One Up On Wall Street

It seems to me the list of qualities ought to include patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit to mistakes, and the ability to ignore general panic.

Getting the story on a company is a lot easier if you understand the basic business. That’s why I’d rather invest in panty hose than in communications satellites, or in motel chains than in fiber optics. The simpler it is, the better I like it.

There are three phases to a growth company’s life: the start-up phase, during which it works out the kinks in the basic business; the rapid expansion phase, during which it moves into new markets; and the mature phase, also known as the saturation phase, when it begins to prepare for the fact that there’s no easy way to continue to expand.

A price drop in a good stock is only a tragedy if you sell at that price and never buy more. To me, a price drop is an opportunity to load up on bargains from among your worst performers and your laggards that show promise.

Stocks aren’t lottery tickets. There’s a company attached to every share.

Investing without research is like playing stud poker and never looking at the cards.

Pick the right stocks and the market will take care of itself.

The perfect stock would be attached to the perfect company, and the perfect company has to be engaged in a perfectly simple business, and the perfectly simple business ought to have a perfectly boring name.

This jump on the experts is what produces 'tenbaggers,' the stocks that appreciate tenfold or more and turn an average stock portfolio into a star performer.

The more right you are about any one stock, the more wrong you can be on all the others and still triumph as an investor.

Historically, investing in stocks is undeniably more profitable than investing in debt.

Average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professionals by doing just a little research.

Investing in stocks is an art, not a science, and people who’ve been trained to rigidly quantify everything have a big disadvantage.

It seemed to me that most of what I learned at Wharton, which was supposed to help you succeed in the investment business, could only help you fail.

Whoever imagines that the average Wall Street professional is looking for reasons to buy exciting stocks hasn’t spent much time on Wall Street.

If you rely on the market to drag your stock along, then you might as well take the bus to Atlantic City and bet on red or black.

The person with the edge is always in a position to outguess the person without an edge.

If your first stock is as important to your future in finance as your first love is to your future in romance, then the Flying Tiger pick was a very lucky thing.

Sooner or later every popular fast-growing industry becomes a slow-growing industry, and numerous analysts and prognosticators are fooled.

A fast-growing company doesn’t necessarily have to belong to a fast-growing industry.

Timing is everything in cyclicals, and you have to be able to detect the early signs that business is falling off or picking up.

If you find a stock with little or no institutional ownership, you’ve found a potential winner.

Every single dumb idea you hear about stocks gets into your brain the same way that 'Warner is overextended' got into mine.

Trying to catch the bottom on a falling stock is like trying to catch a falling knife.

If you know why you bought a stock in the first place, you’ll automatically have a better idea of when to say good-bye to it.

The average person comes across a likely prospect two or three times a year—sometimes more.

A particularly ominous message is repeated over and over until it’s impossible to get away from it.

The best time to sell a turnaround is after it’s turned around.

By simply observing business developments and taking notice of your immediate world—from the mall to the workplace—you can discover potentially successful companies before professional analysts do.

The stock price is the least useful information you can track, and it’s the most widely tracked.

Investment opportunities abound for the layperson.

The stock market demands conviction as surely as it victimizes the unconvinced.

I stumble onto the big winners in extracurricular situations, the same way you could.

If you put $100,000 in stocks on July 1, 1994, and stayed fully invested for five years, your $100,000 grew into $341,722.

Market declines are great opportunities to buy stocks in companies you like. Corrections—Wall Street’s definition of going down a lot—push outstanding companies to bargain prices.

If you can follow only one bit of data, follow the earnings—assuming the company in question has earnings.

Investment opportunities abound for the layperson. By simply observing business developments and taking notice of your immediate world—from the mall to the workplace—you can discover potentially successful companies before professional analysts do.

Reducing the supply of shares increases the earnings per share, which eventually rewards shareholders, although they don’t reap the reward until they sell.

You don’t have to be trendy to succeed as an investor.

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 forth.

If you don’t understand it, then put your life savings into it.

It’s self-defeating to try to invest in good markets and get out of bad ones.

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.

Finding the promising company is only the first step. The next step is doing the research.

It would be wonderful if we could avoid the setbacks with timely exits, but nobody has figured out how to predict them.

The bearish argument always sounds more intelligent.

If I have seen further...it is by standing upon the shoulders of Giants.

The unwary investor continually passes in and out of three emotional states: concern, complacency, and capitulation.

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.

When you consider the thousands of bankrupt companies, plus the solvent companies that never regain their former prosperity, you can begin to see the weakness in the 'they always come back' argument.

There simply isn’t a stock you can own that you can afford to ignore.

Just because the price goes up doesn’t mean you’re right. Just because the price goes down doesn’t mean you’re wrong.

Stocks aren’t lottery tickets. There’s a company attached to every share. Companies do better or they do worse. If a company does worse than before, its stock will fall. If a company does better, its stock will rise.

An amateur investor can pick tomorrow’s big winners by paying attention to new developments at the workplace, the mall, the auto showrooms, the restaurants, or anywhere a promising new enterprise makes its debut.

It is personal preparation, as much as knowledge and research, that distinguishes the successful stockpicker from the chronic loser.

You don’t have to invest like an institution. If you invest like an institution, you’re doomed to perform like one, which in many cases isn’t very well.

Before you buy a share of anything, there are three personal issues that ought to be addressed: (1) Do I own a house? (2) Do I need the money? and (3) Do I have the personal qualities that will bring me success in stocks?

I believe in buying great companies —especially companies that are undervalued, and/or underappreciated.

The market ought to be irrelevant. If I could convince you of this one thing, I’d feel this book had done its job.

Cyclicals are the most misunderstood of all the types of stocks. It is here that the unwary stockpicker is most easily parted from his money, and in stocks that he considers safe.

An asset play is any company that’s sitting on something valuable that you know about, but that the Wall Street crowd has overlooked.

Everything else being equal, you’ll do better with the smaller companies.

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.

I prefer to invest in a low-growth industry like plastic knives and forks, but only if I can’t find a no-growth industry like funerals. That’s where the biggest winners are developed.

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.

If the prospects are so phenomenal, then this will be a fine investment next year and the year after that. Why not put off buying the stock until later, when the company has established a record? Wait for the earnings.

A share of stock is not a lottery ticket. It’s part ownership of a business.

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.

Successful cloning is what turns a local taco joint into a Taco Bell or a local clothing store into The Limited, but there’s no point buying the stock until the company has proven that the cloning works.

In a no-growth industry, especially one that’s boring and upsets people, there’s no problem with competition.

Buying back shares is the simplest and best way a company can reward its investors.

There’s no better tip-off to the probable success of a stock than that people in the company are putting their own money into it.

When cash increases relative to debt, it’s an improving balance sheet. When it’s the other way around, it’s a deteriorating balance sheet.

More than anything else, it’s debt that determines which companies will survive and which will go bankrupt in a crisis.

The real issue, as I see it, is how the dividend, or the lack of a dividend, affects the value of a company and the price of its stock over time.

If you find a business that can get away with raising prices year after year without losing customers (an addictive product such as cigarettes fills the bill), you’ve got a terrific investment.

One more thing about growth rate: all else being equal, a 20-percent grower selling at 20 times earnings (a p/e of 20) is a much better buy than a 10-percent grower selling at 10 times earnings (a p/e of 10).

The company with the highest profit margin is by definition the lowest-cost operator, and the low-cost operator has a better chance of surviving if business conditions deteriorate.

Invest in simple companies that appear dull, mundane, out of favor, and haven’t caught the fancy of Wall Street.

Companies that have no debt can’t go bankrupt.

Base your purchases on the company’s prospects, not on the president’s resume or speaking ability.

Carefully consider the price-earnings ratio. If the stock is grossly overpriced, even if everything else goes right, you won’t make any money.

Invest at least as much time and effort in choosing a new stock as you would in choosing a new refrigerator.

To come out ahead you don’t have to be right all the time, or even a majority of the time.

The point is, 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.

It takes remarkable patience to hold on to a stock in a company that excites you, but which everybody else seems to ignore.

It’s normally harder to stick with a winning stock after the price goes up than it is to believe in it after the price goes down.

As it turns out, if you know why you bought a stock in the first place, you’ll automatically have a better idea of when to say good-bye to it.

The best time to sell a turnaround is after it’s turned around. All the troubles are over and everybody knows it.

When you’ve found the right stock and bought it, all the evidence tells you it’s going higher, and everything is working in your direction, then it’s a shame if you sell.

If I had to choose a great single fallacy of investing, it’s believing that when a stock’s price goes up, then you’ve made a good investment.

Small investors don’t have to fight this mob. They can calmly walk in the entrance when there’s a crowd at the exit, and walk out the exit when there’s a crowd at the entrance.

When you invest in stocks, you have to have a basic faith in human nature, in capitalism, in the country at large, and in future prosperity in general.

Once I’ve established the size of the company relative to others in a particular industry, next I place it into one of six general categories: slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds.

If you ignore the ups and downs of the market and the endless speculation about interest rates, in the long term (anywhere from five to fifteen years) your portfolio will reward you.