The Uncluttered Mind

Read a Money magazine article that was actually pretty good.  It was titled Hot Hands, Hot Picks which is actually a horrible title but most titles are horrible. 

I don't really care about the individuals but more the strategies for picking winning stocks.  Because if you can pick winning stocks, you can pick winning anythings because good decisions are based on logical thinking. 

So let's look at what the article has to say.

Ride Overseas Tailwinds.  In other words, global investing.  Not exactly earth shaking but, again, logical thinking is rarely earth shaking.  This manager looks for interntional companies that don't face a lot of obstacles like oil companies operating in Nigeria.  Also be realistic.  When I was starting out I asked a very wise treasurer why he allowed the company to operate in Latin America which was pretty volatile back then.  He told me he expected a 15% return from the Latin American division.  He usually got it but with some volatility like one country doing 100% and another losing 85% which generated his 15% return.  I didn't believe him at the time but after watching the market for about ten years and then being responsible for Latin America I came to agree with him.  He wanted 15% and wasn't overly concerned about how he got it.

Focus On A Few.  This isn't focus on a few companies.  It is focus on a few statistics, or metrics, that may, key word here, may reveal undervalued stocks.  The manager tries to find companies with high returns on capital (Return on Invested Capital ROIC) and high earnings yield which is profits divided by stock price.  Both statistics are easy to figure out.  Actually you don't have to figure out the first one as some company financial analyst does it for you.  Just go to the company website or financeyahoo.com and look up the company.  The other calculation is easy--divide 100 by the Price Earnings ratio.  If a company has a PE of 20 it has a yield of 5% which you can compare to other investments.  A PE of 15 is a yield of 6.7% and so on.  The PE ratio can be found on any financial website or the newspaper if you still read newspapers.  Beware--the two statistics are starting points, do more analysis after you figure out if the stock is worth looking at.

Know The Value Of Cash.  This is the most important one.  There are three financial statements that are critical--the balance sheet, the income statement, and the cash flow statement.  Everybody studies the first two but most people don't study the third which is the most important.  You can't fudge cash.  Well, you can but its harder than playing around with the income statement and balance sheet.  I asked an accountant that I respect (something wrong with that statement) if a really good analyst could have figured out the Enron scam from the cash flow statement.  He said yes but it wouldn't be easy.  But you could do it.  So study cash flow.  If you see a bunch of extraordinary items, stay away.

Go For Bargains.  Love this one.  I love trash and good deals.  Check them out but be sure you have all your financial skills honed.  Also your logic skills.  Some bargains are bargains because their product is our of favor in this rotation or they had a problem that has been resolved.  But some 'bargains' are cheap because they are rotten companies.  Figuring out the difference is the fun part.

Spot Growth Early.  Also known as figuring out the next big thing.  This is tough and everybody is trying it.  I like finding bargains.  But that's just me.  Young people gravitate to trend spotting since they always try new things.  So if you love a new sound product, restaurant, shop, cell phone, band, whatever, check it out and maybe get in early.  Buy what you like.  It worked for Peter Lynch.  If you don't know who Peter Lynch is, find out and read his books before you do anything.

I didn't like the last two pointers so will stop here.  It is enough.  It is all you need to start becoming a wealthy stock picker.

And always keep an uncluttered mind.  Good decisions cannot be made if you have overloaded on useless facts and statistics. 

Comments

[Jay P]

Bill

Good points. I wish my management looked at Int'l the way you do.

However I have to disagree with you on cash. Cash can be fudged, but only because GAAP (General accepted accounting principles) and FIN 39 make it that way. I could go into a whole discussion on it but it is really boring but it makes the cash on the books phoney. Also if the company is in joint ventures which they have to consolidate into there balance sheet then the cash gets added on also even though the parent company may not actually have access to the cash. (Sorry don't mean to get to technical but that's FIN 46R) I feel the number to look at that can't be fudged is debt. Watch the debt balances quarter to quarter on a a company and then look at the off balance sheet items of operating leases. But on to simpler things. I agree with you on the buy beat up sell when it recovers. You may have to wait a bit but look for stocks that look good for the long run but may be beat to bits because of bad news. Examples Look at Marsh Mac (the big insurance broker) nice jump after getting pounded. Or Halliburton. I bought that one around $12. I know you profess the mutual funds but use that as your base then work the fringes for the little extra. My picks right now: Ford - tough to turn down the 5% dividend each year and it will come back. GM bonds are also interesting. I missed Krispy Kreme. Also I'd look to tech. Microsoft and Intel are both beat up (granted their market caps are huge).

I agree with you on the buy beat up but look to debt levels and not cash.