- Buying a stock where the insiders are buying can generally be a good strategy. Insider activity can be observed with the SEC form 4 . The closer the insider is to the operations, the greater the number of times recently purchased, the larger the purchase, and the smaller the company, the better the performance of future stock price. However, watch out for companies that announce stock buy backs yet their own insiders are selling shares. This may be a red flag that insiders are dumping their shares at investors expense.

- Trading on inside non-public information is illegal but it is very hard to catch and prove. It happens all the time and any seasoned trader or investor knows the tape tells a story of frequent unusual trading before significant company news. Frugal investors should not base stock decisions on price behavior but price behavior cannot be ignored. The safest times to make a stock trade is after a significant news release. If the stock price is heading lower in relation to its peers for some unknown reason - don't buy thinking a bargain opportunity exists! The insiders may be dumping the stock before significant bad news. The converse is true for rapidly rising stocks for some unexplained reason - these stocks should not be sold. The frugal investor is not interested in making and losing a quick buck so it is best to make a trade after significant news to avoid getting taken by the insiders.

- Watch out for accounting gimmicks. Management is allowed some discretion of how to match revenues with expenses. Sometimes management goes too far in recognizing revenues too early and recognizing expenses too late. This makes a company seem more profitable earlier but it will surprise Wall Street with a series of earnings misses once the expenses start catching up with decreasing revenues in the future. For this reason, the frugal investor ignores accounting earnings and instead looks at cash flows. However, companies that have aggressive accounting should be avoided. Investors should not part their money to management with shady intentions. Aggressive revenue recognition can be spotted with a disproportionate growth of accounts receivable on the balance sheet compared to total revenue growth on the income statement. Also look at operating earnings on the cash flow statement compared with net income on the income statement. If operating earnings are growing more slowly than net income, then management might be using aggressive accounting techniques.

- Note the hidden expenses. Management loves to hide expenses from investors (especially their overpaid salaries). One of the most egregious latest hidden cost has been stock options. Stock options are an expense that management loved because it was never recorded on the income statement. Further, the issuance of stock options did not even appear in the cash flow statement since this is essentially a non cash transaction. An option is a long term contract given to management and employees that allows them to buy the stock at a low price at a future date after a predetermined vesting period. Now companies are required to expense stock options but adjustments may still need to be made to historical financial statements. Our valuation model incorporates estimated future stock option expenses into the company's valuation.

- If the stock has publicly traded options you can assess the stock's implied volatility. Implied volatility is the option's market's assessment of anticpated price volatility in the next few months. To assess the stock's implied volatility, go to ivolatility and type the stock symbol to get the implied volatility. Compare the implied volatility to the implied volatility of an median BETA stock. Lately Microsoft (MSFT) has been a relatively good proxy.

For example, if the implied volatility of Microsoft is 20 and the stock being analyzed has an implied volatility of 40 then a rule of thumb is that the implied volatility is 2 times (40/20) the volatility of the market in general. Thus the forward Beta will be 2. Many finance textbooks advocate looking at the backward beta of a stock. However, the beta measures historical volatility in relation to the market. What matters to the investor is forward looking risk not backward looking risk.

- If the stock has publicly traded corporate debt then it is probably rated by S&P and Moodys. Etrade customers can get this information through bonddesk. Sometimes the bond ratings can be found in the company's annual report. Each rating is tied to a risk of default. Companies with a low bond rating have a higher risk of default and are more risky. Conversely higher rated debt implies less risky companies.

- Another technique to use is an intuitive assessment of the predictability of future cash flows. If the stock is expected to generate large growth, then more capital investment is needed to fund that growth. This would then be a higher risk business - especially if the ROIC is expected to be small. On the other hand, some businesses are slower growth but therefore require little new investment. Low risk industries may include tobacco and food companies because they don't need to invest a lot of money into future growth because there is little growth. One of the highest risk industries is biotechnology. These companies must spend millions of R&D to develop a drug, and then must go through the stringent FDA process. It can take 10 years for a biotech company to make the first dollar in revenue assuming the drug is developed and passes the FDA tests. This makes the predictability of cash flows very uncertain thus it is very risky.