My notes from reading “Beating the Street”.
National Association of Investors Corp. Represents over 10,000 stockpicking clubs.
Majority of chapters beat s&p and 3/4 of all mutual funds. Offer investors manual and home study course. Monthly “Better Investing”.
Maxims from NAIC:
-Hold no more stocks than you can remain informed on.
-You want to see, first, that sales and earnings per share are moving forward at an acceptable rate and, second, that you can buy the stock at a reasonable price.
-It is well to consider the financial strength and debt structure to see if a few bad years would hinder the company’s long-term progress.
-Buy or do not buy the stock on the basis of whether or not the growth meets your objectives and whether the price is reasonable.
-Understanding the reason for past sales growth will help you form a good judgment as to the likelihood of past growth rates continuing.
The St Agnes Chorus (some 8th graders who are learning about stock picking)
– A good company usually increases its dividen every year.
– You can lose money in a very short time but it takes a long time t omake money.
– The stock market really isn’t a gamble, as long as you pick good companies that you think will do well, and not just because of the stock price.
– You can make a lot of money from the stock market, but then again you can also lose money, as we proved.
– You have to research the company before you put your money into it.
– When you invest in the stock market you should always diversify.
-You should invest in several stocks because otu of every five you pick one will be very great, one will be rally bad, and three will be OK.
– Never fall in love with a stock; always have an open mind.
– You shouldn’t just pick a stock– you should do your homework.
– buying stocks in utility companies is good because it gives you a higher dividen, but you’ll make money in growth stocks.
– Just because a stock goes down doesn’t mean it can’t go lower.
– Over the long term, it’s better to buy stocks in small companies.
– You should not buy a stock because it’s cheap but because you know a lot about it.
Moody’s Handbook of Dividen Achievers – complete listing of companies whose dividends have increased continously. One could do well to pick stocks at the top of this list.
Michael Lipper is the #1 authority on mutual funds.
He talks about how the T. Rowe Price New Horizons Fund is a good indicator for emerging growth markets. I look at this funds performance for the last 5 years and it looks as good as eating mud.
Forbes Honor Roll – published every September lists the best funds. Prereqs are success through two bull and two bear markets.
Summary of Mutual Fund investing strategies;
– Put as mch of yoru money int ostock funds as you can. Even if you need income, you will be better off in the long run to own dividend-paying stocks and to occasionally dip into capital as an income substitute.
– If you must own gov’t bonds, buy them outright from the Treasury and avoid the bond funds, in which you’re paying managment fees for nothing.
– Know what kinds of stock fnds you own. When evaluating performance, compare apples to apples, i.e., value funds to value funds. Don’t blame a gold-fnd manager for failing to outperform a growth stock fund.
– It’s best to divide your money amoung three of four types of stock funds (growth, value, emerging growth, etc.) so you’ll always have some money invested in the most profitable sector of the market.
– When you add money to your portfolio, put it into the func that’s invested in the sector that has lagged the market for several years.
– Trying to pick tomorrow’s winning fund based on yesterday’s performance is a difficult if not futile task. Concentrate on solid performers and stick with those. Constantly switching your money from one fund to another is an expensive habit that is harmful to your net worth.
The 5 basic types of funds;
– Capital appreciation funds; Magellan – managers have carte blanc
– Value funds: assets, not earnings
– Quality growth; medium / large companies, well established, expanding steadily, increasing earnings regularly – no cyclicals, blue chips nor utilities.
– Emerging growth: small caps
– Special situations funds: something unique about the companies that make them look good to the manager.
Some investors, the rumor goes, own a single share of Warren Buffets Berkshire Hathaway company, just to get on his mailing list. (The book says it’s 11k per share ~1994, yahoo says it’s 69k in ’99).
“Chart books” used to be the way you got the #’s, from the library or brokers office.
– Buy shares when the stock price is at or below the earnings line, and not when the price line diverges into the danger zone, way above the earnings line.
In retail and restaurant chains, the growth the propels earnings and the stock price comes mainly from expansion. As long as the same-store sales are on the increase (available from Q and Y reports), the company is not crippled by excessive debt, and it is fllowing it’s expansion plans as described to shareholders, it usually pays to stock with the stock.
I.E. Walmart 20 years public, 100 bagger.
SuperCuts panned out just like a good retail or restaurant chain. Power of franchising.
The autos, GM, Ford, Chrysler etc., often misidentified as blue chips, are actually classic cyclicals.
Given the billions of dollars that recently have been pouring into bonds, stocks, and money-market mutual funds, it should be no suprise that these mutual fund companies have outperformed the market. (The companies, not necessarily the funds they own/manage). If there’s any suprise here, it’s that nobody has yet launched the Mutual-Fund Company Mutual-Fund.
Montgomer Securities in California keeps tabs on the entire restaurant group and produces reports.
“Buy and forget” strategy can be unproductive and downright dangerous. IBM, Sears and Kodak are good examples. Regular checkups are required. Two basic questions: 1) is the stock stilla ttractively priced relative to earnings, and 2) what is happening in the company to make the earnings go up?
#1 When the operas outnumber the football games three to zero, you know there is something wrong with your life.
#2 Gentlemen who prefer bonds don’t know what they’re missing
#3 Never invest in any idea you can’t illustrate with a crayon.
#4 You can’t see the future through a rear-view mirror
#5 There’s no point paying Yo-Yo Ma to play a radio.
#6 As long as you’re picking a fund, you might as well pick a good one
#7 The extravagance of any corporate office is directly proporional to management’s reluctance to reward the shareholders.
#8 When yields on long-term gov’t bonds exceed the dividend yield of the S&P 500 by 6 percent or more, sell you stocks and buy bonds.
#9 Not all common stocks are equally common.
#10 Never look back when you’re driving on the autobahn.
#11 The best stock to buy may be the one you already own.
#12 A sure cure for taking a stock for granted is a big drop in the price.
#13 Never bet on a “comeback” while they’re playing Taps.
#14 If you like the store, chances are you’ll like the stock.
#15 When insiders are buying, it’s a good sign – unless they happento be New England bankers.
#16 In business, competition is never as healthy as total domination.
#17 All else being equal, invest in the company with the fewest color photographs in the annual report.
#18 When even the analysts are bored, it’s time to start buying.
#19 Unless you’re a short seller or a poet lookig for a wealthy spouse, it never pays to be pessimistic.
#20 Corporations, like people, change their names for one of two reasons: either they’ve gotten married, or they’vebeen involved in some fiasco that they hope the public will forget.
#21 Whatever the queen is selling, buy it.
25 Golden Rules
– Investing is fun, exciting, and dangerous if you don’t do any work.
– Your investors edge is not something you get from Wall Street experts. It’s something you already have. You canoutperform the experts if you use your edge by investing incompanies or industries you already understand.
– Over the past three decades, the stock market has come to be dominated by a herd of professional investors. Contrary to popular believe, this makes it easier for the amateur investor. you can beat the market by ignoring the herd.
– Behind every stock is a company. Find out what it’s doing.
Often, there is no correlation between the success of a company’s operations and the success of its stock over a few months or even a few years. In the long term, there is a 100 percent correlation between the success of the company and the success of its stock. This disparity is the key tomaking money; it pays to be patient, and to own successfull companies.
– You have to know what you own and why you own it. “This baby is a cinch to go up!” doesn’t count.
– Long shots almost always miss the mark.
– Owning stocks is like having children — don’t get involved with more than you can handle. The part-time stockpicker probably has time to follow 8-12 companies, and to buy and sell shares as conditions warrant. There don’t have to be more than 5 companies in the portfolio at any one time.
– If you can’t find any companies that you think are attractive, put you rmoney in the bank until you discover some.
– Never invest in a company without understanding its finances. The biggest lisses in stocks come from companies with poor balance sheets. Always look at the balance sheet to see if a company is slovent before you risk your money on it.
– Avoid hot stocks in hot industired. Great companies in cold, nongrowth industries are consistent big winners.
– With small companies, you’re better off to wait until they turn a profit before you invest.
– If you’re thinking about investing in a troubled undustry, buy the companies with staying power. Also, wait for the industry to show signs of revival. Buggy whips and radio tubes were troubled industries that never came back.
– If you invest 1k in a stock, all you can lose is 1k. but you stand to gain 10k or even 50k over time if you’re patient. The average person can concentrate on a few good companies, while the fund manager is forced to diversify. By owning too many stocks, you lose this advantage of concentration. It oly takes a handful of bug winers to make a lifetime of investing worthwhile.
– In ever undustry and every region of the country, the observant amateur can find great growth companies long before the professinals have discovered them.
– A stock-market decline is as routine as a January blizzard in Colorado. 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 fleeing the storm in panic.
– Everyone has the brainpower to make money in stocks. Note every has the stomach. If you are susceptible to selling everything in a panic, you ought to avoid stocks and stock mutual funds altogether.
– There is always something to worry about. Avoid weekend thinking and ignore the latest dire predictionsof the newscasters. Sell a stock because the company’s fundamentals deteriorate, not because the sky is falling.
– Nobody can predict interest rates, the future direction of teh economy, or the stock market. Dismiss all such forecasts and concentrate on what’s actually happening to the companies in which you’ve invested.
– If you study 10 companies, you’ll 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 market – companies whose achievements are being overlooked by Wall Street.
– If you dont’ study any companies, you have the same 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 superiod companies. You can affored to be patient – even if you missed Wal-Mart in the first five years, it was a great stock to own the next five years. Time is against you when you own options.
– If you have the stomach for stocks, but neither the time nor the inclination to do the homework, invest in equity mutual funds. here, it’s a good idea to diversify. you should own a few different kinds of funds, with managers who pursue different styles of investing: growth, value, small companies, large, etc., Investing in six of the same kind of fund is not diversificatin.
– The cap-gains tax penalizes investors who do too much switching from one fund to another. If you’ve invested in one func or several funds that have done wel, don’t abandon them cpriciously. Stick with them.
– Amoung the major stock markets of the world, the US market ranks eight in total returnover the past decade. You can take advantage of the faster-growing economies by investing some portion of your assets n an oversears fund with a good record.
– In the long run, a portfolio of well-chosen stocks and/or equity mutual funds will always outperform a portfolio of bonds or a money-market accuont. In the long run, a portfolio of poorly chosen stocks won’t outperformthe money left under the mattress.