3 Ways a Stock Should Pay You

Do you get a lot of useless mass emails? I know I do.

You know the type of emails I’m talking about. They have a catchy headline and a thin veneer of information, but really they’re simply advertising. Mutton dressed up as lamb.

Among the deluge of email noise, Tom Jacobs stands tall. I asked his permission to reprint the following email, as both it and Tom deserve more attention. I’ve followed, liked and learnt from him for 15 years. I recommend you do too.

3 Ways a Stock Should Pay You

Many people incorrectly think there is magic to stock gains and losses because they consider only price. Rather, what matters is whether the business creates what’s called shareholder value. If it does, the stock price will eventually follow. Very simple.

You’d think creating shareholder value would be the goal of every company, right? Sell products and services, take in more money than you spend, and reinvest the excess cash to earn more than if it sits in the checking account. This creates value for owners, whether of a lemonade stand, coffee shop, or Apple, and someone would pay more to buy the business-through our shares.

Yet many businesses are in business to create value for management, not owner-shareholders. And even those who try to be shareholder friendly aren’t often good at it. There are very few truly good CEOs, or every company would make shareholders better off. How do we find good management?

 

The Five Choices

There are five places execs can spend cash beyond what’s needed to run the business: (1) property, plant, equipment, research and development; (2) mergers and acquisitions; (3) dividends; (4) buying back the company’s own undervalued stock; and (5) paying down higher interest debt.

The first two are growth investing. Here, companies build more manufacturing and distribution facilities, hire more software developers, buy other companies and grow empires! More often than not, these fail to create a more valuable company. These investments don’t earn a sufficient return, and roughly 85% of M&A activity fails to add shareholder value. Simply, most CEOs don’t spend shareholder cash well.

 

The Virtuous Cash Cycle

The other three choices help prevent management from blowing our money on skittles and beer. They provide shareholder yield. Paying down debt saves on interest payments, freeing up more cash. If the company’s shares are selling at a price that places a very low value on the company, buying its own stock is a good investment. And when the company buys back shares, our shares own more of the company, and earnings and cash flow per share rise, usually leading to stock gains.

Plus, if a company pays dividends, every share it buys back eliminates paying the dividend on that share forever. If the dividend yield is 4% a share, the company “earns” 4% a year forever just by not having spend it anymore. Even more cash is available to increase the dividends, buybacks, and debt paydowns. It’s a virtuous cycle.

Despite this simple thinking, most investors avoid companies that pay dividends and buy back stock, believing their best days are over. Quite the opposite. The best days for management moon-shot paydays may be gone, but the sweet paydays for shareholders have just begun.

Don’t worry about our vibrant entrepreneurial culture. Venture capitalists and institutional investors will always provide capital for companies with new ideas, products and services to enhance our lives. However, let’s leave it to them to speculate.

Instead, we will buy cheaply and get paid. It’s as simple as that.

 

Tom Jacobs is the co-author of What’s Behind the Numbers? A Guide to Exposing Financial Chicanery and Avoiding Huge Losses in Your Portfolio. He is an Investment Advisor for separately managed accounts at Dallas’s Echelon Investment Management and serves clients worldwide. You may reach him at tjacobs@echelonim.com.

Fund managers I’d trust to manage my money

There are two basic ways to invest in the share market. Via low cost index funds or active management.

Low cost index funds are a low cost means to get slightly below market average. Humm, I don’t know what you think, but paying for guaranteed under-performance seems bizarre to me. If you must settle for bottom half performance, then at least time the market to ensure you finish in the top half at the end.

If your brain is exploding due to my heresy of commonly accepted wisdom, all I can say is look at the trees not the forest. Statistics tell a general story, but in investing it’s the individual stories that count.

So, that leaves active management as the only sensible basic approach. The decision then becomes, should I be the manager or hire someone? For the vast majority of people the answer is you should hire someone.

How to choose the best fund manager for your money.

Play the man not the ball. The ball is the game, the share market. The man or woman is the individual fund manager.

Collectively, active fund managers suck. Active investors pay a higher price for worse performance than index funds. You of course know that, as the poor average performance of active fund managers has been the major marketing thrust of index funds for decades.

Fortunately, as with most human endeavour, there’s a rough bell curve in ability and expertise. Our task is to find those top managers.

Sadly this is where most people trip up. But they shouldn’t feel bad as selecting a top fund managers is bloody hard to do.

Top criteria for  picking a fund manager

Here’s my list.

  • Go with a  boutique manager. You want a manager making final investment decisions not an investment committee. Do not go with a major ASX listed company. That includes the legendary Kerr Neilson’s Platinum Asset Management. Investing with one of them is investing with the crowd, and the crowd always finishes in the bottom half. Platinum is an exception, but I’m not sure it will be for the next decade or two.
  • Go with someone with almost all their own funds invested alongside you.
  • Someone 30 to 50. Perhaps older if you have good reason to believe they still have passion and will continue to perform for another decade.
  • Make sure they have reputable back-end companies. The companies then ensure the safety and integrity of your money.
  • Give preference to a value investing philosophy – intrinsic value, business focused investing.
  • Bonus points if they have a track record of picking growth companies.

Are you one of Australia’s best fund managers?

I going to list my top three below as a benchmark. If you believe you’re a better fund manager or know of one, then please drop me a line. Comment below on at the bottom of this page.

I’ve had some funds invested with OC Funds Management for nearly a decade now. I choose the OC Dynamic fund in 2004 based on an article I read while still living int he UK, plus a read of everything on their website. Both the performance and communication has been outstanding.

OC funds management performance

My current favourite  fund manager is a young Kiwi guy called Mike Taylor. This guy may even be better than me! LOL.

Mike founded and manages Pie Funds. Bummer, checking his site he’s soft closed his flagship funds, so getting in would be difficult. The global small companies fund is till open, but I believe that is predominately managed by external fund managers. 

I’ll sub Smallco in for Pie Funds.

smallco investment fund performance

In the young guns category of my top three fund managers is Tony Hansen of Eternal Growth Partners.

I think Tony is highly likely to continue beating the market over the long haul. But if he doesn’t at least you know he’ll go hungry! Here’s how Tony puts it.

Over the course of the last few years, I have actively and unsuccessfully sought a product which is accessible to the average investor which has two desirable characteristics – 1. no management fee & 2. fee for performance only. I have found no suitable product, and so decided to create one.

One final word of advice.

It’s no coincidence Mike Taylor of Pie Funds has soft closed his funds. Good investments are very difficult to find now.

Good fund managers are even harder to find. This is a good time to be reducing debt and building cash reserves.

Disclosure: I continue to target 50 percent invested. I’ve been selling down our units in OC Dynamic Fund. I just bought a new house and have taken on a mountain of debt. I am not you, and what’s right for me is not right for you. You may be the unnamed Star Trek security officer beaming down to the alien planet with me. This is not advice.

Investing in biotech companies

Here’s what a clever guy said about investing in biotechnology companies.

After many years investing in Bio’s a few lessons that I learned have helped greatly in making money from them.

  • Charts have a place, but can’t predict those Black Swan announcements…like the data base ann…so relying on charts is very dangerous..
  • Very good deep research and experience count for a lot. That’s how the big killings are made in Bio’s.
  • BAD MANAGEMENT is the real killer, and the hardest to spot. The road to success in Aussie Bio’s is littered with wrecks from idiots sitting in CEO chairs and on Boards…
  • It [PBT] has very good management… A stable long term team who have skin in the game….
  • The successful outcome with PBT2 will make these guys Billionaires and Nobel Prize winners.. They have a very strong interest in success…
  • Management and Directors who have a lot to win or lose have much better outcomes….
  • There are enough companies that fit those rules to diversify and make a very lot of money here..
  • Finding time to do the of research is hard.

Good observations, except for calling the Prana database announcement a black swan. Most probably that was simply a clinical operations screw up. Mistakes happen all the time, so are common white swans, not black swans.

In short, dig deep, and focus on management’s ability and their skin in the game.

Here’s my last tweet on Prana  [old now] .

Prana Biotechnology ASX:PBT alert

I sold some of our Prana shares later that day at 71 cents. That trade was simple risk management. The trigger to sell Prana was the sudden deterioration of its risk reward  profile, fused with my euphoria meter peaking.

Risk management is one of the keys to long-term investment success.

I shoot for a win win strategy. Naturally I sometimes loss, occasionally badly, so here’s what I mean by win win.

  • I try to think of at least the two most probable outcomes. Then I decide what I’d have liked to have done in the event of those two outcomes occurring. That is, how would I fell like a winner in each event.
  • Then, multiply each outcome by the rough probability of the event occurring. Prior to gaining experience, a wild ass guess at the probabilities will help you think along the right lines. Always err on the conservative side.

I started writing this four weeks ago, and post it now after I  failed to implement my own rule on Psivida $PSDV.

Here’s a rough example using PSDV.

  • FDA reject 50% probability multiplied by $2 target if happens, plus FDA approve times $8 target, for a fair value of $5 [50%*($2+$8)]. At $5 PSDV had a 1:1 risk return ratio, $3 downside for $3 upside based on a binary event.

My own rules screamed trim the position. 30% would have left me felling like a winner in either event. I didn’t as I was not focused enough. Massive life change is so freaking distracting! I take a moment to think damn.

For those without a position in PSDV, now is a good time to tune in, as you may get a wonderful opportunity to buy, as I outlined back here.

Disclosusre: Long Prana and Psivida

Don’t be a dart throwing monkey

When you make an investment decision you must have an idea of the probable outcomes. If you have no idea then you may as well throw darts.

Have an idea

I laugh and cry when I read statements by analysts like the following.

When we moved the company to Hold, we had no idea if we’d ever make it a Buy again. Being patient doesn’t mean we were necessarily ‘waiting for a better price’ — we had no idea if a better price would ever come.

If they had no idea what the heck are they doing advising people what to do! Investing is all about having ideas and assessing the probable outcomes. If you can’t do that then get out of the game.

What’s just as bad is the focus on price, as in “if a better price would ever come”. At its core investing is about profiting from a perceived margin of safety. Margin of safety is the difference between price and value. The larger the margin the better.

Look for a better entry point — not a better price

Once you find a company you like, you should be looking for a wide margin of safety, not a better price. It is entirely possible to pay a higher price, and yet have a more attractive margin of safety — a better entry point. You may miss an opportunity or two, but remember opportunities are plentiful, capital is scarce.

Shares move in waves from under to overvalued and from under to overbought. Once you recognise those trends you’ll have an idea, and that will help you make better investment decisions.

However you invest, make sure you have an idea! Practice estimating probabilities and making rational decisions based on those probabilities. Keep track of your estimates and continuously revisit them to judge your performance. Doing so will help you improve your decision making process and your investment returns.

Why having no idea kills performance

Do I really need to explain why having no idea is death knell to your investment success?

When investing, don't be a monkey throwing dartsIf you have no idea you, are patsy sitting at the card table. Having no idea leads to holding companies in a sector that’s in obvious decline — obvious that is to anyone who does have an idea. It will result in dismal investment returns that a dart throwing monkey throwing could better. Having no idea means you won’t recognise we’re in a secular bear market and the probability of getting a better entry point for an overbought company is considerable higher than during a secular bull market. I could go on and on… but hopefully you get the idea.

As I said tried to explain in selling is hard, so start practicing your investing results will improve with practice. So start practicing basing all your decisions on an idea. Base your ideas on probable outcomes and a margin of safety. Then track all your estimates in an investing journal.

You do have a journal, don’t you?

 

Image edited from the amusing monkey poop site.

Unsolicited and Possibly Unwanted Advice

The following advice is offered with Matrix Composites & Engineering Limited (MCE) owners in mind, but it applies to all value investors who are holding on to fully valued companies.

I offer this unsolicited advice as I believe there are a number of new “value” investors who are sitting on substantial gains in MCE and my view is they should book those gains and move on.

  1. Is there a margin of safety at the current level? I think not, the only way to get see a decent MoS is to use a very low required rate of return and optimistic forecasts. The valuation to the right is from the excellent MyClime service. To get a decent MoS I had to use a ROE of 50% and required return of 11%.
  2. True value investors don’t forecast. Basing analysis on what analysts forecast is appropriate for growth investors not value investors. Analysts in general are over-optimistic in the long run.
  3. Surely you can find a better MoS else where. If not there is nothing wrong with holding cash, it gives a decent return plus the option of buying when bargains do appear.
  4. Who is buying at this level. MoMo (momentum) investors that’s who, there is no-one left to buy after them and they’ll head for the exists quicker than you.
  5. You never go broke taking a profit.
  6. Don’t fall in love with a position.
  7. If you don’t want to sell at least put in place a trailing stop.
  8. Mr Market is in a great mood at the moment and that means it is time to sell to him.

Put all the above together and I hope you conclude that taking your profit and looking for an investment with better margin of safety is the prudent path of value investing. I’d love to know if and why you disagree.

Disclosure: No position in MCE.

Investing is About Expectations

Bill Miller from Legg Mason provides an excellent summary about investing in this video. His outlook is also interesting, even if it is a few months old.

Investing is about expectations. Look for companies where the expectations are too low. This is usually caused by pessimism, controversy, complexity or fear. This belief has been echoed over the ages and expressed in many ways by Ben Graham, Warren Buffett and other value investing luminaries. The idea is very simple, yet surprisingly hard for most investors to implement. Buy fear and sell greed!

The video is well worth seven minutes of your time.

BP is an excellent recent company specific example. Late 2008 early 2009 is a great macro example. Many people are currently arguing that Microsoft is a great example of expectations being too low. MSFT certainly is shrouded with pessimism and deserves a very close look at the least.

Telstra is a blue chip Australian company that almost fits the bill. With a current reasonably safe fully franked dividend of $0.28 and price of $2.65 TLS.AX is sitting on a yield to SMSFs of over 12%, that implies a lot of pessimism. I’m certainly a considerably more comfortable holding Telstra than any if the Australian banks. Telstra should do more than simply talk about floating Sensis, they should flog that cash cow, before it is fully milked and only fit for dog food.

DAVID Thodey has given his first indication that Telstra may be open to spinning off its directories business, Sensis.
The Telstra chief declined to rule out a possible sale of the subsidiary in an interview with BusinessDaily.

Disclosure: Long Telstra, considering Long position in MSFT

A Simple Method for Buffett Like Returns

So you want to be an investing superstar. Or at least retire comfortably with control over your own finances. Here’s a simple starting point for Buffett like returns.

  1. Buy a basket of stock in the highest book to market decile, rinse and repeat. (Lowest price to book.)
  2. Hold more cash when the market is above long term trend lines, deploy that cash when it is below.

Value stocks outperform Growth stocks

http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library.html

What do you think when you look at the above graph and consider the following?

More thoughts

  • While markets are reasonably micro-efficient they are certainly prone to times of macro-inefficiency.
  • The high risk premiums from equity market can be reasonably explained by investors taking a short term view. Those taking long term views are better placed to exploit the risk premium.

Investing 101 – Price and Value

Yesterday I found the following email from early December.

“Just purchased MTU last friday at 1.64 and it is down now to 1.47 closing today. Bit discouraging, but as you suggested it might cross 2.00 mark, what would you recommend to sell it at a nominal profit price of any thing above 1.64 or wait it out.”

Salina, if you’re reading this sorry for the tardy reply, your message slipped through to the keeper.

Firstly, all my comments are general in nature and I am not qualified to provide financial advice. Second, I’m still learning and always will be so don’t rely on my valuations. Third this is a short article aimed to help new investors think, as such it contains many generalisations and less than expansive explanations. Finally, these are my opinions for long term investors.

If 10% wiggles in price cause you concern then you shouldn’t invest directly in shares. One of the worst aspects of shares is their frequent quotation. The wiggles play havoc with investors’ emotions. If the wiggles cause you lost sleep then you probably shouldn’t be a direct investor. However, if you’re determined to invest directly in shares and to learn and grow, then the best advice I can offer is look at major announcements from the company not the share price.  At the most look at your share prices once a month. [Speaking of major announcements MTU will announce their half year results tomorrow, Thursday 25th February]

If you can’t do a basic valuation of companies then you’re on a hiding to nothing. As Salina’s message demonstrates without your own reasoned valuation you’ll have no idea about what price you should buy or sell at. You’ll be at the mercy of the market and forever concerned about those wiggles. The valuation doesn’t need to be complex, a simple P/E based valuation is better than nothing, as it at least starts you on the path to thinking about value. There’s an example of a basic P/E matrix valuation in my original analysis of M2.

Taking a small loss is the best thing new investors can do. All to often new investors let small losses become big losses. Heck even I still do! Damn me TREES 3! While the debate over using stop losses is never ending, new investors will do well to consider themselves lucky if the price goes up and wrong if the price goes down. I don’t advocate a fixed stop loss, but if you look at the chart below you’ll see how once a loss goes over 20% making that loss back quickly gets much harder.

Taking a small loss teaches a good habit. Being flexible and realising you may be wrong will make you more money is the long run than holding on and hoping the stock goes back up so you can get out of even. If you’re nervous about a stock then sell. Remember you can always re-buy. Also remember opportunity cost, holding that dog has a cost.

Profit Required to make up for a loss

Buy with a margin of safety. Buy at a discount. Pay less than what you believe the company is worth, lots less! Think mega closing down sale. If you’re buying with a wide margin of safety, i.e. the price is a lot less than value, then it doesn’t matter if your valuations skills are weak. The discount helps hide your valuation errors. For example, I value Woolworths at $32. I think an appropriate discount for a large cap stable company is 30% so I’d buy in the $22.50 range. Yes I’ll miss out on buying a lot of companies only to see the price go higher, but as I’ll cover next, that’s a good thing.

Avoid the need to trade. Most new investors want to buy and buy and then buy some more. Don’t do it! Use Buffett’s 20 punch-hole analogy, i.e. treat each purchase as one of the only 20 buys you’ll make in my life. While we’ll all buy more than 20, thinking that way focuses the mind and can stop the urge to buy.

Avoid chasing shares. Capital is scarce opportunities are plentiful.

Investing is a marathon not a sprint. I don’t care what the price of MTU is today, unless it is above my sell point or below my current buy point (not my original buy price). I care what it will be next year and the potential it has after that. At 42 I hope to be investing for another forty years. With that in mind the price wiggles become meaningless.

Salina’s message also demonstrates why technical support and resistance lines work. Investors are obsessed with not losing money. Once a share rises back to where there was previously large volume then there’s a lot of investors relieved to get out. The price then falls due to the increased sellers, hence resistance.

Back to Salina

Her first mistake was buying with no idea of the value of MTU. She then bought with no margin of safety. Thirdly she focused on the price wiggles rather than the fundamental story. That played havoc with her emotions and while I hope she didn’t sell, she would be typical of those who did sell at below $1.40 in mid December.

If I was to make a recommendation, which I don’t, I’d say read MTU’s 2009 annual report, do a rough valuation and then decide if it is one of your best current opportunities. If not sell. If that seems too hard, then sell and buy an index fund.

Investing in individual shares is a lot harder than most people think. I’ve been doing it for over twenty years and am only now getting comfortably with my decisions, granted I’m a slow learner.

Investment Newsletters, Services and Media

A regular commentator, Sean, posted the following comment. You can read his full comment here, it’s comment three.

stockval is interesting but after a brief trial, I’m not sure it adds much to Morningstar/huntley. Thanks for the link though! Valuecruncher, although less user friendly is free.

For $300, Morningstar/ Huntley is great value for money. Try out the trial if you haven’t.
http://www.morningstar.com.au/ [I’ll give it a trial during my mid year break.]

Eureka report is ok for a read but I’ve made very little money on any of the ideas or information from it. I like Alan Kohler though, he’s entertaining.

About the only thing I find worth reading in AFR is Bassanese. I pretty much buy the weekend AFR, read his column and throw the rest out. I found out he has a site on investing/trading ETF’s :  http://www.pennywiseinvestment.com.au/webpages/1_home.php

Which is basically my philosophy except that I trade a bit more. I’ve signed on for the trial subscription but I’m not sure it’s worth the $300 per year.

Out of the sites I’d rate (out of 10):

  • Morningstar/Huntly 9/10
  • Your site 8/10 (love your site, keep it up!)
  • Bassanese 7/10
  • Eureka/business speculator report 6/10
  • AFR 5/10

Since being taken over by Morningstar, huntley doesn’t do small companies as much.

I must buy Sean a beer someday to thank him for the encouraging feedback and worthwhile comments.

I have subscribed to dozens of investment newsletters and sites over the years and used to read newspapers. What follows are my opinions based on past experience, the publications mentioned may have changed since I subscribed.

Traditional Media

  • Newspapers 1/10. I gave up reading newspaper about fifteen years ago. Mind numbing garbage written by journalists can not provide an edge. As Sean said there are some good journalists, but I don’t wish to waste time sorting the wheat from the chaff. Journalists are paid to comments on the noise. I prefer to concentrate on the bigger picture, the signals. Consume for entertainment purposes only.
  • Television news and finance shows 1/10. A worse time waster than papers. The talking heads may occasionally be entertaining but they’ll rot your brain and blunt any edge you may have. Avoid.

Before I go on I should point out I’m like an empty vessel filled by those around me. Hence why I avoid newspapers and television news. If you have stronger filters than me and plenty of time to waste consuming noise, then suck up as much as you want.

Newsletters

I’ve subscribed to a score or more over the years. I always considered newsletters to be like employing cheap analysts and treated them as a source of good ideas. For me the best newsletters are the ones which teach their subscribers along the way.

  • The hands down winner based on that criteria are The Motley Fool newsletters. Unfortunately, over recent years, the Brothers Gardner have eviscerated their value by upping the price of their newer services and spreading themselves to thin. However, there remains great value in many of their newsletters and the associated forums are excellent adjuncts. 9/10 for TMF newsletters under $300.
  • Eureka Report. I enjoyed a two month free of the eureka report last year. They were the first site I offered free advertising is exchange for a subscription. Alan Kohler said no. I particularly enjoyed reading Roger Montgomery’s articles. If you’re a resources investor then Eureka’s resource columnist, David Haselhurst, has an excellent track record. 7/10 (gets two bonus points for a reasonable price.)
  • Intelligent Investor. Good educational material. Reasonable ideas. Unfortunately they take too many savaging from too many dogs for my liking, ROC Oil and GTP TREES spring to mind. They need to focus more on Buffett’s rules one and two; Never Loose Money. A focus on quality not quantity would help them. Good content, but at $545 it’s overpriced. 5/10
  • Complete Growth Investor. Excellent value, good ideas, very educational. Was 10/10 prior to Jeff Fischer defecting back to the TMF. 8/10
  • ChangeWave. Fantastic idea to entice an army of coal face professionals to give their views on the state of their industries and then try and synthesis that into investment ideas. Unfortunately something is lost in translation. Toby and co talk up their successes and sweep their failures under the mat, sometimes even for the same stock, Sirius Radio is a great example of that. Many subscribers took a bath on Sirius, but all you ever hear from ChangeWave is how one of their calls on the stock worked out.  Low on education high on marketing hyperbole. 2/10

Investment newsletters are not a free rideThe main problem with newsletters is that only a lucky minority of subscribers ever outperform the newsletter. Newsletters influence market prices, some dramatically so; therefore, subscribers will on average buy higher and sell lower. Another influential factor is subscriber biases resulting in a pick ‘n’ mix approach by subscribers. Investment returns are often skewed by one or two excellent performers. Subscribers have poor odds of picking the winners amongst the dozens of suggestions.

That’s enough opinions from me for one day. I’d love to hear about your experiences with different newsletters and investment services.

Wait for Profits

With small companies, you’re better off to wait until they turn a profit before you invest.Peter Lynch – 20 Golden Rules

Excellent advice that.

I’m breaking it with Catch the Wind,  breaking it in a big way. CTW doesn’t even have sales! Let alone profits. Even if sales eventuate, profits are an entirely different matter. The list of tech companies with hundreds of millions in sales who still can’t crack a consistent profit is long. Heck software companies can have 70% gross margins and still struggle to turn a consistent profit. Investing without profits is playing with fire.

For the time challenged here’s a summary of Lynch’s 20 Golden Rules. Though I encourage everyone to read the rules in full and if you haven’t read Lynch in the last five years then it is probably time to do so.

I enjoy and profit from distilled wisdom like these rules, but profiting from them requires more than simply reading the list. It is important to fold the rules into your investment strategy or clearly articulate why you’re not. Can you add some of these rules to your investing checklist? Think about each rule and whether you regularly apply it and if not why not. Like all rules they are made to be broken, but before you break a rule it is essential to understand it.

  • Invest in companies or industries you already understand
  • Ignore the herd
  • The disparity between price and value is the key to success, be patient and own successful companies.
  • Know the company and why you own it.
  • long shots almost always miss the mark.
  • The part time stock picker probably has time to follow 8-12 companies and five is sufficient.
  • If you can’t find any companies that you think are attractive, put your money in the bank.
  • Never invest in a company without understanding its finances.
  • Avoid hot stocks in hot companies.
  • If you invest $1000 in a stock, all you can lose is $1000, but you stand to gain $10000 or even $50000 over the time you’re patient. You need to find few good stocks to make a lifetime of investing worthwhile.
  • In every industry and every region, the observant amateur can find great growth companies long before the professionals have discovered them.
  • Stock-market declines are routine. If you’re prepared , it can’t hurt you . A decline is a great opportunity to pick up the bargains left behind by investors who are feeling the storm in panic.
  • Investing is more about your stomach than your brain. If you are susceptible of selling everything in a panic, you ought to avoid stocks and stock mutual fund altogether.
  • There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictions of newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.
  • Dismiss all predictions and forecasts and concentrate on what‘s actually happening to the companies in which you’ve invested.
  • If you study 10 companies, you will find 1 for which the story is better than expected. If you study 50, you’ll find 5 . There are always pleasant surprises to be found in the stock market companies whose achievements are being overlooked on Wall Street.
  • If you don’t study any companies you have the same chance of success buying stocks as you do in a poker game if you bet without looking at your cards.
  • Time is on your side when you own shares of superior companies. You can afford to be patient –even if you are missed Wal- Mart in the first 5 years, it was a great stock to own in the next 5 years.
  • In the long run, a portfolio of well chosen stocks will always outperform a portfolio of bonds or a money market account. In the long run, a portfolio of poorly chosen stocks won’t outperform the money left under the mattress.
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