Reviewing Editors' Investing Lessons
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This year has certainly been a wild ride for investors, the volatility in the market has been extraordinary, we're "officially" in a recession and the financial landscape has been dramatically altered. But we've been here with you through it all, giving you our best advice. Today, and in another issue before the end of the year, I'm going to re-print some of the pieces we've written in the last 12 months.
Think of it like reviewing before a test--while there's no pop quiz at the end, there are always new investing challenges to tackle, and reviewing lessons learned in the last year can help you meet them head on.
This year, J. Royden Ward, editor of Cabot Benjamin Graham Value Letter, Brendan Coffey, editor of Cabot Green Investor, and myself, editor of Cabot Wealth Advisory, all wrote for the first time in this space. Today you'll read pieces these other two editors and I have written, while the next issue like this will review what Michael Cintolo, Timothy Lutts and Paul Goodwin have been writing about.
Here's a snippet from Roy, about his value investing philosophy, written for his very first Cabot Wealth Advisory on March 13:
"Many years ago, I was taught to believe that value investing, using fundamental analysis, is the best long-term approach when making investment decisions. I was taught to buy stocks at bargain prices and wait patiently until they become overpriced.
"In the years since, I learned some growth and momentum techniques as well. I never argue whether one approach is better than another. But I do believe in using more than one methodology when choosing stocks to diversify my portfolio; broad diversification reduces risk significantly. Thus my portfolio contains a mixture of growth stocks and value stocks.
"I have two favorite approaches to find stocks that are selling at bargain prices.
"The first is to find stocks that are cheap, and I use Benjamin Graham's criteria to guide me. Benjamin Graham is known as the father of value investing and Warren Buffett is his most famous protégé. Why try to re-invent the wheel when a proven, excellent system is there for the taking?
"In his book, "The Intelligent Investor," Mr. Graham details seven criteria to identify a bargain stock. Included in his criteria are: low price-to-book value ratio, low price-to-earnings ratio, strong balance sheet, some earnings growth and no earnings deficits during the last five years. In addition, the company must be currently paying a dividend and the future outlook for the company must be positive.
"I know what you are thinking--this is old-fashioned stuff and won't work in today's fast-paced stock market. But that's not true; Warren Buffett has become the richest man in the world using the old-fashioned knowledge he gained from Benjamin Graham.
"If a stock meets all the criteria, and is trading well below its fair value, I use my checklist as described above and wait ... and wait ... and if necessary I wait some more for the stock to reach my Minimum Sell Price.
"Warren Buffett has said, "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."
"What about us ordinary investors who can't wait 10 years? I have an easy solution--I buy when a stock is undervalued and sell when it becomes overvalued. Historically, it takes about two years for this to happen, on average.
"The basic principle is simple: The stock market and the individual stocks that make up the stock market have always bounced back and forth from overvalued to undervalued to overvalued, over and over again. As a value investor, I am simply taking advantage of the fluctuations of the stock market."
Here's the advice Brendan gave on August 8:
"Throughout the 13 years he was steering the Magellan Fund, Peter Lynch became known for his philosophy that you should invest in what you know. In his 1993 book, "Beating the Street," he discussed how he built Magellan from a $200 million fund to a $14 billion fund in a little more than a decade. The philosophy Lynch wanted to drive home to individual investors was that you should buy companies that you are familiar with. In Lynch's case, he liked the "tasty tacos of Taco Bell," so he added the then-unknown chain into the portfolio; his wife loved the convenience of L'eggs hosiery, so he bought shares of Hanes.
"Buying what you know has long since become a bit of Gospel among a large segment of investors--after all, if it worked for Peter Lynch, it should work for you. It's not a bad idea--certainly if you feel strongly about a company and have what you think is pretty decent insight into its products and market, then you can do all right. I know a few creative types who did quite well buying Apple Computer stock when it was well under 20 in the late 1990s.
"But it's possible to take buying what you know too far. It's one thing to rely on your gut feeling, but another to let it overwhelm your intellect. Peter Lynch, after all, wasn't a Forrest Gump-like fund manager, blindly lucking into gold because he liked the taste of nacho cheese. He liked the underlying business of Taco Bell, the balance sheet, the management and the growth plan. It certainly helps that the company had a simple story to tell--it prompted Lynch to take a deeper look at the business structure and the stock valuation.
"But a lot of other food chains have had simple stories, and even better food, but everything from poor management to a too-high debt burden to unrealistic growth plans did them in. That's a lesson Peter Lynch also discusses in his book, but because it isn't so pithy, it doesn't get repeated very often. There is a difference between a good company and a good stock. One can be the first, but that doesn't mean it's the second."
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Of all the pieces I've written this year, this is my favorite. It was originally published on November 15, but I liked it so much that I wanted to share it with you again:
"Warning: The following Cabot Wealth Advisory contains a rant.
"After years of buying gadgets, cars and whole wardrobes on credit, the gravy train has stopped. Not only has it stopped, it's derailed and is hurtling off of a cliff. Many people have locked up their purses and wallets, cut up their credit cards and stopped spending money. American consumers are spent.
"Every day it seems we are bombarded with a slew of figures detailing the low level of consumer confidence and how this holiday season is going to be one of deep discounts and little buying. Already, the list of stores that are closing reads like a who's who of chain retailers, like Circuit City and Linens-n-Things.
"Many people are eating out less, staying home to cook dinner and actually talk to their families. Some aren't getting 900 channels on their televisions, so they're playing games, going for walks or reading. Others are putting money into savings accounts, meaning that when they want to buy a gadget, car or clothes, they will be spending money they have actually earned.
"How dare they!
"The media would have you believe that this is a terrible thing. Maybe I'm old-fashioned, but I was taught to save, invest and live within my means. This means buying a house with a substantial down payment and not overextending credit. Apparently, I'm in the minority on this one.
"Now, I certainly don't want our economy to go up in flames or grind to a painful halt, but I can't help but think that this reduction in spending is a good thing, at least in part. For years, many American consumers have made shopping into a hobby, some going to the mall weekly, or even daily, to purchase (mostly unneeded) stuff. I was beginning to worry that bargain hunting would become an Olympic sport.
"So it's only natural that eventually the tide would turn, that American consumers would put the brakes on and stop overspending. It makes sense that after years of living on credit and not saving a dime, many American consumers would stop, take stock of things and realize that such a lifestyle can't be sustained indefinitely.
"But things can go too far in the other direction just as easily. Not spending is not healthy for our economy, it will put people out of work and eventually the wheels of commerce will stop turning. While I might think that a return to a more conservative way of spending is a good thing, I wouldn't advocate a total end to the modern age of consumerism.
"What we need is to find a balance between overspending and not spending. Maybe a whole new wardrobe isn't necessary every season, but having a few new pieces of clothing probably won't break the bank. It's striking that balance that's going to help lead the U.S. economy out of the rut we've gotten it into, and, more important, keep us on a sustainable growth path going forward.
"OK, rant over."
That’s all for this issue’s look back, but I'll be bringing you pieces from our other three writers in another issue very soon, but before then, we want to hear from you. What was your most memorable part of the year in the investment or financial world? Share it with us in an email or by commenting on our blog, http://www.iconoclast-investor.com.
In case you didn't get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, we have links below to each issue.
Cabot Wealth Advisory 12/8/08 - My Crystal Ball
On Monday, Timothy Lutts reflected on an issue he wrote three months ago and the things that have changed or stayed the same since. Tim wrote about how economic shrinkage in the U.S. might not be such a bad thing. Tim also wrote about a stock that's sure to benefit from President-elect Barack Obama's infrastructure plan. Featured Stock: Granite Construction (GVA).
Cabot Wealth Advisory 12/11/08 - It's How You Think That Counts
On Thursday, Michael Cintolo wrote about his solution to the Social Security problem in the U.S. Mike gave a pep talk, saying while it's good to learn from trading mistakes, it's almost as important to remember that making money in the market is difficult, especially this year, and to not read too much into any one trading success or mistake. Mike also discussed a stock that he thinks could be a potential leader of a new bull market. Featured Stock: Thoratec (THOR).
Until next time,
Editor of Cabot Wealth Advisory
Editor's Note: Are you looking for somewhere safe to invest your money over the long term? Cabot Benjamin Graham Value Letter uses the system set forth by the father of value investing, Benjamin Graham, and used by Warren Buffett to become a billionaire, to do just that. Each month, editor J. Royden Ward ferrets out the best value stocks so you can safeguard your money against the volatile market. He uses dozens of criteria to select just the right stocks so you don't have to. You owe it to yourself to get your portfolio back on track. Click the link below to find out how you can start today.