While reading this book couple of years back in Japan, I just laid my eyes in my real estate agents' office, and borrowed from him. It appeared to be just another book on the shelf. Once I started reading and went past couple of pages, it appeared to be a volume. I then read this book in trains, home, parks and while walking to office and finished it with more hunger, anger (that why I did not read it much before) and aggressiveness. Here, I bring some excerpts of this book, for you:
1. There is unwritten rule on Wall street "You'll never lose your job losing your client's money in IBM"
2. Acceptable mediocrity is far more comfortable than diverse performance.
3. There's an unwritten rule that the bigger the client, the more talking the portfolio manager has to do to please him.
4. The old wall street adage "Never invest in anything that eats or needs repairs" may apply to racehorses, but it's malarkey when it comes to houses.
5. Only invest what you could afford to lose without that loss having any effect on your daily life in the foreseeable future.
6. "Rise early, work hard, strike oil" - J Paul Getty
7. If you must forecast, forecast often.
8. I believe in buying great companies-especally companies that are undervalued, and /or underappreciated.
9. "As far as I am concerned, the stock market doesnt exist. It is there only as a reference to see if anybody is offering to do something foolish" - Warren Buffett
10. Don't overestimate the skill and wisdom of professionals.
- Take advantage of what you already know.
- Look for opportunities that havent yet been discovered and certified by Wall STreet - companies that are "off the radar scope"
- Invest in a house before you invest in a stock.
- Invest in companies, not in the stock market.
- Ignore short term fluctuations.
- Large profits can be common stocks.
- Large losses can be made in common stocks.
- Predicting the economy is futile.
- Predicting the short term direction of the stock market is futile
- The long term returns from stocks are both relatively predictable and also far superior to the long term returns from bonds
- Keeping up with a company in which you own stock is like playing an endless stud-poker hand
- Common stocks aren't for everyone, nor even for all phases of a person's life.
- The average person is exposed to interesting local companies and products years before the professionals
- Having an edge will help you make money in stocks.
- In the stock market, one in the hand is worth ten in the bush
11. So often we struggle to pick a winning stock, when all the while a winning stock has been struggling to pick us.
12. A great patients's drug is the one that cures an affliction once and for all, but a great investor's drug is one that the patient has to keep buying.
13. In general, if you polled all the doctors, I'd bet only a small percentage would turn out to be invested in medical stocks, and more would be invested in oil; and if you polled the shoe-store owners, more would be invested in aerospace than in shoes, while the aerospace engineers are more likely to dabble in shoe stocks. Why is that stock certificates, like grasses, are always greener in somebody else's pasture I'm not sure.
14. Investing without research is like playing stud poker and never looking at the cards.
15. I separate the growth stocks into slow growers (sluggards), medium growers (starlwarts), and then the fast growers - the superstocks that deserve the most attention.
16. A sure sign of a slow grower is that it pays a generous and regular dividend.
17. If you choose wisely, Fast Growers is the land of the 10 to 40 baggers and even 200 baggers. With a small portfolio, one or two of these can make a career.
18. Turnaround stocks make up lost ground very quickly.
19. "Any idiot can run this business" is one characteristic of the perfect company, the kind of stock I dream about. You never find the perfect company, but if you can imagine it, then you'll know how to recognize favorable attributes, the most important thirteen of which are as follows:
- IT SOUNDS DULL - OR, EVEN BETTER, RIDICULOUS
- IT DOES SOMETHING DULL
- IT DOES SOMETHING DISAGREEABLE
- IT'S A SPINOFF
- THE INSTITUTIONS DON'T OWN IT, AND THE ANALYSTS DON'T FOLLOW IT
- THE RUMORS ABOUND: IT'S INVOLVED WITH TOXIC WASTE AND/OR THE MAFIA
- THERE'S SOMETHING DEPRESSING ABOUT IT
- IT'S A NO GROWTH INDUSTRY
- IT'S GOT A NICHE
- PEOPLE HAVE TO KEEP BUYING IT
- IT'S A USER OF TECHNOLOGY
- THE INSIDERS ARE BUYERS
- THE COMPANY IS BUYING BACK SHARES
20. The common alternatives to buying back share are (1) raising the dividend, (2) developing new products, (3) starting new operations, and (4) making acquisitions.
21. If I could avoid a single stock, it would be the hottest stock in the hottest industry, the one that gets the most favorable publicity, the one that every investor hears about in the car pool or on the commuter train- and succumbing to the social pressure, often buys.
22. BEWARE THE NEXT SOMETHING
23. AVOID DIWORSIFICATIONS
24. BEWARE THE WHISPER STOCK
25. BEWARE THE MIDDLEMAN
26. BEWARE THE STOCK WITH THE EXCITING NAME
27. Although it is easy to forget sometimes, a share of stock is not a lottery ticket. It's part ownership of a business.
28. A quick way to tell if a stock is overpriced is to compare the price line to the earnings line. If you bought familiar growth companies when the stock price fell well below the earnings line, and sold them when the stock price rose dramatically above it, the chances are you'd do pretty well.
29. The p/e ratio 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 the compay's earnings stay constant.
30. You might begin by asking whether the p/e ratios of various stocks you own are low, high, or average, relative to the industry norms. Sometimes you'll hear things like "this company is selling at a discount to the industry" - meaning that its p/e is at a bargain level.
31. A broker can also give you the historical record of a company's p/e-and the same information can be found on the S&P reports also available from the brokerage firm. Before you buy a stock, you might want to track its p/e ratio back through several years to get a sense of its normal levels. New companies, of course, haven't been around long enought to have such records.
32. Company p/e ratios do not exist in a vaccum. The stock market as a whole has its own collective p/e ratio, which is good indicator of whether the market at large is overvalued or undervalued. When you find that a few stocks are selling at inflated prices relative to the earnings, its likely that most stocks are selling at inflated prices relative to earnings.
33. 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 revitalize, close, or otherwise dispose of a losing operation. These are the factors to investigate as you develop the story.
34. Wait to see if this good idea from the neighborhood would actually succeed someplace else.
35. It's never too late not invest in an unproven enterprise.
36. What you can't get from the anual report you can get by asking your broker, by calling the company, by visiting the company, or by doing some grassroots research, also known as kicking the tires.
37. If you buy and sell stocks through a full service brokerage firm instead of a discount house, you're probably paying an extra 30 cents a share in commissions.
38. If you use the broker as an advisor (a foolhardy practice generally, but sometimes worthwhile), then ask the broker to give you the two miniute speech on the recommended stocks.
39. Professionals call companies all the time, yet amateurs never think of it. If you have specific questions, the investor relations office is a good place to get the answers. The accepted form of the question is subtle and indirect: "what are the wall street estimates of your company's earnings for the upcoming year?"
40. Better you lead off with a question that shows you've done some research on your own.
41. Even if you have no script, you can learn something by asking two general questions: "What are the positives this year?" and "what are the negatives?"
42. When Looking at the same sky, people in mature industries see clouds where people in immature industries see pie.
43. When I visit a headquarters, what I'm really after is a feel for the place.
44. The first thing, by the way, is: "when is the last time a fund manager or an analyst visited here?" If the answer is "two years ago, I think," then I'm ecstatic.
45. Rich earnings and a cheap headquarters is a great combination.
46. Among other things, proxy statements tell you how many shares are owned by the various corporate officers and directors, and how much those people are paid.
47. I've continued to believe that wandering through stores and tasting things is a fundamental investment strategy.
48. It's amazing how much analysis of the auto industry you can do in the parking lots of ski lodges, shopping centers, bowling alleys, or churches.
49. The p/e ratio of any company that's fairly priced will equal its growth rate. I'm talking about growth rate of earnings here. In general, a p/e ratio that's half the growth rate is very positive, and one that's twice the growth, is very negative.
50. A slightly more complicated formula enables us to compare growth rates to earnings, while also taking the dividends into account. Find the 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
51. How much does the company owe, and how much does it own? Debt versus Equity. It's just the kind of thing a loan officer would want to know about you in deciding if you are a good credit risk.
52. Among turnarounds and troubled companies, I pay special attention to the debt factor. More than anything else, it's debt that determines which companies will survive and which will go bankrupt in a crisis.
53. It's the kind of debt, as much as the actual amount, that separates the winners from the losers in a crisis. There's bank debt an there's funded debt.
54. "Do you know the only thing that gives me pleasure? It's to see my dividends coming in." - John D Rockefeller, 1901
55. The smaller companies that don't pay dividends are likely to grow much faster because of it. They're plowing the money into expansion. The reason that companies issue stock in the first place is so they can finance their expansion without having to burden themselves with debt from the bank. I'll take an aggressive grower over a stodgy old dividend payer any day.
56. A company with a 20 or 30 year record of regularly raising the dividend is your best bet.
57. The flaw is that the stated book value often bears little relationship to the actual worth of the company. It often understates or overstates reality by a large margin.
58. Unwritten rule - The closer you get to a finished product, the less predictable the resale value. You know how much cotton is worth, but who can be sure about an orange cotton shirt?
59. Overvalued assets on the left side of the balance sheet are especially treacherous when there is a lot of debt on the right. Let's say that company shows $400 million in assets and $300 million in debts, resulting in a positive book value of $100 million. You know the debt part is a real number. But if the $400 million in assets will bring only $200 million in a bankruptcy sale, then the actual book value is a negative $100 million. The company is less than worthless.
60. Just as often as book value overstates true worth, it can understate true worth. This is where you get the greatest asset plays.
61. There are many kinds of hidden assets besides gold and silver. Brand names such as coca-cola have tremendous value that isn't reflected on the books. So do patented drugs, cable franchises, TV and radio stations - all are carried at original cost, then depreciated until they, too, disappear from the asset side of the balance sheet.
62. "Goodwill" is carried on the new books as an asset, and eventually it, too, will be written off. This in turn will create another potential asset play.
63. Sometimes the best way to invest in a company is to find the foreign owner of it. I realize this is easier said than done, but if you have any access to European companies, you can stumble onto some unbelievable situations. European companies in general are not well analyzed, and in many cases they're not analyzed at all. I discovered this on a fact finding trip to sweden, where Volvo and several other giants of Swedish industry were covered by one person who didn't even have a computer.
64. Cash flow is the amont of money a company takes in as a result of doing business. All companies take in cash, but some have to spend more than others to get it. This is a critical difference that makes a Philip Morris such a wonderfully reliable investment, and a steel company such a shaky one.
65. Occasionally I find a company that has modest earnings and yet is a great investment because of the free cash flow. Usually, it's a company with a huge depreciation allowance for old equipment that doesn't need to be replaced in the immediate future. The company continues to enjoy the tax breaks (the depreciation on equipment is tax deductible) as it spends as little as possible to modernize and renovate.
66. Dedicated asset buyers look for this situation: a mundane company going nowhere, a lot of free cash flow, and owners who aren't trying to build up the businesses. It might be a leasing company with a bunch of railroad containers that have a 12 year life. All the company wants to do is contract the old container business and squeeze as much cash out of it as possible. In the upcoming decade, managment will shrink the plant, phase out the containers, and pile up cash. From a $10 million operation, they might be able to generate $40 million this way. It wouldn't work in the computer business, because the prices drop so fast that old inventory doesn't hold its value long enough for anybody to squeeze anything out of it.
67. A company may brag that sales are up 10 percent, but if inventories are up 30 percent, you have to say to yourself: "wait a second. Maybe they should have marked that stuff down and gotten rid of it. Since they didn't get rid of it, they might have a problem next year and a bigger problem the year after that. The new stuff they make will compete witht the old stuff, and inventories will pile up even higher until they're forced to cut prices, and that means less profit."
68. On the bright side, if a company has been depressed and the inventrories are beginning to be depleted, it's the first evidence that things have turned around.
69. As more companies reward their employees with stock options and pension benefits, investors are well advised to consider the consequences.
70. That "growth" is synonymous with "expansion" is one of the most popular misconception on wall street., leading people to overlook the really great growth companies such as Philip Morris.
71. one more thing about growth rate: all else being equal, a 20 percent grower selling at 20 times earnings (a p/e ratio of 20) is a much better buy than a 10 percent grower selling at 10 time earnings (a p/e of 10). This may sound like an esoteric point, but its important to understand what happens to the earnings of the faster growers that propels the stock price.
72. Its no accident that the Wal-Marts and The Limiteds can go up so much in a decade. Its all based on the arithmetic of compounded earnings.
73. Whats the bottom line? Whats the real bottom line? Its the final number at the end of an income statement: profit after taxes. Profit before taxes, also known as the pretax profit margin, is a tool I use in analyzing companies. Thats whats left of companys annual sales dollar after al the costs, including depreciation and interest expenses, have been deducted. Pretax profit margin is one more factor to consider in evaluating a companys staying power in hard times.
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.
The Final Checklist
Stocks in General
1. The p/e ratio. It is hight or low for this particular company and for similar companies in the same industry.
2. The percentage or institutional ownership. The lower the better.
3. Whether insiders are buying and whether the company itself is buying back its own shares. Both are positive signs.
4. The record of earnings growth to date and whether the earnings are sporadic or consistent.
5. Whether the company has a strong balance sheet or a weak balance sheet (debt to equity ratio) and how its rated for financial strength.
6. The cash position. With $16 in net cash, I know Ford is unlikely to drop below $16 a share. Thats the floor on the stock
1. These are big companies that arent likely to go out of business. The key issue is price, and p/e ratio will tell you whether you are paying too much.
2. Check for possible diworseifications that may reduce earnings in the future.
3. Check the companys long term growth rate, and whether it has kept up the same momentum in recent years.
4. If you plan to hold the stock forever, see how the company has fared during previous recessions and market drops.
1. Keep a close watch on inventories, and the supply demand relationship. Watch for new entrants, which is usually a dangerous development.
2. anticipate a shrinking p/e multiple over time as business recovers and investors look ahead to the end of the cycle, when peak earnings are achieved.
3. If you know your cyclical, you have an advantage in figuring out the cycles.
1. Investigate whether the product thats supposed to enrich the company is a major part of the companys business.
2. What the growth rate in earnings has been in recent years.
3. That the company has duplicated its successes in more than one city or town, to prove that expansion will work.
4. That the company still has room to grow.
5. Whether the stock is selling at a p/e ratio at or near the growth rate.
6. Whether the expansion is speeding up or slowing down.
1. Most important, can the company survive a raid by its creditors? How much cash does the company have? How much debt?
2. It its bankrupt already, then whats left for the shareholders?
3. How is the company supposed to be turning around? Has it rid itself of unprofitable divisions?
4. Is the business coming back?
5. Are costs being cut? If so, what will the effect be?
1. Whats the value of the assets? Are there any hidden assets?
2. How much debt is there to detract from these assets?
3. Is the company taking on new debt, making the assets less valuable?
4. Is there a raider in the wings to help shareholders reap the benefits of the assets?