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All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.
You could gradually have reduced your portfolio of stocks and come out ahead of the panic-sellers,
In a small portfolio even one of these remarkable performers can transform a lost cause into a profitable one. It’s amazing how this works.
Under the current system, a stock isn’t truly attractive until a number of large institutions have recognized its suitability and an equal number of respected Wall Street analysts (the researchers who track the various industries and companies) have put it on the recommended list. With so many people waiting for others to make the first move, it’s amazing that anything gets bought.
In our business the indiscriminate selling of current losers is called “burying the evidence.”
In spite of crashes, depressions, wars, recessions, ten different presidential administrations, and numerous changes in skirt lengths, stocks in general have paid off fifteen times as well as corporate bonds, and well over thirty times better than Treasury bills!
Historically, stocks are embraced as investments or dismissed as gambles in routine and circular fashion, and usually at the wrong times. Stocks are most likely to be accepted as prudent at the moment they’re not.
Since I’ve run Magellan, the fund has declined from 10 to 35 percent during eight bearish episodes, and in 1987 alone the fund was up 40 percent in August, down 11 percent by December.
things are never clear until it’s too late.
Several of my favorite tenbaggers made their biggest moves during bad markets.
If you’re considering a stock on the strength of some specific product that a company makes, the first thing to find out is: What effect will the success of the product have on the company’s bottom line?
general categories: slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds. There are almost as many ways to classify stocks as there are stockbrokers—but I’ve found that these six categories cover all of the useful distinctions that any investor has to make.
In the twenties the railroads were the great growth companies,
companies pay generous dividends when they can’t dream up new ways to use the money to expand the business.
THE FAST GROWERS These are among my favorite investments: small, aggressive new enterprises that grow at 20 to 25 percent a year. If you choose wisely, this is the land of the 10- to 40-baggers, and even the 200-baggers. With a small portfolio, one or two of these can make a career.
for as long as they can keep it up, fast growers are the big winners in the stock market.
Ford’s stock fluctuates wildly as the company alternately loses billions of dollars in recessions and makes billions of dollars in prosperous stretches.
Are you looking for slow growth, fast growth, recession protection, a turnaround, a cyclical bounce, or assets?
Basing a strategy on general maxims, such as “Sell when you double your money,” “Sell after two years,” or “Cut your losses by selling when the price falls ten percent,” is absolute folly. It’s simply impossible to find a generic formula that sensibly applies to all the different kinds of stocks.
Putting stocks in categories is the first step in developing the story.
The perfect stock would be attached to the perfect company, and the perfect company has to be engaged in a perfectly simple business,
if you’re sent a few fractions of shares in some newly created company, begin an immediate investigation into buying more. A month or two after the spinoff is completed, you can check to see if there is heavy insider buying among the new officers and directors. This will confirm that they, too, believe in the company’s prospects.
If you find a stock with little or no institutional ownership, you’ve found a potential winner. Find a company that no analyst has ever visited, or that no analyst would admit to knowing about, and you’ve got a double winner.
for every single product in a hot industry, there are a thousand MIT graduates trying to figure out how to make it cheaper in Taiwan.
When stock is bought in by the company, it is taken out of circulation, therefore shrinking the number of outstanding shares. This can have a magical effect on earnings per share, which in turn has a magical effect on the stock price.
fervent expectations put a fog on the arithmetic.
BEWARE THE NEXT SOMETHING Another stock I’d avoid is a stock in a company that’s been touted as the next IBM, the next McDonald’s, the next Intel, or the next Disney, etc. In my experience the next of something almost never is—on
I could never prove this scientifically, but if you can’t imagine how a company representative could ever get that rich, chances are you’re right.
The p/e ratio of any company that’s fairly priced will equal its growth rate.
In general, a p/e ratio that’s half the growth rate is very positive, and one that’s twice the growth rate is very negative.
long-term growth rate (say, Company X’s is 12 percent), add the dividend yield (Company X pays 3 percent), and divide by the p/e ratio (Company X’s is 10). 12 plus 3 divided by 10 is 1.5. Less than a 1 is poor, and 1.5 is okay, but what you’re really looking for is a 2 or better.
A normal corporate balance sheet has 75 percent equity and 25 percent debt.
Corporate profitability tends to be misunderstood by many in our society. In a survey I once saw, college students and other young adults were asked to guess the average profit margin on the corporate dollar. Most guessed 20–40 percent. In the last few decades the actual answer has been closer to 5 percent.
What you want, then, is a relatively high profit-margin in a long-term stock that you plan to hold through good times and bad, and a relatively low profit-margin in a successful turnaround.
What the growth rate in earnings has been in recent years. (My favorites are the ones in the 20 to 25 percent range. I’m wary of companies that seem to be growing faster than 25 percent.
Be suspicious of companies with growth rates of 50 to 100 percent a year.
It’s better to miss the first move in a stock and wait to see if a company’s plans are working out.
Moderately fast growers (20 to 25 percent) in nongrowth industries are ideal investments.
When in doubt, tune in later.
Nine to ten percent a year is the generic long-term return for stocks, the historic market average. You can get ten percent, over time, by investing in a no-load mutual fund that buys all 500 stocks in the S&P 500 Index, thus duplicating the average automatically.
to be able to say that picking your own stocks is worth the effort, you ought to be getting a 12–15 percent return, compounded over time.
in spite of all the takeover rumors that fill the newspapers these days, I can’t think of a single example of a company that I bought in expectation of a takeover that was actually taken over. Usually what happens is that some company I own for its fundamental virtues gets taken over—and
Younger investors have more years in which they can experiment and make mistakes before they find the great stocks that make investing careers.
The best time to buy stocks will always be the day you’ve convinced yourself you’ve found solid merchandise at a good price—the same as at the department store.
Over the years I’ve learned to think about when to sell the same way I think about when to buy. I pay no attention to external economic conditions, except in the few obvious instances when I’m sure that a specific business will be affected in a specific way.
Other than at the end of the cycle, the best time to sell a cyclical is when something has actually started to go wrong.
Unlike the cyclical where the p/e ratio gets smaller near the end, in a growth company the p/e usually gets bigger, and it may reach absurd and illogical dimensions.
It’s normally a good idea to wait until the knife hits the ground and sticks, then vibrates for a while and settles down before you try to grab it.
If you get interested in buying a turnaround, it ought to be for a more sensible reason than the stock’s gone down so far it looks like up to you.
there’s no arbitrary limit to how high a stock can go, and if the story is still good, the earnings continue to improve, and the fundamentals haven’t changed, “can’t go much higher” is a terrible reason to snub a stock.
