taxes in your taxable account, defeating the purpose of the switch.
Talk to management teams
2
It may seem like the management teams are off-limits to individual investors, but not always. Sure, Facebook CEO Mark Zuckerberg is not likely to take your call, but you have a real chance to ask questions at smaller firms, where execs will speak with current or future investors.
You’ll want to have pertinent questions lined up that show you know the business, and it can be a moment to ask insiders the finer points about the business. Even if you can’t get on the phone with the top brass, you can access a public company’s investor relations department. IR, as it’s known, can give you financial details or perspective on a press release, among other things.
It can also be helpful to ask a management team which other companies they respect most in the industry and why. This line of questioning can give you a good perspective on which rivals are worth watching – and they may even be worth investing in, too.
Do your own first-hand research
3
Getting out from behind the desk can be a great way to find out what’s actually going on before it breaks big. That’s classic advice from investing legend Peter Lynch, who recommends watching for new trends emerging with their friends, whether it’s a new product or service.
Have you heard about a great new restaurant in the area? Check it out yourself and see what you like and whether its operation is running smoothly. Your neighbor likes a new tech gadget? See for yourself what it’s all about – and then assess if the company is worth an investment.
This way is great for finding a hot new consumer brand, especially in the restaurant or retail spaces. Food fans could easily have picked up future high-flyers such as Chipotle and Panera before they became big household names. Even if investors didn’t get in at the bottom, these restaurants had years of attractive growth remaining in them after they were “discovered.”
Run your own channel checks
4
Especially for consumer or retail brands, you can do some of what Wall Street analysts call “channel checks.” A channel check is a fancy name for actually seeing what amount of product is moving through the system. A channel check can give you valuable information about what’s happening now before it shows up in the reported financial statements in three or six months.
For the pros, a channel check might involve calling up suppliers and customers of a target investment and seeing how much business the company is doing. In the case of individual investors you can do much of the same with consumer brands, asking questions such as:
Subscribe to a newsletter
5
An investing newsletter is a great resource for individual investors, and it’s a technique that pro investors use as well, though the two kinds of newsletters typically focus on much different analysis. Still, a good newsletter can help individual investors find and evaluate good investment opportunities, and give them a wider perspective, since the market is so large.
It may seem like Wall Street investors are omniscient, but they outsource a lot of research to third parties. That’s exactly what individuals can do, but they may have an additional advantage, because they can invest in small, high-growth businesses that the big investors can’t touch. Plus, you may have the added advantage of bouncing good stock ideas off the newsletter pros.
Look for a reputable newsletter company with a long track record and a history of treating subscribers well. In some cases you can find good newsletters for a few hundred dollars a year.
Other things to
watch out for
While everyone likes to minimize their taxes, especially ones that you can avoid without too much legwork, it’s important that you keep things in perspective.
“Tax strategy should be part of your overall financial planning,” says Crane. “Don’t let tax strategy be the tail that wags the dog.”
In other words, make the financial moves that maximize your after-tax income, but don’t make minimizing taxes your only goal. After all, those who earn no income also pay no taxes but earning no income is not a sensible financial path. For example, it can be better to find ways to maximize your Social Security benefits rather than minimizing your taxes.
And it could be financially smart to first avoid some of the biggest Social Security blunders.
Don’t forget that these rules apply to minimizing your tax at the federal level, but your state may tax your Social Security benefit. The laws differ by state, so it’s important to investigate how your state treats Social Security.
“There really aren’t any tricks, you just have to be careful with your interest and dividends,” says Miller.
Bottom line
While it’s easy to lament that Wall Street pros have huge advantages over individual investors, even the little guys have ways to use some of the pros’ techniques. And in some cases, individual investors even have advantages that large investors can never take advantage of.
But what if you held your stock during that whole
period? You’d compound the whole amount at 20 percent annually, turning $10,000 into just over $24,883. Even if you decided to sell at that point, you’d still realize an after-tax amount of about $21,906 – more than in the first scenario.
The difference? You’ve compounded further gains on top of the gains you had to pay taxes on in the first scenario. In effect, by not selling your stock, you’re forcing the government to defer its taxes and to give you the ability to keep compounding on the full, pre-tax amount.
That’s how legendary investors compound their gains when it makes sense. It’s not just a question of having the best research but also using it the best, in this case by minimizing taxes.
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