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If the stock seems the right one and the price seems reasonably attractive at current levels, buy “at the market.” The extra eighth, or quarter, or half point that may be paid is insignificant compared to the profit that will be missed if the stock is not obtained.
This is the disadvantage of having eggs in so many baskets that a lot of the eggs do not end up in really attractive baskets, and it is impossible to keep watching all the baskets after the eggs get put into them.
Usually a very long list of securities is not a sign of the brilliant investor, but of one who is unsure of himself.
If the investor owns stock in so many companies that he cannot keep in touch with their managements directly or indirectly, he is rather sure to end up in worse shape than if he had owned stock in too few companies.
In war, particularly modern war, the money of the defeated side is likely to become completely or almost worthless, and common stocks would lose most of their value.
By giving heavy emphasis to the “stock that hasn't gone up yet” they are unconsciously subscribing to the delusion that all stocks go up about the same amount and that the one that has already risen a lot will not climb further, while the one that has not yet gone up has something “due” it.
One of its most outstanding characteristics has been considered to be domination by a single customer, the government. This customer in some years goes in for heavy military procurement, and in others cuts buying way down. Therefore the industry never knows from one year to the next when it may be subject to major contract cancellations and drying up of business.
abnormally low profit margin that customarily prevails in government work,
If a widely known man is put in as the new president, the shares will usually not only respond at once, but will probably over-respond. This is because the time it takes to bring about basic improvement will probably be overlooked in the first enthusiasm.
This source is the major consulting research laboratories such as Arthur D. Little, Stanford Research Institute, or Battelle. I have found that personnel of these organizations have great understanding of just the business and technical developments from which worthwhile original investment ideas should come. However, I have found the usefulness of this group largely blocked by their tendency (which is entirely praiseworthy) to be unwilling to discuss most of what they know because it might violate the confidence of the client companies for which they have worked. If someone smarter than I am
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I will, however, glance over the balance sheet to determine the general nature of the capitalization and financial position. If there is an SEC prospectus I will read with care those parts covering breakdown of total sales by product lines, competition, degree of officer or other major ownership of common stock (this can also usually be obtained from the proxy statement), and all earning statement figures throwing light on depreciation (and depletion, if any), profit margins, extent of research activity, and abnormal or non-recurring costs in prior years' operations.
Those who just drop in on a company without real advance preparation, often have two strikes against them almost before the visit starts.
Possibly one-fifth of my first investigations start from ideas gleaned from friends in industry and four-fifths from culling what I believe are the more attractive selections of a small number of able investment men. These decisions are frankly a fast snap judgment on which companies I should spend my time investigating and which I should ignore. Then after a brief scrutiny of a few key points in an SEC prospectus, I will seek “scuttlebutt” aggressively, constantly working toward how close to our fifteen-point standard the company comes.
This almost automatically increases the profits of the surviving low-cost companies because they benefit from the increased production that comes to them as they take over demand formerly supplied by the closed plants. The low-cost company will benefit even more when the decreased supply from competitors enables it not only to do more business but also to increase prices as excess supplies stop pressing on the market.
Company A has a profit of four cents per widget and Company B of one cent. Now let us suppose that costs remain the same but a temporary extra demand for widgets pushes up the price to twelve cents, with both companies remaining the same size. The strong company has increased profits from four cents per widget to six cents, a gain of 50 percent, but the high-cost company has made a 300 percent profit gain, or tripled its profits. This is why, short-range, the high-cost company sometimes goes up more in a boom and also why, a few years later, when hard times come and widgets fall back to eight
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When we come to a discussion of the influence of inflation on investments, other reasons for the importance of growth will present themselves.
In general, however, the company with real investment merit is the company that usually promotes from within.
This is because all companies of the highest investment order (these do not necessarily have to be the biggest and best-known companies) have developed a set of policies and ways of doing things peculiar to their own needs. If these special ways are truly worthwhile, it is always difficult and frequently impossible to retrain those long accustomed to them to different ways of getting things done.
The annual salaries of top management of all publicly owned companies are made public in the proxy statements. If the salary of the number-one man is very much larger than that of the next two or three, a warning flag is flying. If the compensation scale goes down rather gradually, it isn't.
All of this shows, from the investor's standpoint, that if enough ingenuity is used, even the companies with well-above-average growth rates can also “grow” the needed unusual people from within so as to maintain competitive superiority without running the high risk of friction and failure that so often occurs when a rapidly growing company must go to the outside for more than a very small part of its outstanding talent.
Possibly Dow's most significant departure from past ways was to break its management into five separate managements on geographical lines (Dow USA, Dow Europe, Dow Canada, etc.). It was believed that only in this way could local problems be handled quickly as best suited local conditions and without suffering from the bureaucratic inefficiencies that so often accompany bigness.
2. There must always be a conscious and continuous effort, based on fact, not propaganda, to have employees at every level, from the most newly hired blue-collar or white-collar worker to the highest levels of management, feel that their company is a good place to work.
Because workers started feeling that they (1) were genuinely participating in decisions, not just being told what to do, and (2) were being rewarded both financially and in honors and recognition, the results have been spectacular.
In all countries the morale effects appear striking when worker teams not only report directly to top management levels but also know their reports will be heeded and their accomplishments recognized and acknowledged.
He stated that a people-effectiveness index had been established consisting of the net sales billed divided by the total payroll.
3. Management must be willing to submit itself to the disciplines required for sound growth.
The true investment objective of growth is not just to make gains but to avoid loss.
The first dimension of a conservative stock investment is the degree of excellence in the company's activities that are most important to present and future profitability. The second dimension is the quality of the people controlling these activities and the policies they create. The third dimension deals with something quite different: the degree to which there does or does not exist within the nature of the business itself certain inherent characteristics that make possible an above-average profitability for as long as can be foreseen into the future.
In inflationary periods the matter of profitability becomes even more important. Usually when prices and, therefore, costs are rising on a broad front, a business can, in time, pass these costs along through higher prices of its own. However, this often cannot be done immediately. During the interim, obviously a much smaller bite is taken out of the profits of the broad-profit-margin company than occurs for its higher-cost competition, since the higher-cost company is probably facing comparably increased costs of doing business.
Thus if two companies were each to experience a 2 percent increase in operating costs and were unable to raise prices, the one with a 1 percent margin of profit would be running at a loss and might be wiped out, while, if the other had a 10 percent margin, the increased costs would wipe out only one-fifth of its profits.
if the monopoly is due to patent protection, it may not be. In any event, monopolies are likely to end quite suddenly and do not commend themselves as vehicles for the safest type of investing. The other way for the honey-jar company to keep the insects out is to operate so much more efficiently than others that there is no incentive for present or potential competition to take action that will upset the existing situation.
when a company clearly becomes the leader in its field, not just in dollar volume but in profitability, it seldom gets displaced from this position as long as its management remains highly competent.
pharmaceutical industry that, when a truly worthwhile new drug is created, the company that gets in first takes and holds 60 percent of the market, thereby making by far the bulk of the profits. The next company to introduce a competitive version of the same product gets perhaps 25 percent of the market and makes moderate profits. The next three companies to arrive divide perhaps 10 percent to 15 percent of the market and earn meager profits. Any further entrants usually find themselves in a quite unhappy position.
An example is a company that has created in its customers the habit of almost automatically specifying its products for reorder in a way that makes it rather uneconomical for a competitor to attempt to displace them. Two sets of conditions are necessary for this to happen. First, the company must build up a reputation for quality and reliability in a product (a) that the customer recognizes is very important for the proper conduct of his activities, (b) where an inferior or malfunctioning product would cause serious problems, (c) where no competitor is serving more than a minor segment of the
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Actually, if the profit or return on investment is too spectacular, it can be a source of danger, as the inducement then becomes almost irresistible for all sorts of companies to try to compete so as to get a share of the unusual honey pot. In contrast, a profit margin consistently just 2 or 3 percent of sales greater than that of the next best competitor is sufficient to ensure a quite outstanding investment.
Let us suppose that four years later the price-earnings ratios of stocks as a whole are unchanged so that generally sound stocks, but ones with no growth prospects, are still selling at ten times earnings. Let us also suppose that at this same time, four years later, one of our two stocks has much the same growth prospects for the time ahead as it had four years before so that the financial community's appraisal is that this stock should again double its earnings over the next four years. This means it would still be selling at twenty times the doubled earnings of the past four years, or, in
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Security analysts in those pre-crash days were called statisticians.
reading the printed financial records about a company is never enough to justify an investment. One of the major steps in prudent investment must be to find out about a company's affairs from those who have some direct familiarity with them.
It is also necessary to learn as much as possible about the people who are running a company under investment considerations, either by getting to know those people yourself or by finding someone in whom you have confidence who knows them well.
I have always believed that the chief difference between a fool and a wise man is that the wise man learns from his mistakes, while the fool never does.
The methods of all these pools were fundamentally similar. The members would sell stock back and forth among themselves at gradually rising prices. All this activity on the stock tape would attract the attention of others, who would then start to buy and take the pool's shares off its hands at still higher prices.
This matter of training oneself not to go with the crowd but to be able to zig when the crowd zags, in my opinion, is one of the most important fundamentals of investment success.
three-year rule. I have repeated again and again to my clients that when I purchase something for them, not to judge the results in a matter of a month or a year, but to allow me a three-year period.
After the war, I would limit my clientele to a small group of large investors with the objective of concentrating solely on this single class of growth investment. For tax reasons, growth was more likely to benefit these clients.
One of these was “Never promote someone who hasn't made some bad mistakes, because if you do, you are promoting someone who has never done anything.”The failure to understand this element by so many in the investment community has time and again created unusual investment opportunities in the stock market.
The other of Dr. Dow's comments which I have tried to apply to the process of investment selection is “If you can't do a thing better than others are doing it, don't do it at all.”
changes in market share depend largely on shifting public tastes or on fashions greatly influenced by the effectiveness of advertising,
you stay with the right stocks through even a major temporary market drop, you are at most going to be temporarily behind 40 percent of the former peak at the very worst point and will ultimately be ahead; whereas if you sell and don't buy back you will have missed long-term profits many times the short-term gains from having sold the stock in anticipation at a short-term reversal.
In general, more attractive opportunities will be found among stocks with a low dividend payout or none at all.
