Introduction
• To my mind, the stock price is the least useful information you can track, and it’s the most widely tracked.
• What Mr. Market pays for a stock today or next week doesn’t tell you which company has the best chance to succeed two to three years down the information superhighway.
• You don’t need to make money on every stock you pick.
• History tells us that corrections (declines of 10 percent or more) occur every couple of years, and bear markets (declines of 20 percent or more) occur every six years.
• Stop listening to professionals! Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert.
• The more right you are about any one stock, the more wrong you can be on all the others and still triumph as an investor.
• Why wait for the Merrill Lynch restaurant expert to recommend Dunkin’ Donuts when you’ve already seen eight new franchises opening up in your area?
• Finding the promising company is only the first step. The next step is doing the research.
Part I: PREPARING TO INVEST
• A lot of investors sit around and debate whether a stock is going up, as if the financial muse will give them the answer, instead of checking the company.
• Most important, you can find terrific opportunities in the neighborhood or at the workplace, months or even years before the news has reached the analysts and the fund managers they advise.
• Six out of ten is all it takes to produce an enviable record on Wall Street.
• Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future.
• It’s also important to be able to make decisions without complete or perfect information. Things are almost never clear on Wall Street, or when they are, then it’s too late to profit from them.
• The true contrarian is not the investor who takes the opposite side of a popular hot issue (i.e., shorting a stock that everyone else is buying). The true contrarian waits for things to cool down and buys stocks that nobody cares about, and especially those that make Wall Street yawn.
• The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them.
Part II: PICKING WINNERS
• In general, if you polled all the doctors, I’d bet only a small percentage would turn out to be invested in medical stocks, and more would be invested in oil; and if you polled the shoe-store owners, more would be invested in aerospace than in shoes, while the aerospace engineers are more likely to dabble in shoe stocks.
• Just because Dunkin’ Donuts is always crowded or Reynolds Metals has more aluminum orders than it can handle doesn’t mean you ought to own the stock. Not yet.
• If you’re considering a stock on the strength of some specific product that a company makes, the first thing to find out is: What effect will the success of the product have on the company’s bottom line?
• Specific products aside, big companies don’t have big stock moves. In certain markets they perform well, but you’ll get your biggest moves in smaller companies.
• Sooner or later every popular fast-growing industry becomes a slow-growing industry,
• Companies pay generous dividends when they can’t dream up new ways to use the money to expand the business.
• A fast-growing company doesn’t necessarily have to belong to a fast-growing industry.
• The perfect stock would be attached to the perfect company, and the perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring name.
• In a no-growth industry, especially one that’s boring and upsets people, there’s no problem with competition.
• Drug companies and chemical companies have niches—products that no one else is allowed to make. It took years for SmithKline to get the patent for Tagamet. Once a patent is approved, all the rival companies with their billions in research dollars can’t invade the territory. They have to invent a different drug, prove it is different, and then go through three years of clinical trials before the government will let them sell it.
• There’s no better tip-off to the probable success of a stock than that people in the company are putting their own money into it.
• When insiders are buying like crazy, you can be certain that, at a minimum, the company will not go bankrupt in the next six months.
• Buying back shares is the simplest and best way a company can reward its investors. If a company has faith in its own future, then why shouldn’t it invest in itself, just as the shareholders do?
• If I could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favorable publicity, the one that every investor hears about in the car pool or on the commuter train—and succumbing to the social pressure, often buys.
• Hot stocks can go up fast, usually out of sight of any of the known landmarks of value, but since there’s nothing but hope and thin air to support them, they fall just as quickly.
• Instead of buying back shares or raising dividends, profitable companies often prefer to blow the money on foolish acquisitions. The dedicated diworseifier seeks out merchandise that is (1) overpriced, and (2) completely beyond his or her realm of understanding. This ensures that losses will be maximized.
• Often the whisper companies are on the brink of solving the latest national problem: the oil shortage, drug addiction, AIDS. The solution is either (a) very imaginative, or (b) impressively complicated.
• In those few spots where the price got ahead of the earnings, it promptly fell back to reality, as you can see in the chart.
• I see that K mart has a p/e ratio of 10. This was derived by taking the current price of the stock ($35 a share) and dividing it by the company’s earnings for the prior 12 months or fiscal year (in this case, $3.50 a
share). The $35 divided by the $3.50 results in the p/e of 10.
• If you buy shares in a company selling at two times earnings (a p/e of 2), you will earn back your initial investment in two years, but in a company selling at 40 times earnings (a p/e of 40) it would take forty years to accomplish the same thing.
• Rich earnings and a cheap headquarters is a great combination. Other bad signs include fine antique furniture, trompe l’oeil drapes, and polished-walnut walls.
• Debt reduction is another sign of prosperity. When cash increases relative to debt, it’s an improving balance sheet. When it’s the other way around, it’s a deteriorating balance sheet.
• Let’s say you’ve gotten excited about Lexan plastic, and you find out that General Electric makes Lexan. Next, you discover from your broker (or from the annual report if you can follow it) that the plastics division is part of the materials division, and that entire division contributes only 6.8 percent to GE’s total revenues. So what if Lexan is the next Pampers—it’s not going to mean much to the shareholders of GE. You look at this and ask yourself who else makes Lexan, or you forget about Lexan.
• But if the p/e ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year (also known as a “12-percent grower”) and a p/e ratio of 6 is a very attractive prospect.
• In general, a p/e ratio that’s half the growth rate is very positive, and one that’s twice the growth rate is very negative.
• There’s bank debt and there’s funded debt. Bank debt (the worst kind, and the kind that GCA had) is due on demand.
• The important thing is that it’s due very soon, and sometimes even “due on call.” That means that the lender can ask for his money back at the first sign of trouble.
• Funded debt (the best kind, from the shareholder’s point of view) can never be called in no matter how bleak the situation, as long as the borrower continues to pay the interest.
• If you do plan to buy a stock for its dividend, find out if the company is going to be able to pay it during recessions and bad times. A company with a 20-or 30-year record of regularly raising the dividend is your best bet.
• The first year Pig Iron doesn’t spend $80 million on furnace improvements, it loses business to more efficient competitors. In cases where you have to spend cash to make cash, you aren’t going to get very far.
• Coastal had borrowed $2.45 billion to acquire a major pipeline company, American Natural Resources. The beauty of the pipeline was that they didn’t have to spend much to maintain it. A pipeline, after all, doesn’t demand much attention.
• With a manufacturer or a retailer, an inventory buildup is usually a bad sign. When inventories grow faster than sales, it’s a red flag.
• Before I invest in a turnaround, I always check to make sure the company doesn’t have an overwhelming pension obligation that it can’t meet. I specifically look to see if pension fund assets exceed the vested benefit liabilities.
• If you find a business that can get away with raising prices year after year without losing customers (an addictive product such as cigarettes fills the bill), you’ve got a terrific investment.
• What’s the bottom line?”It’s the final number at the end of an income statement: profit after taxes.
• There are three phases to a growth company’s life: the start-up phase, during which it works out the kinks in the basic business; the rapid expansion phase, during which it moves into new markets; and the mature phase, also known as the saturation phase.
• If 25 to 30 percent isn’t a realistic return, then what is? Certainly you ought to do better in stocks than you’d do in bonds, so to make 4, 5, or 6 percent on your stocks over a long period of time is terrible.
• Given all these convenient alternatives, to be able to say that picking your own stocks is worth the effort, you ought to be getting a 12–15 percent return, compounded over time. That’s after all the costs and commissions have been subtracted, and all dividends and other bonuses have been added.
• If you are looking for tenbaggers, the more stocks you own the more likely that one of them will become a tenbagger.
• There are two particular periods when great bargains are likely to be found.
•The first is during the peculiar annual ritual of end-of-the-year tax selling. It’s no accident that the most severe drops have occurred between October and December. If you have a list of companies that you’d like to own if only the stock price were reduced, the end of the year is a likely time to find the deals you’ve been waiting for.
• The second is during the collapses, drops, burps, hiccups, and freefalls that occur in the stock market every few years. If you can summon the courage and presence of mind to buy during these scary episodes when your stomach says “sell,” you’ll find opportunities that you wouldn’t have thought you’d ever see again.
• One of the biggest troubles with stock market advice is that good or bad it sticks in your brain. You can’t get it out of there, and someday, sometime, you may find yourself reacting to it.
• Not buying because an insider has started selling can be as big a mistake as selling because an outsider (Petrie) has stopped buying.
• There’s simply no rule that tells you how low a stock can go in principle.
• The point is, there’s no arbitrary limit to how high a stock can go, and if the story is still good, the earnings continue to improve, and the fundamentals haven’t changed, “can’t go much higher” is a terrible reason to snub a stock. Shame on all those experts who advise clients to sell automatically after they double their money. You’ll never get a tenbagger doing that.
• There’s a very human tendency to believe that things that have gotten a little bad can’t get any worse.
• It takes remarkable patience to hold on to a stock in a company that excites you, but which everybody else seems to ignore. You begin to think everybody else is right and you are wrong. But where the fundamentals are promising, patience is often rewarded.
• The more stocks you learn about, the more winners you realize that you’ve missed, and soon enough you’re blaming yourself for losses in the billions and trillions. If you get out of stocks entirely and the market goes up 100 points in a day, you’ll be waking up and muttering: “I’ve just suffered a $110 billion setback.”
• In most cases it’s better to buy the original good company at a high price than it is to jump on the “next one” at a bargain price.
• Before you short a stock, you have to have more than a conviction that the company is falling apart. You have to have the patience, the courage, and the resources to hold on if the stock price doesn’t go down—or worse, goes up.
• This demonstrates that the market, like individual stocks, can move in the opposite direction of the fundamentals over the short term.
• Buying a company with mediocre prospects just because the stock is cheap is a losing technique.
• Selling an outstanding fast grower because its stock seems slightly overpriced is a losing technique.
• You don’t lose anything by not owning a successful stock, even if it’s a tenbagger.
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