Beginner Investment Hacking for Improved Personal Financial Strategy and Awareness

I recently walked into a local high street bank interested in what investment options are available to the regular high street bank user. I was told that apart from ISAs (low rate of interest) the only other option was to have at least £50k and give it to a fund manager who would take a healthy fee and 'manage’ it for you.

In the last couple of years, I’ve been building up my knowledge to explore options for small scale investing to at least getting a much better rate of interest than your bank, saving account or ISA. With the amount of financial innovation that is happening with the internet there are plenty of avenues to take.

Shares

Investing in company stocks and shares is often seen as a 'dark art’. However, it is not and a little background knowledge can go a long way to demystify the stock market.

Public companies that you find on the stock market raise their investment funding in order to do business through issuing shares to investors who become shareholders. Those shareholders’ shares increase in price relative to the growth of the company and companies  sometimes pay dividends.

Dividends

A dividend is a distribution of a portion of a company's earnings, decided by the board of directors, to a class of its shareholders. Dividends can be issued as cash payments, as shares of stock, or other property. (Iinvestopia)

A company's net profits can be allocated to shareholders via a dividend, or kept within the company as retained earnings. A company may also choose to use net profits to repurchase their own shares in the open markets in a share buyback.

Start-ups and other high-growth companies such as those in the technology or biotechnology sectors rarely offer dividend because all of their profits are reinvested to help sustain higher-than-average growth and expansion.

Larger, established companies tend to issue regular dividends as they seek to maximize shareholder wealth in ways aside from supernormal growth.

Some argue that dividends are irrelevant as if you wanted to get more income you could just sell some of your stock at the higher price if the company just reinvested it into the value of the company. If the dividends were too big you could just use them to buy more stock.

Sharedealing

You can deals shares online which cuts out the cost of paper trading and makes it cheaper and more convenient. iWeb is the cheapest and Hargreaves Lansdown is the best if you need more support. (MoneySavingExpert).

It is still quite difficult to know what to invest in as you need to find reliable information about a company. So you need to get insights from either people who are ‘inside’ the game or who write about shares and whose advice consistently beats the market (such as the Motley Fool).

Investing in shares tends to get broken down into two strategies:

The long game

This is a general investment strategy that refers to holding an asset and being indifferent to  short-term mark-to-market movements. Usually the minimum period for investing is between 3 - 5 years and this helps to protect investments from short term volatility.

"It is a mindset that believes that compounding cash flows over time is the most effective form of investment.”(Nils Pratley, the Guardian)

Selling in the short term, because it looks like you are losing money, might mean you are cementing your loses as opposed to allowing them to recover.

Knowing your goals is important - vis a vis what you want to achieve in the long term and revisiting your goals if you feel a sense of worry or the desire to meddle, so you can understand why you aren’t doing that. (Nils Pratley, the Guardian).

Fidelity did an article about a review they did of the best investors and the best ones were the ones where people forgot they had an account (Myles Udland, Business Insider)

Holding shares in ‘mega-cap’ multinationals, e.g. companies with a market cap exceeding $100 billion, is a way of investing in something tried and tested (Investopia).

Investment in the stock market needs awareness of the market on the behalf of the investor which is the fear of most people when it comes to investing money - e.g. not having the time or intelligence to research the market or contrarily having the patience to wait and avoid knee -jerk reactions or reacting with not enough information.

"The distractions to solid long-term thinking are everywhere: newspapers, 24/7 cable news, unending amounts of online financial information, opinion and discussion. Investors have access to everything and anything they would ever want to know, except perspective.” (Marshall Jaffe, Think Advisor).

"Little by little, mistake by mistake, we can slowly start to get out of our own way.” It turns out that the Long Game is quite enlightened in the sense that it involves self-observation and taking the ‘right action' as opposed to reacting to circumstances.

Macroeconomic factors play a part in changes over the long term so you have to be willing to think big and wide. Macroeconomics is the performance, structure, behavior, and decision-making of an economy as a whole.

It is the study of relationships between such factors as national income, output, consumption, unemployment, inflation, savings, investment, international trade and international finance.  Indicators include GDP, unemployment rates, and price indexes to understand how the whole economy functions. (Chris Williams, Wealth Advisor).

"The worst 30-year period in the history of the U.S. stock market still provided investors with a compounded annual return of almost 5% “

The short game

Get in, get out in order to make a profit. The attraction of this method is that investors see an opportunity where some parameter will change and take action to capitalise on it and the transaction is done and dusted.

To an extent you can see what you are getting yourself into, write your hypotheses about what the likely pay off will be, conduct your experiment and then regroup.

This method is what is always portrayed in glamorous films about investing. The issue is that everyone wants the same thing which can limit the potential pay off and it requires insight, timing, money and a large dose of opportunism to pull off.

Due to the nature of the game, regardless of the odds or the ethics there will be inpiduals who have the situation and the predisposition to take the risk. (Marshall Jaffe, Think Advisor)

Peer 2 Peer

The internet has enabled new investment structures. Peer 2 peer is one of them. When you invest your money it is lent out to a broad range of unrelated ‘peers'. Platforms such as Zopa (UK) and Lendingworks are good examples. Rates around 5% are quoted and numerous platforms have ‘insurance’ policies against serious failure scenarios.

Equity crowdfunding investment

Another mechanism that emerged from the internet is ‘crowd funding’. It enables broad groups of investors to fund startup companies and small businesses in return for equity. Back a project in return for a reward or an equity share. Examples include Crowdcube or Funding Circle.

Although by no means an expert, I have found it rewarding to begin to build up my knowledge and awareness in the area of investment. Whichever angle you want to look at it from, the financial world is of huge importance especially in the UK, and to ignore it is to be ignorant of what drives a significant amount of economic activity. Please add any additional insights or information you can contribute to the comments.

Further Reading

http://www.moneysavingexpert.com/savings/cheap-online-sharedealing

Notes from One Up on Wall Street by Peter Lynch

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In centuries past, people hearing the rooster crow as the sun came up decided that the crowing caused the sunrise. It sounds silly now, but every day the experts confuse cause and effect on Wall Street in offering some new explanation for why the market goes up: hemlines are up, a certain conference wins the Super Bowl, the Japanese are unhappy, a trendline has been broken, Republicans will win the election, stocks are “oversold,” etc. When I hear theories like these, I always remember the rooster.

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“Stocks you trade, it’s wives you’re stuck with,” said

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Almost by definition the result will be mediocre, but acceptable mediocrity is far more comfortable than diverse performance.

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each stock on the list has to be acceptable to all thirty managers, and if no great book or symphony was ever written by committee, no great portfolio has ever been selected by one, either.

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Vonnegut short story in which various highly talented practitioners are deliberately held back (the good dancers wear weights, the good artists have their fingers tied together, etc.) so as not to upset the less skillful.

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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.

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I’m always amused when people describe their investments as “conservative speculations” or else claim that they are “prudently speculating.” Usually that means they hope they’re investing but they’re worried that they’re gambling. The phrase “we’re seeing one another” serves the same function for couples who can’t decide if they’re serious.

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Once the unsettling fact of the risk in money is accepted, we can begin to separate gambling from investing not by the type of activity (buying bonds, buying stocks, betting on the horses, etc.) but by the skill, dedication, and enterprise of the participant.

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Meanwhile, to the rash and impetuous stockpicker who chases hot tips and rushes in and out of his equities, an “investment” in stocks is no more reliable than throwing away paychecks on the horse with the prettiest mane, or the jockey with the purple silks.

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thankful. Six out of ten is all it takes to produce an enviable record on Wall Street.

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As some perceptive person once said, if all the economists of the world were laid end to end, it wouldn’t be a bad thing.

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Ed Hyman at C. J. Lawrence who looks at scrap prices, inventories, and railroad car deliveries, totally ignoring Laffer curves and phases of the moon. Practical economists are economists after my own heart.

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PENULTIMATE PREPAREDNESS No matter how we arrive at the latest financial conclusion, we always seem to be preparing ourselves for the last thing that’s happened, as opposed to what’s going to happen next. This “penultimate preparedness” is our way of making up for the fact that we didn’t see the last thing coming along in the first place.

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This all reminds me of the Mayan conception of the universe. In Mayan mythology the universe was destroyed four times, and every time the Mayans learned a sad lesson and vowed to be better protected—but it was always for the previous menace.

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When ten people would rather talk to a dentist about plaque than to the manager of an equity mutual fund about stocks, it’s likely that the market is about to turn up.

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When the neighbors tell me what to buy and then I wish I had taken their advice, it’s a sure sign that the market has reached a top and is due for a tumble.

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

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If you want to worry about something, worry about whether the sheet business is getting better at West Point-Pepperell, or whether Taco Bell is doing well with its new burrito supreme. Pick the right stocks and the market will take care of itself.

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The only buy signal I need is to find a company I like. In that case, it’s never too soon nor too late to buy shares.

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• Don’t overestimate the skill and wisdom of professionals. • Take advantage of what you already know. • Look for opportunities that haven’t 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 made in common stocks. • Large losses can be made in common stocks.

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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 longterm 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.

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All along the retail and wholesale chains, people who make things, sell things, clean things, or analyze things encounter numerous stockpicking opportunities.

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You don’t have to work in Kodak’s main office to learn that the new generation of inexpensive, easy-to-use, high-quality 35mm cameras from Japan is reviving the photo industry, and that film sales are up. You could be a film salesman, the owner of a camera store, or a clerk in a camera store. You could also be the local wedding photographer who notices that five or six relatives are taking unofficial pictures at weddings and making it harder for you to get good shots.

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You don’t have to be Steven Spielberg to know that some new blockbuster, or string of blockbusters, is going to give a significant boost to the earnings of Paramount or Orion Pictures.

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Zantac was just as well-received as Tagamet, and just as profitable to Glaxo. In mid-1983 Glaxo’s stock sold for $7.50 and moved up to $30 in 1987.

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the oil experts, on average, are in a better position than doctors to decide when to buy or to sell Schlumberger; and (2) the doctors, on average, know better than oil experts when to invest in a successful drug.

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It doesn’t have to be a turnaround in sales that gets your attention. It may be that companies you know about have incredible hidden assets that don’t show up on the balance sheet.

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maybe you know that a department store chain owns four city blocks in downtown Atlanta, carried on the books at pre– Civil War prices. This is a definite hidden asset, and similar opportunities might be found in gold, oil, timberland, and TV stations.

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Every time I look at the Dreyfus chart, it reminds me of the advice I’ve been trying to give you all along: Invest in things you know about.

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

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Isn’t that Houndstooth over there in his recliner, reading the Consumer Reports article on the relative thickness and absorbency of the five popular brands of toilet paper? He’s trying to figure out whether or not to switch to Charmin. But will he give equal time to reading the annual report of Procter and Gamble, the company that makes the Charmin, before he invests $5,000 in the stock? Of course not. He’ll buy the stock first and later toss the Procter and Gamble annual report into the garbage can.

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But on the strength of Pampers alone, should you have rushed out to buy the stock? Not if you’d begun to develop the story. Then, in about five minutes, you would have noticed that Procter and Gamble is a huge company and that Pampers sales contribute only a small part of the earnings.

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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? Back

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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. 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.

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or in motel chains than in fiber optics. The simpler it is, the better I like it. When somebody says, “Any idiot could run this joint,” that’s a plus as far as I’m concerned, because sooner or later any idiot probably is going to be running it.

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I get even more excited when a company with a boring name also does something boring.

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long. That’s because 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.

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The answer has a lot to do with a concept called synergy. “Synergy” is a fancy name for the two-plus-two-equals-five theory of putting together related businesses and making the whole thing work.

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Farmers, hotel and resort employees, jai alai players, summer-camp operators, and Christmas tree sales-lot operators who make all their money in short bursts and then try to budget it through long, unprofitable stretches are cyclicals. Writers and actors may also be cyclicals, but the possibility of sudden increases in fortune makes them potential fast growers.

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Guttersnipes, drifters, down-and-outers, bankrupts, workers who’ve been laid off, and others in the unemployment lines are all potential turnarounds, as long as there’s any energy and enterprise left in them. Actors, inventors, real estate developers, small businessmen, athletes, musicians, and criminals are all potential fast growers. In this group there’s a higher failure rate than there is among stalwarts, but if and when a fast grower succeeds, he or she may boost income tenfold, twentyfold, or even a hundredfold overnight, making him or her the human equivalent of Taco Bell or Stop & Shop.

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In today’s Wall Street Journal, for instance, I see that K mart has a p/e ratio of 10. This was derived by taking the current price of the stock ($35 a share) and dividing it by the company’s earnings for the prior 12 months or fiscal year (in this case, $3.50 a share). The $35 divided by the $3.50 results in the p/e of 10.

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If you buy shares in a company selling at two times earnings (a p/e of 2), you will earn back your initial investment in two years, but in a company selling at 40 times earnings (a p/e of 40) it would take forty years to accomplish the same thing. Cher might be a great-grandmother by then. With all the low p/e opportunities around, why then would anybody buy a stock with a high p/e? Because they’re looking for Harrison Ford at the lumber yard. Corporate earnings do not stay constant any more than human earnings do.

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Already you’ve found out whether you’re dealing with a slow grower, a stalwart, a fast grower, a turnaround, an asset play, or a cyclical. The p/e ratio has given you a rough idea of whether the stock, as currently priced, is undervalued or overvalued relative to its immediate prospects.

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The next step is to learn as much as possible about what the company is doing to bring about the added prosperity, the growth spurt, or whatever happy event is expected to occur. This is known as the “story.”

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The two-minute monologue can be muttered under your breath or repeated out loud to colleagues who happen to be standing within earshot. Once you’re able to tell the story of a stock to your family, your friends, or the dog (and I don’t mean “a guy on the bus says Caesars World is a takeover”), and so that even a child could understand it, then you have a proper grasp of the situation.

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Mr. Biegler I learned that hotel and motel customers routinely pay one one-thousandth of the value of a room for each night’s lodging. If the Plaza Hotel in New York is worth $400,000 a room, you’re probably going to pay $400 a night to stay there, and if the No-Tell Motel is built for $20,000 a room, then you’ll be paying $20 a night. Because it cost 30 percent less to build a La Quinta than it did to build a Holiday Inn, I could see how La Quinta could rent out rooms at a 30-percent discount and still make the same profit as a Holiday Inn. Where was the niche? I

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I continue to eat sandwiches from Bildner’s, and every time I take a bite of one it reminds me of what I did wrong. I didn’t wait to see if this good idea from the neighborhood would actually succeed someplace else.

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more weight than Goodyear’s own literature. It’s the old oracle rule at work: the more mysterious the source, the more persuasive the advice.

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Even as far back as the early nineteenth century, the poet Shelley found stockbrokers (or at least one of them) eager to lend a helping hand to their clients. “Is it not odd that the only generous person I ever knew, who had money to be generous with, should be a stockbroker?” Today’s

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YOU: “Right now in October? You know what Mark Twain says: ‘October is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.’”

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Earnings are a good topic, but for some reason it’s not regarded as proper etiquette to ask the company “How much are you going to make?” any more than it’s proper etiquette for strangers to ask you your annual salary. 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?”

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If I’m calling depressed companies, then in nine cases the details will confirm that the companies ought to be depressed, but in the tenth case, there’ll be some new cause for optimism that isn’t generally perceived. The same ratio holds, but in reverse, for the companies that are supposedly in great shape. If I make 100 calls, I find 10 surprising situations, or if I make 1,000 calls, then 100.

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(That’s a rule with annuals and perhaps with publications in general— the cheaper the paper the more valuable the information.) The balance sheet lists the assets and then the liabilities. That’s critical to me.

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In the top column marked Current Assets, I notice that the company has $5.672 billion in cash and cash items, plus $4.424 billion in marketable securities. Adding these two items together, I get the company’s current overall-cash position, which I round off to $10.1 billion. Comparing the 1987 cash to the 1986 cash in the right-hand column, I see that Ford is socking away more and more cash. This is a sure sign of prosperity.

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Debt reduction is another sign of prosperity. 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.

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. I discover that there are 511 million shares outstanding. I can also see that the number has been reduced in each of the past two years. This means that Ford has been buying back its own shares, another positive step.

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Dividing the $8.35 billion in cash and cash assets by the 511 million shares outstanding, I conclude that there’s $16.30 in net cash to go along with every share of Ford. Why this is important will be apparent in the next chapter.

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When I’m interested in a company because of a particular product—such as L’eggs, Pampers, Bufferin, or Lexan plastic—the first thing I want to know is what that product means to the company in question.

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If the p/e of Coca-Cola is 15, you’d expect the company to be growing at about 15 percent a year, etc. But if the p/e ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12 percent a year (also known as a “12-percent grower”) and a p/e ratio of 6 is a very attractive prospect. On the other hand, a company with a growth rate of 6 percent a year and a p/e ratio of 12 is an unattractive prospect and headed for a comedown.

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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. We use this measure all the time in analyzing stocks for the mutual funds.

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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. Less than a 1 is poor, and 1.5 is okay, but what you’re really looking for is a 2 or better. A company with a 15 percent growth rate, a 3 percent dividend, and a p/e of 6 would have a fabulous 3.

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Nevertheless, it’s always advisable to check the cash position (and the value of related businesses) as part of your research.

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A normal corporate balance sheet has two sides. On the left side are the assets (inventories, receivables, plant and equipment, etc.). The right side shows how the assets are financed. One

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A normal corporate balance sheet has 75 percent equity and 25 percent debt.

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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 and there’s funded debt.

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Funded debt gives companies time to wiggle out of trouble.

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The basic conflict between corporate directors and shareholders over dividends is similar to the conflict between children and their parents over trust funds. The children prefer a quick distribution, and the parents prefer to control the money for the children’s greater benefit.

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One strong argument in favor of companies that pay dividends is that companies that don’t pay dividends have a sorry history of blowing the money on a string of stupid diworseifications. I’ve seen this happen enough times to begin to believe in the bladder theory of corporate finance, as propounded by Hugh Liedtke of Pennzoil: The more cash that builds up in the treasury, the greater the pressure to piss it away.

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Electric utilities and telephone utilities are the major dividend-payers.

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Popular computer programs can tell you instantly how many stocks are selling for less than the stated book value. People invest in these on the theory that if the

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Popular computer programs can tell you instantly how many stocks are selling for less than the stated book value.

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A textile company may have a warehouse full of fabric that nobody wants, carried on the books at $4 a yard. In reality, they couldn’t give the stuff away for 10 cents.

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Recently it was announced that Buffett is cutting back his interest in the company. So far, Handy and Harman looks like the only bad investment he’s ever made,

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But real estate plays like that are all over the place; railroads are probably the best examples. Not only do Burlington Northern, Union Pacific, and Santa Fe Southern Pacific own vast amounts of land, as I mentioned before, but it’s all carried on the books at a cost of next to nothing. Santa Fe Southern Pacific

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A ten percent return on cash corresponds nicely with the ten percent that one expects as a minimum reward for owning stocks long term. A $20 stock with a $4-per-share cash flow gives you a 20 percent return on cash, which is terrific. And if you find a $20 stock with a sustainable $10-per-share cash flow, mortgage your house and buy all the shares you can find.

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Free cash flow is what’s left over after the normal capital spending is taken out. It’s the cash you’ve taken in that you don’t have to spend.

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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 business. 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.

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With a manufacturer or a retailer, an inventory buildup is usually a bad sign. When inventories grow faster than sales, it’s a red flag.

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It’s hard for amateurs and neophytes to have any feel for inventories and what they mean, but investors with an edge in a particular business will know how to figure this out. Whereas they didn’t have to do so five years ago, companies must now publish balance sheets in their quarterly reports to shareholders, so that the inventory numbers can be regularly monitored.

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off. One out of four Germans now smokes Marlboros made by Philip Morris, and the company sends 747s full of Marlboros to Japan every week.

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(Procter and Gamble was able to “grow” its earnings in toilet paper by gradually changing the character of the paper, in effect adding ridges to the sheets, making them softer and slowly reducing the roll from 500 to 350 sheets. Then, they marketed the smaller roll as a “squeezable” improvement. This was the cleverest maneuver in the annals of short sheeting.)

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This in a nutshell is the key to the bigbaggers, and why stocks of 20-percent growers produce huge gains in the market, especially over a number of years.

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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.

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Every few months it’s worthwhile to recheck the com pany story.

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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.

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It’s better to miss the first move in a stock and wait to see if a company’s plans are working out.

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Find a story line to follow as a way of monitoring a company’s progress.

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• Devote at least an hour a week to investment research. Adding up your dividends and figuring out your gains and losses doesn’t count.

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• When in doubt, tune in later.

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

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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. That this return can be achieved without your having to do any homework or spending any extra money is a useful benchmark against which you can measure your own performance, and also the performance of the managed equity funds such as Magellan. If professionals who are employed to pick

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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. That this return can be achieved without your having to do any homework or spending any extra money is a useful benchmark against which you can measure your own performance, and also the performance of the managed equity funds such as Magellan. If professionals who are employed to pick

Your Highlight at location 3096-3099

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. That this return can be achieved without your having to do any homework or spending any extra money is a useful benchmark against which you can measure your own performance, and also the performance of the managed equity funds such as Magellan.

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Some people ascribe my success to my having specialized in growth stocks. But that’s only partly accurate. I never put more than 30–40 percent of my fund’s assets into growth stocks. The rest I spread out among the other categories described in this book. Normally I keep about 10–20 percent or so in the stalwarts, another 10–20 percent or so in the cyclicals, and the rest in the turnarounds.

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Younger investors with a lifetime of wage-earning ahead of them can afford to take more chances on tenbaggers than can older investors who must live off the income from their investments. Younger investors have more years in which they can experiment and make mistakes before they find the great stocks that make investing careers.

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I’d believed in “Sell when it’s a double,” I would never have benefited from a single big winner,

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The first is during the peculiar annual ritual of end-of-the-year tax selling.

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After all that’s been said, I don’t want to sound like a market timer and tell you that there’s a certain best time to buy stocks. 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. However, there are two particular periods when great bargains are likely to be found. The first is during the peculiar annual ritual of end-of-the-year tax selling.

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It’s no accident that the most severe drops have occurred between October and December. It’s the holiday period, after all, and brokers need spending money like the rest of us, so there’s extra incentive for them to call and ask what you might want to sell to get the tax loss.

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If you have a list of companies that you’d like to own if only the stock price were reduced, the end of the year is a likely time to find the deals you’ve been waiting for.

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The second is during the collapses, drops, burps, hiccups, and freefalls that occur in the stock market every few years. If you can summon the courage and presence of mind to buy during these scary episodes when your stomach says “sell,” you’ll find opportunities that you wouldn’t have thought you’d ever see again.

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THE1987 BREAK In the sell-off of October, 1987, you had a chance to buy many of the companies I’ve been mentioning throughout this book. The 1,000-point drop between summer and fall took everything with it, but in the real world all the companies listed below were healthy, profitable, and never missed a beat. Many of them recovered in quick fashion, and I took advantage whenever I could. I missed Dreyfus the first time around, but not this time (fool me once, shame on you; fool me twice, shame on me).

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These days, dumb ideas are at a deafening roar. Every time you turn on the television there’s somebody declaring that bank stocks are in and airline stocks are out, that utilities have seen their best days and savings-and-loans are doomed. If you flip around the radio dial and happen to hear the offhand remark that an overheated Japanese economy will destroy the world, you’ll remember that snippet the next time the market drops 10 percent, and maybe it will scare you into selling your Sony and your Honda, and even your Colgate-Palmolive, which isn’t cyclical or Japanese.

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Lately we’ve had to contend with the drumbeat effect. A particularly ominous message is repeated over and over until it’s impossible to get away from it. A

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William Miller, once Fed chairman, said that 23 percent of the U.S. population thought the Federal Reserve was an Indian reservation, 26 percent thought it was a wildlife preserve, and 51 percent thought it was a brand of whiskey.

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More recently we’ve been warned (in no particular order) that a rise in oil prices is a terrible thing and a fall in oil prices is a terrible thing; that a strong dollar is a bad omen and a weak dollar is a bad omen; that a drop in the money supply is cause for alarm and an increase in the money supply is cause for alarm. A preoccupation with money supply figures has been supplanted with intense fears over budget and trade deficits, and thousands more must have been drummed out of their stocks because of each.

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If forty Wall Street analysts are giving the stock their highest recommendation, 60 percent of the shares are held by institutions, and three national magazines have fawned over the CEO, then it’s definitely time to think about selling.

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With so many raiders around, it’s harder for the amateur to find a good asset stock, but it’s a cinch to know when to sell. You don’t sell until the Bass brothers show up, and if it’s not the Bass brothers, then it’s certain to be Steinberg, Icahn, the Belzbergs, the Pritzkers, Irwin Jacobs, Sir James Goldsmith, Donald Trump, Boone Pickens, or maybe even Merv Griffin. After that, there could be a takeover, a bidding war, or a leveraged buyout to double, triple or quadruple the stock price.

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Here’s something else that’s certain to occur: If you give up on a stock because you’re tired of waiting for something wonderful to happen, then something wonderful will begin to happen the day after you get rid of it. I call this the postdivestiture flourish.

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where the fundamentals are promising, patience is often rewarded

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Regarding somebody else’s gains as your own personal losses is not a productive attitude for investing in the stock market.

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The worst part about this kind of thinking is that it leads people to try to play catch up by buying stocks they shouldn’t buy, if only to protect themselves from losing more than they’ve already “lost.” This usually results in real losses.

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Actually you’ve taken a mistake that cost you nothing (remember, you didn’t lose anything by not buying Toys “R” Us) and turned it into a mistake that cost you plenty.

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I’ve never bought a future nor an option in my entire investing career, and I can’t imagine buying one now. It’s hard enough to make money in regular stocks without getting distracted by these side bets, which I’m told are nearly impossible to win unless you’re a professional trader.

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That’s not to say that futures don’t serve a useful purpose in the commodity business, where a farmer can lock in a price for wheat or corn at harvest and know he can sell for that amount when the crops are delivered; and a buyer of wheat or corn can do the same. But stocks are not commodities, and there is no relationship between producer and consumer that makes such price insurance necessary to the functioning of a stock market.

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and you’re in deep kimchee.

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Warren Buffett thinks that stock futures and options ought to be outlawed, and I agree with him.

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didn’t John Maynard Keynes say in the long run “we all are dead”?

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Before you short a stock, you have to have more than a conviction that the company is falling apart. You have to have the patience, the courage, and the resources to hold on if the stock price doesn’t go down—or worse, goes up. Stocks that are supposed to go down but don’t remind me of the cartoon characters who walk off cliffs into thin air. As long as they don’t recognize their predicament, they can just hang out there forever.

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(Nixon once remarked that if he weren’t the president he’d be buying stocks, and a Wall Street wag retorted that if Nixon weren’t president, he’d be buying stocks, too);

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If you ask me what’s been the most important development in the stock market, the breakup of ATT ranks near the top (this affected 2.96 million shareholders), and the Wobble of October probably wouldn’t rank in my top three.

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A new book called What’s Wrong with Wall Street reports that we spend $25 to $30 billion annually to maintain the various exchanges and pay the commissions and fees for trading stocks, futures, and options. That means we spend as much money on passing old shares back and forth as we raise for new issues.

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