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you have several things that you possess that will make you a good investor they're inherent to your life it's the field you work in it's the area where you live there may be some local company that's terrific you're a consumer you see some products you see some services that are terrific we bought a Volvo it was better than the American station wagons it was safer the price was right I did a little bit of research I found that Volvo the stock it's a Swedish company was selling equal to its cash you're paying almost nothing for the company they had lots of other divisions that were doing terrific buying that car turned out to be a great way to begin researching the stock sometimes people take things for granted my feel was the mutual fund industry in the early 1970s the industry grew slowly but then it took off in the 80s money piled in to money market funds to Equity Funds like an idiot I miss stocks like dfus pioneer tro price strategic Investments Franklin resources there was lots of companies that went up dramatically these are my own field all I had to do was buy these things it was really dumb back in the 1950s a fireman from New England noticed a factory in his town seemed to be hiring and expanding all of the time this person didn't have a cray computer and he wasn't a professional investor he was just an observant neighbor he decided to put $2,000 per year into tan Brands then called t packs by 1972 the fireman was a millionaire just from using his local Edge investing is a personal thing you have to do it by yourself you don't do it with a committee you have to be able to have the emotional strength to stand the volatility of the market in general and stocks in general the key organ here is not the brain it's the stomach you have the stomach for this you have the patience for it you should be able to look in the mirror and say to myself what am I going to do if the market goes down if you know something that will drive a company's earnings higher you know something that will drive the company's stock higher sooner or later but you can't just guess at it you have to have some reasons such as costs are coming down or new products going to be a big hit research is developing a company story an idea of why earnings should go up or down it doesn't means sitting in the library for hours reading SEC filings or fiddling with a calculator research is exciting it's very little math when I own Chrysler when the biggest position in my fund when I was at a movie theater at a sports event I'd run into somebody driving a minivan I'd ask them what do you think of the minivan would you buy another one what do you like about it people some would say well it's a little underpowered they only have a four-cylinder engine I knew they were already working on a six-cylinder engine so this is research research starts with the things you know your Edge if you're a mechanic look at the tools you use which are the best which are the best value or or if you're a doctor see what new technology saves the insurer money or software systems that reduce costs at hospital you probably already know a few companies quite thoroughly the amateur investor probably can follow between five and eight companies they could lecture in these five or eight companies they know them very well there's 10 to 15,000 public companies in the United States there's lots more overseas so you don't have to be experts on lots of companies you just have to know a few very well it's a lot of fun it only takes a few hours a month it's not a full-time job I own Dunkin Donuts for 12 years I think I might have talked to him once every year the story didn't change a lot you don't have to worry about lowcost Imports coming from Korea when you you own a dut company you don't have to worry about the economy you don't have to worry about in some inventing a new computer chip the story doesn't change that much McDonald's earnings have gone up I think more than 80 fold over the last 30 years the stocks gone up 100 fold what made McDonald's earnings continue to grow if they had just stuck with a cheap cheeseburger and a cheap hamburger at lunch they probably would have run into earnings problems 10 15 years ago but they expanded their menu they kept it cost low they added breakfast they went overseas every day they add two or three more restaurants people thought there was no room for more mcdonals 5 10 15 years ago they were wrong if they had done the research they would said well there's a couple hundred countries out there there's lots of places to grow actual bad economic news Rising interest rates Wars elections any of these can push the market down if you're one of those people that pour over graphs economic statistics or astrology charts trying to figure out what the stock market is going to do next you are wasting your time no one can predict the market you have to understand the market goes down there's been 95 years this Century we've had 50 declines of over 10% of those 50 declines 15 have been 25% or more so about once every two years the market Falls 10% but once every six years it falls 25% these are big drops you have to understand that that's the nature of the market in 1990 Saddam Hussein went into Kuwait the banking system was in trouble we had a recession he had all this background noise lots of good companies had nothing to do with Wars nothing to do with banking they all went down in 1990 the market fell from 3,000 it fell over 20% this gave you a great opportunity to buy terrific companies at very good prices behind every stock is a company if the company does terrific over a long period of time the stock will do terrific if the company does lousy the Stock's going to do lousy that's all you're betting on this is a company that's had 35 years of double digit earnings growth every single quarter we've had changes in the Supreme Court we had the stock market go up and down we had changes in presidents we've had recessions we've had Wars all of those things had no effect on automatic data processing so every time the market went down it gave you a chance to buy it you're saying I believe strongly this company's going to do well if you start to see symptoms that's not going to happen the Stock's going to very rapidly respond to that if the company runs out of steam the Stock's going to run out of steam look at Fanny May from July through October 1990 the standard pors 500 fell 21% Fanny May fell from about $42 a share to about 26 even though earnings were still increasing this this was a terrific time to buy Fanny May Company was doing well management was still great the story was solid and they had a very good business but you got to buy the stock at a 38% discount if you start by looking at the entire universe of stocks more than 3,000 stocks on the New York Stock Exchange alone and over 13,000 public companies in total you'll blow a gasket so I break stocks into categories partly to make the job of researching more manageable putting stocks into categories is the first step in developing the story at least you'll know what kind of story it's supposed to be the category tells you what questions you should be asking about a company you simply can't expect all stocks to behave the same basing a strategy on General maxims like sell when you double your money or sell when the price Falls 10% is absolute Folly no formula will apply to all stocks different stocks behave differently so they require different approaches different expectations and different kinds of stories so suppose you've made a 50% gain on two companies one is a fast grower with a long way to go the other is a big lumbering slow growth company that has already saturated 95% of its market and that market itself is growing slowly the 50% return is fantastic for the slow grower the chances are it's time to sell it the same 50% return could be just the tip of the iceberg for the fast grower there are basically five categories one would be fast Growers two would be slow Growers three would be cyc four would be asset plays and the fifth one would be turnarounds in the meantime remember categories are guidelines they are not hard rules some companies may not fit neatly into a category others may seem to be in two categories at once almost all companies change categories at some time throughout their lifetimes fast Growers if successful will always eventually slow their growth they'll run out of places to go cyclicals experiencing long down Cycles may become turnarounds once recovered they probably will be cyclicals again use the categories as guides to help you build your story but don't let them limit the questions you ask or the research you do one thing we can say about companies in general it's easier to go from 100 million in sales to 200 million in sales then it is to go from 10 billion in sales to $20 billion in sales so smaller companies tend to have more upside potential than larger companies but don't dismiss all big companies out of hand some big companies defy their size and find exciting new ways to grow their earnings as well good opportunities exist in companies that are cyclical regardless of their size when most people think about investing in stock market they dream about investing in a fast grower a company that is growing at over 25% a year at 25% a year a company's profits will double in three they quadruple in six they go up Eightfold in nine years that's how you get a huge stock in a decade there's not a lot of these but they're very powerful and the best part is you don't have to catch them just as they're taking off the beauty of growth companies is you have plenty of time if they're going to grow for 5 10 20 30 years you don't have to be there the first year or the second year you could have bought Walmart 10 years after they went public and made 30 times your money what makes a company grow earning so quickly either it is a rapidly growing industry or it's a rapidly growing company in a slow growth industry rapid Revenue growth and Rapid earnings growth are the Hallmarks of a fast grower you just can't buy any stock with hot earnings and hot sales you have to check the balance sheet make sure the company can keep growing one way you can look at growth companies is think of baseball normal baseball game has nine innings you should look at a growth company and say I don't want to buy it when they're in the first inning I want to buy it when they're in the second or third inning they've got the formula right they got lots of room to go so you want to say to yourself This is a company that's very early in its cycle like a McDonald's when they're only in a few stores or limited when they're only in 100 stores and they had lots of malls to go to Microsoft was a company you could have bought 3 years after it went public and made over 20 times your money sales and earnings were growing at several times the rate of the companies in the S&P 500 in an industry that was exploding by Leaps and Bounds and it had a lot of potential both overseas and domestically this was only the beginning of a 15 to 20 year growth cycle you had plenty of time to get involved there was this amazing company called Superior Industries I think the stock went up over 100 fold they were very good at making aluminum wheels a lot of car companies went to aluminum wheels the industry for Autos wasn't growing aluminum wheels growing dramatically and they were the best at it the fast Growers get all the attention in the media but there's nothing wrong with slow growing stock provided you get it at a very decent price somebody would say to you I'm going to sell you a business for $100,000 and they're earning $50,000 a year you say what's the bad news let's say the bad news is earnings are never going to grow they're earn $50,000 a year forever so this is a price earnings multiple of two you pay $100,000 $50,000 of earnings but they're never going to grow you say I don't care I'm going to get a $50,000 return every year in two years I get all my money back I'm going to make $50,000 a year on my $100,000 investment forever so sometimes even if a company has a very low growth rate in earnings if the stock is selling at the right price it may still be a very good deal a slow to moderate grower will have earnings growth of 3 to 15% a year why one company that I was very lucky with was Service Corp International it's a funeral home company that bought up local Family Funeral Homes a very steady Business Service Corp could grow earnings at 15% a year when I owned it with very little problems a slow grower that turns into a no- grower is a very bad news situation so when you start researching the stock look for these signs steady earnings growth Rising dividends companies that raise their dividends each year have to have the earnings to do so a rising dividend is normally a good sign for a stock room to keep growing you want slow Growers to go on forever that's one reason I like C scorp International so much this was a great stock for me in the 1980s at that point it had a long way to go cyclical companies rise and fall with the economy typically they make expensive Big Ticket items that people buy when the econom is good things like houses cars and Furniture when the economy is bad and people are worried about losing their jobs they don't buy Big Ticket items they're too broke or too scared that they will go R don't try to time a cyclical stock if you don't have intimate knowledge of the business if you don't have an Investor's Edge everyone on Wall Street thrives the time Cy stocks too because the stock market looks forward you could be left with a sinking stock even though the company's earnings are terrific you make your best money in a circle when earnings go from rotten To Mediocre or from mediocre to pretty good the danger point is when earnings go from great to spectacular somewhere between these two points Wall Street will figure out there's only one way to go and that's for profits to go down some point in the future just don't buy in the Hope wait for things to get better prices to get better capacity to shrink inventories to go down scrap prices to get better something ought to be happening so you just want to wait for something really to happen and then when it happens it's going to be big let's take a look at Chrysler 1990 the company was selling for $10 a share the economy was lousy people were talking about Chrysler going out of business but guess what the economy came back everyone's old car was falling apart as people made more money they started buying new cars and because Chrysler had great products the minivan the Jeep and its first new full-size truck in 20 years the stock was big in addition very importantly the balance sheet was decent in 1990 this was not a company about to go bankrupt if it's a cyclical you're hoping for dramatic turnaround in earnings it's going to happen over two or three years earnings are going to go from A Loss to a huge profit Stock's going to go up and you're going to get out make sure you're picking a strong company that can survive when the Cy goes down that means good cash flow and low debt if its cash flow is spotty or its debt is high when the downturn comes the company faces the danger of going bankrupt turnarounds these are stocks that are battered down or they're hated companies or they've been forgotten about they're depressed in price but you have determined some one thing or a few things that have the potential for reversing this company's fortunes independent of the industry getting better or the economy getting better you always have to do a balance sheet check on any company this includes turnarounds do they have enough cash to make it through the next 12 months next 24 months do they have a lot of debt that's due right now these are important questions to answer make sure you understand and believe in the plan to restore corporate profits it's all internal they're doing something either new product New Management cutting costs getting rid of something something inside the company that allows them to improve themselves lots of turn never happen but a few winners can make up for lots of losers what's important is to wait for the actual evidence of the turnaround occurring not just the symptoms the turnaround you had plenty of time so just don't buy on the Hope wait for the reality turnarounds is so big it's worth waiting to get some real evidence SS kresy was a company going nowhere in real trouble they invented the Kmart formula they rolled it out across the country the stock went up over 5050 fold Kmart became a massive stock sometimes 2 and two equals 8 how could this be because a company has a hidden asset that isn't reflected in the stock price when Wall Street wakes up to the hidden assets the stock could be terrific want a great example let's look at Disney Walt Disney is an example of an asset play after they open up Disney World and after they'd opened up Epcot the company's growth rate sort of slowed down they weren't growing very fast and then they discovered there was a lot of assets inside the company there was a name Walt Disney they started the Disney Channel they started selling things that they sold at Disney world into Disneyland they started selling them everywhere they use their licenses for Mickey Mouse and all their characters made a fortune on that these are on the books for nothing the company was loaded with Assets in addition they had all that land inside of Disney World and everybody had hotels outside of Disney World they decided to use their land inside to develop more parks and then even have other companies come in these companies paid their money to build inside of Epcot or inside of areas of Disney World
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