USING CHARTS TO BUY STOCKS - ITS HARD!

Gary B. Smith is on Fox Business News as a frequent guest analyst and he also is a regular commentator on a show called "Bulls & Bears". His nickname is "The Chartman" because his expertise is picking stocks by just looking at their charts. Thats it....he doesn't care what a company does or anything else about it....he only cares about its chart.

Since I have never picked a stock solely on the basis of what the chart looks like, I can't personally vouch for whether a person can really make money over the long term that way. But one thing I do know, if you invest only on the basis of a stock's chart, you will be doing a lot of short term trading and you better keep abreast of what is happening on a daily basis because one break in the chart's pattern means you need to sell or buy.

Can buying and selling stocks purely based on their charts really be called investing?  I guess it can because the definition of the word mentions only that you put money to use with the expectation of making a profit. But if charts are the only way you pick stocks, it sure seems like you need to devote a tremendous amount of time to the endeavor because it isn't easy. Charts have an endless number of patterns and interpretations and mastering a winning strategy seems to be out of reach for most investors.

Interestingly, in Gary's latest article, he talks about investing for his daughter's future. I don't know what their ages are and he doesn't say but based on his age, they are perhaps between 10 and 18 years old. Does he talk about teaching them the charting process and daily grind of chart analysis? Nope. Seems like he prefers the old long term buy and hold a solid stock method for his daughters who have many years ahead of them before retirement.

He picks two stocks (ExxonMobile and Waste Management) because they presumably will stand the test of time and be around for the next 50 years. Putting stocks you know are solid picks in your portfolio seems to be what he would suggest for own daughters. That has to make you wonder about the validity and difficulty of his preferred investing style of chart analysis.

Again, I know some people are able to make money in the stock market just by analyzing charts. However, for the vast majority of investors, that seems like something that is just not feasible because of the complexity and the high number of hours it would require to learn. For most people, it is best just to pick good companies, buy their stocks, and watch them grow over the long term.

WHY STOCK BUYBACKS CAN EITHER BE GOOD OR BAD

Stock buybacks are when a company spends its excess capital to buy back shares of its own stock. Investors generally consider buybacks a good thing because it can signal that a company is confident in its future and sees no better investment than itself.

Publicly held companies have these choices when it comes to spending profits:

1) Offer dividends to investors - dividends are a way to directly funnel profits to investors.
2) Do a stock buy back - stock buybacks can indirectly make investors money because the stock price might go up as the company buys shares.
3) Use the money for research and development - using the money for R&D is an investment in the future and will hopefully pay off at a future time.
4) Buy other smaller companies - buying another company is something that can make the buying company stronger by adding new technology and new products.
5) Sit on the money and invest it - keeping the money and investing it is something that might add security to the company as they build savings that could be used to keep the company afloat in tough times or be used in any of the above ways later.

Stock buybacks have become popular in recent years (you can get a current list of announced buybacks here) and the biggest one on record is Apple's buyback. Anything Apple does gets a ridiculous amount of scrutiny so there are a lot of opinions rattling around the Web. But with all those opinions you can sift through and sometimes find the truth and that truth is that a buy back can turn out to be a good thing or a bad thing.

Stock Buybacks Can Be Good

When a company spends its own money buying its own stock, it might show that management is confident in the future (after all they know best whats in store in their pipeline of products). They feel that there is no better investment out their than their own stock so that is a vote of confidence that many investors like. 

Also, when a company does do a buyback, that means there will be shares bought and that will/should/can help drive up the price of the stock. This will of course depend on the number of sellers but having guaranteed buyers is a good thing. So, investors may profit from a buyback by seeing their shares appreciate in value.

But, Stock Buybacks Can Also Be Bad Because...

When a company buys back any amount of its shares on the open market, they are paying the same price you or I would if we bought the stock. So if they pay a hypothetical average price of $100 per share and after they do that the stock goes down and continues going down, it sure looks like they paid too high a price. That is bad. Just like investors can buy stocks at too high a price and get burned, so can companies who buy back their own stock. Figuring out what the correct value of their company is and making sure they pay a price that is lower than that is key for management.

Another reason a stock buyback could be interpreted to be a bad thing is if investors decide a company is doing a buyback because they are out of ideas for better ways to use the cash. Remember, investors are always looking for businesses that are growing so they can make more and more money. That is why R&D and M&A are often considered good ways to spend money - it shows that company management is thinking forward and trying to grow the business. Just buying back their own stock could indicate a lack of new direction which might in some instances be viewed by investors as bad.