I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction.
At 500 times earnings, I noted, “it would take five centuries to make back your investment, if the EDS earnings stayed constant.”
Never invest in any company before you’ve done the homework on the company’s earnings prospects, financial condition, competitive position, plans for expansion, and so fourth.
You have to keep track of where the future growth is coming from and when it’s likely to slow down.
I felt as if I understood what Isaac Newton was talking about when he said: “If I have seen further… it is by standing on the shoulders of giants.”
There’s an unwritten rule on Wall Street: “You’ll never lose your job losing your client’s money on IBM.” If IBM goes bad and you bought it, the clients and the bosses will ask: “What’s wrong with that damn IBM lately?” But if La Quinta Motor Inns goes bad, they’ll ask: “What’s wrong with you?”
Almost by definition the result will be mediocre, but acceptable mediocrity is far more comfortable than diverse performance.
But the way it usually works is that each stock on the list has to be acceptable to all thirty managers, and if no great book or symphony was ever written by a committee, no great portfolio has ever been selected by one, either.
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 scientific mind that needs to know all the data will be thwarted here.
No matter how we arrive at the latest financial conclusion we always seem to be preparing ourselves for the last thing that’s happened, as opposed to what’s going to happen next.
That’s not to say there is no such thing as an overvalued market, but there’s no point worrying about it. … The reason Buffet returned is partner’s money was that he said he couldn’t find any stocks worth buying.
You don’t need to be a vice president of Exxon to sense the growing prosperity in the company, or a turnaround in oil prices. You can be a roustabout, a geologist, a driller, a supplier, a gas-station owner, a grease monkey, or even a client at the gas pumps.
Sooner or later, every fast growing industry becomes a slow growing industry, and numerous analysts and prognosticators are fooled.
You won’t find a lot of two or four percent growers in my portfolio, because if companies aren’t going anywhere fast, nor will their share price. If growth in earnings is what enriches a company, then what’s the sense in wasting time on sluggards?
Also Wall Street does not look kindly on fast growers that run out of stamina and turn in to slow growers, and when that happens, the stocks are beaten down accordingly.
Turnaround stocks make up lost ground very quickly… the best thing about investing in turnarounds is that of all the categories, their ups and downs are least related to the general market.
Ford’s stock fluctuates wildly as the company alternately loses billions of dollars in recessions and makes billions of dollars in prosperous stretches.
Getting the story on a company is a lot easier if you understand the basic business. That’s why I’d rather invest panty hose than in communications satellites, or in motel chains rather than fibre optics. The simpler it is, the better I like it. When somebody says “Any idiot could run this joint”, that’s a plus as far as I am concerned, because sooner or later, any idiot probably is going to be running it.
Hot stocks can go up fast, but since there’s nothing but hope and thin air to support them, they fall just as quickly.
I already mentioned the various hot industries where sizzle led to fizzle. Mobile phones, digital watches, and health maintenance organisations were all hot industries where fervent expectations put a fog on the arithmetic. Just when the analysts predict double digit growth rates forever the industry goes into a decline.
Remember what happened to disk drives? The experts said that this exciting industry would grow at 52 percent a year – and they were right, it did. But with thirty or thirty-five rival companies scrambling on the action, there were no profits.
What all these long shots had in common besides the fact that you lost money on them was that the great story had no substance. That’s the essence of a whisper stock.
The p/e ration can be thought of as the number of years it will take the company to earn back the amount of your initial investment – assuming, of course, that earnings stay constant.
There are five basic ways a company can increase earnings: reduce costs; raise prices; expand into new markets; sell more of its product in the old markets; or revitalise, close, or otherwise dispose of a losing operation. These are the factors to investigate as you develop the story. If you have an edge, this is where it’s going to be most useful.
Before buying a stock, I like to be able to give a two minute monologue that covers the reasons I’m interested in it, what has to happen for the company to succeed, and the pitfalls that stand in its path.
But there’s no reason for the investor to waste time deciphering the corporate vocabulary. It’s simpler to ignore all the adjectives.
So with Ford selling for $38, you were getting the $16.30 in net cash and another $16.60 in the value of the finance companies, so the automobile business was costing you a grand total of $5.10 per share. And the same automobile business was expected to earn $7 a share. Was Ford a risky pick. At $5.10 it was an absolute steal, in spite of the fact that the stock was up almost tenfold since 1982.
Young companies with heavy debts are always at risk.
Every few months it’s worthwhile rechecking the company story.
Be suspicious of companies with growth rates of 50 to 100 percent a year.
Avoid hot stocks in hot industries.
Bottom fishing is a popular pastime, but its usually the fisherman who gets hooked.
Sometimes it’s always darkest before the dawn, but then again, other times it’s always dark before it’s pitch black.
A stock going up or down after you buy it only tells you that there was somebody who was willing to pay more – or less – for the identical merchandise.
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