Summary of Investment Advice

Transcription

1 Summary of Investment Advice I. What to Buy? Philip A. Fisher 1 -"What to Buy-The fifteen Points to look for in a Common Stock " What to Buy-The fifteen Points to look for in a Common Stock 1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years. 2. Does the management have a determination to continue to develop products or processes that will further increase total sales potentials when the growth potentials of the current attractive product lines have largely been exploited. 3. How effective are the companies research and development efforts in relation to it size? 4. Does the company have an above average sales organization? 5. Does the company have a worthwhile profit margin? 6. What is the company doing to maintain or improve profit margins? 7. Does the company have outstanding labor and personnel relations? 8. Does the company have outstanding executive relations? 9. Does the company have depth to its management? 10. How good are the company's cost analysis and accounting controls? 11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition? 12. Does the company have a short-range or long-range outlook in regard to profits? 13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders' benefit from this anticipated growth? 14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur? 15. Does the company have a management of unquestionable integrity? 1 Suuarized from Philip A. Fisher, Common Stocks and Uncommon Profits (Woodside California, 1984: originally published 1958), 15-51, The material presented here are excepts from the original articles.

2 Page 2 Henry G. Davis 2 -An Investment Philosophy Davis argues that any stock should pass three tests before you buy it. 1. Sales of the company's product or service must be growing and seem likely to continue to do so. 2. The company's profit margin must have been maintained so that this growth of sales will come through to profits. We should also check simultaneously on the return from its expanding plant to obtain an indication of the probable course of future profit margins. 3. The response of the public must be in agreement with the above trends of sales and profits: in other words, if the price of the company's stock is not reflecting these trends we should reanalyze our conclusions carefully to see if something is being discounted in the future which has not been disclosed by statistics. Warren E. Buffet-1977 Annual Report "We get excited enough to commit a big percentage of insurance company net worth to equities only when we find (1) businesses we can understand, (2) with favorable longterm prospects, (3) operated by honest and competent people, and priced very attractively. We can identify a small number of potential investments meeting requirements (1), (2) and (3), but (4) often prevents action." Warren E. Buffet Annual Report "This annual report is read by a varied audience, and it is possible that some members of that audience may be helpful to us in our acquisition program. We prefer: 1. Large purchases (at least $5 million of after-tax earnings), 2. Demonstrated consistent earning power (future projects are of little interest to us, nor are "turn-around" situations), 3. Businesses earning good returns on equity while employing little or no debt, 4. Management in place (we can't supply it ), 5. Simple businesses (if there's lots of technology, we won't understand it), 6. An offering price (we don't want to waste our time or that of the seller by talking, even preliminarily, about a transaction when price is unknown). 2 Taken from a speech given during the summer of 1962 and reprinted in Classics An Investor's Anthology, edited by Charles D. Ellis with James R. Vertin, pages332

3 Page 3 Peter Lynch "One up on Wall Street" Peter Lynch in his book, One Up on Wall Street, describes his perfect stock. The following is his list of things that make for a perfect stock: 1 It sounds dull-or even better, ridiculous. 2 It does something dull 3 It does something disagreeable 4 It is a spin-off 5 The Institutions don't own it, and the Analysts don't follow it. 6 The rumors abound: It's involved with toxic waste. 7 There is something depressing about it. 8 It is a no-growth industry 9 Its got a niche 10 People have to keep buying it 11 It's a user of technology 12 The insiders are buying 13 The company is buying back shares II. Investing in Problem Companies Winthrop Knowlton and John Furth Chapter 10, Shaking the Money Tree; How to invest in problem companies Ten key problems facing non-growth companies 1. Cyclical problems 2. Regulatory problems 3. Labor problems 4. Import problems 5. Obsolescence 6. Technological problems 7. Ecological and environmental problems 8. Nationalization problems 9. Financial problems 10. Management problems-signs of weak management include An aging top executive Nepotism Luxurious executive facilities A record of overly optimistic forecasts High executive turnover Too many footnotes to the company financial statement Lack of clearly defined corporate objectives.

4 Page 4 They go on to say that if you want to invest in a problem company you should proceed as follows: 1. Define the problems 2. Do not invest in a company with too many problems 3. Avoid companies with a serious financial problem 4. Avoid companies with management problems 5. Find companies that reward you while you wait. 6. Ask yourself whether a less problematical company in a particular industry would not do as well or nearly as well as the particular company you are considering. On the other hand, Warren E. Buffet-1977 Annual Report "We have written in past reports about the disappointments that usually result form purchase and operation of "turn-around" businesses. Literally hundreds of turnaround possibilities in dozens of industries have been described to us over the years and either as participants or as observers, we have tracked performance against expectations. Our conclusion is that, with few exceptions, when management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact." III. When to Sell? Peter Lynch- One Up on Wall Street. When to sell a slow grower The company has lost market share of two consecutive years and is hiring another advertising agency. No new products are being developed and spending on R&D is curtailed. Two recent acquisitions of unrelated businesses, and the company announes it is looking for further acquisitions "at the leading edge of technology". When to sell a Stalwart New products introduced in the last two years have had mixed results, and others still in the testing stage are a year away from the market place. The stock has a P/E of 15, while similar-quality companies in the industry have P/E's of No officers or directors have bought shares in the last year.

5 Page 5 The company's growth rate has been slowing down and though it's been maintaining profits by cutting costs, future cost-cutting opportunities are limited. When to sell a Cyclical The best time is when something has actually started to go wrong. Inventories are building up and the company can not get rid of them. The company has doubled its capital spending budget to build a fancy new plant, as opposed to modernizing the old plants at low cost. The company has tried to cut costs but still can not compete with foreign producers. When to sell a fast grower. Same store sales are down 3 percent in the last quarter New store results are disappointing Two top executives and several key employees leave to join a rival firm. The company recently returned from a "dog and pony" show telling an extremly positive story to institutional investors in twelve cities in two weeks. When to sell a turnaround The best time to sell a turnaround is after it's turned around! IV. Golden Rules Peter Lynch-"Beating the Street (Chapter 25 golden Rules) Investing is fun. Your investor's edge is something you already have. You can beat the market if you avoid the herd. Behind every stock is a company. Often there is no correlation between the success of a company's operations and its stock price over a few months. However, over the long run there is 100% correlation between the success of a company's operations and its stock price. Long shots almost always miss the mark. Owning stocks is like having children--don't have more than you can handle. If you can not find companies that you think are attractive keep your money in the bank. Never invest in a company without understanding its finances. Avoid hot stocks in hot industries. Great companies in cold, nongrowth industries are always big winners. With small companies, wait until they turn a profit.

6 Page 6 When investing in a troubled industry, pick companies with staying power. Also wait for signs of a turnaround. Buggy whips was a troubled industry. It only takes a handful of big winners to make a lifetime of investing worthwhile. A stock market decline is as routine as a January blizzard in Colorado. Be prepared. Everyone has the brain power to invest in stocks. Not everyone has the stomoch. There is always something to worry about. No one can predict interest rates, the future direction of the economy or the stock market. The are always companies whose achievements are being overlooked by the market. If you do not study companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.