Fool Article: Dividend Millionaire by holding forever

The Easiest Way to Become a Millionaire

By Adam J. Wiederman
October 27, 2009

Sure, there are folks who have become rich finding stocks like Hansen Natural (Nasdaq: HANS) or Celgene (Nasdaq: CELG) when they were micro caps, then staying with them until their market cap is well over $1 billion. Others have become wealthy with smart options plays, still others by discovering high-momentum growth stocks like Amazon.com (Nasdaq: AMZN) or Intuitive Surgical (Nasdaq: ISRG) before other investors catch on.

But these complicated, labor-intensive tactics are ones that many investors don't have enough time to master.

I'd like to share with you a simple, easy strategy for becoming wealthy -- and then give you stock recommendations based on it. Although it's simple, it takes discipline to adhere to the rules. But if you follow this advice, you'll be well on your way to a million-dollar portfolio.

Keep it simple
One of the biggest mistakes investors make is complicating the process. Academics have proven that more information doesn't necessarily lead to better decisions -- but it does lead to overconfidence. Even worse, the more time and effort you put into researching, analyzing, and deciding whether to buy a stock, the more likely you are to buy it -- even if it's a horrible stock after all.

Overconfidence and overcommitment are counterproductive in investing -- and it's why keeping your investment criteria simple and easy can help you avoid falling into these traps.

What sort of criteria am I suggesting? Just two steps:

1. Find strong, long-term dividend-paying companies.
Dividends are the surest gains you can find in any market environment. As Bloomberg recently reported, even though the 10-year trailing return of the Dow Jones Industrial Average was negative through Sept. 30, when you factored in dividends, the return was actually a positive 18%.

What's more, between January 1926 and December 2004, 41% of the S&P 500's total return came from dividends. Without dividends, a $10,000 investment in 1926 would have become $1,013,000 by 2004 -- a remarkable return, to be sure. But with dividends, $10,000 would have become $24,113,000.

It's best to look for companies with a long history of paying out dividends. If a company only has a few years of dividend history under its belt, those payouts might be cut or suspended to fuel future growth -- as happened at Whole Foods (Nasdaq: WFMI) and DryShips (Nasdaq: DRYS) during this bear market.

Of course, that didn't stop many former stalwarts from cutting their payouts over the past year. So it's also wise to find companies with a culture of insider ownership and enduring demand. And you should also find companies with predictable, sufficient free cash flow, so you can be reasonably sure these dividends will continue to be paid. This is often easier said than done, but just below I'll tell you whom I look to for help in this regard.

But now for the hard part ...

2. Hold forever.
The strongest of dividend-paying companies raise their dividend over time. So when you hold one for long enough, you eventually reach a point where you are making more money annually in dividends than you initially invested in the company.

This is hastened when you reinvest your dividends back into the company, with each dividend purchasing even more shares of the company, meaning even more payout at the next quarterly dividend.

So long as the business continues to perform, and the company continues to maintain or raise its payouts, the simplest and oftentimes most lucrative approach is to remain an owner and collect your dividends.

Implement this strategy today
Motley Fool dividend expert James Early has seven "buy first" stocks for members of his Motley Fool Income Investor newsletter service, and they have an average yield of 3.8%. These stocks are, in his opinion, timeless investments that should serve as the foundation for a dividend-paying portfolio -- stocks you can feel comfortable holding for decades.

One of the companies on this list is legendary dividend payer Johnson & Johnson (NYSE: JNJ), which is yielding 3.3%. This company, which has paid out a dividend since 1944, not only has a long dividend history, but also has a long history of increasing its dividend. Over the past five years alone, it has grown its dividend annually by an average 12%. Better yet, it's trading well below James' estimate of its intrinsic value.

We've seen more than a fair share of dividend blowups over the past year, but if you look for the three criteria I outlined above when looking for dividend-paying companies -- insider ownership, a company with enduring demand, and sufficient free cash flow -- you are following the easiest way to become a millionaire.

I invite you to read more about why James believes Johnson & Johnson is a strong core dividend holding, check out the six other stocks on his "buy first" list, and read more about how he uncovers top-notch dividend investments, completely free for 30 days. Click here for more information.

Adam J. Wiederman do

Fool: Mungers Advice and Reading list

Charlie Munger's Advice for Striking It Rich

By Ryan Fuhrmann, CFA
June 27, 2008 | Comments (1)

It's been well documented that Warren Buffett spends most of his time reading, and he attributes the secret of his success to spending most of his day hunkered down in the details of company annual reports, business periodicals, and numerous other books. The same can be said for Charlie Munger, best known as Buffett's right-hand man and co-chairman of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B).

Describing Munger as Buffett's sidekick ignores much of Munger's talent, because Munger also happens to be a billionaire who's made a name for himself through a deadpan yet hilarious delivery of timeless investment advice. It's clear that he's had a beneficial impact on Berkshire's success, as well as that of Wesco Financial, a Berkshire subsidiary that Munger leads

Like Buffett, Munger concedes that being well-read has proved invaluable in earning superior investment results through holdings such as Costco (Nasdaq: COST), where he is also on the board. In that spirit, for those interested in learning more about Munger, his enduring investment philosophies, and his views on just about everything, let's go through an overview of three key books that make the rounds during Berkshire's annual shareholder meeting in Omaha.

Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger, edited by Peter Kaufman
Now in its third edition and topping out at more than 500 pages, Poor Charlie's Almanack offers the most thorough and insightful summary you'll find on why Munger has become an investing legend. Buffett and Munger cooperated on this book as a collection of writers compiled Munger's biographical details, lectures, and public commentaries. There are also countless interviews offering a firsthand account of Munger's personal life and investment wit.

The best chapters cover a series of talks Munger gave from 1992 to 1995, collectively titled "The Psychology of Human Misjudgment," in which he summarizes 25 inherent psychological traits that frequently trip up investors. I read through the second edition recently and can't recommend Poor Charlie's Almanack enough.

Seeking Wisdom: From Darwin to Munger, by Peter Bevelin
I picked up a copy of Seeking Wisdom at this year's meeting. What drew me to the book is its overview of world-renowned thinkers who have a penchant for thinking clearly and avoiding the psychological pitfalls that cause humans to act irrationally.

Chock-full of findings from many academic disciplines, the book mirrors Munger's thinking that a combination of factors, or "Lollapalooza effects," work together in producing potentially exponential investment returns. Berkshire's holdings in Coca-Cola (NYSE: KO), Wells Fargo (NYSE: WFC), and Procter & Gamble (NYSE: PG) are prime examples of the benefits of these effects.

Influence: The Psychology of Persuasion, by Robert Cialdini
A frequent recommendation from Munger himself, Cialdini's Influence dives into the art of persuasion and the tactics that salespeople successfully employ to persuade people to buy goods. It's fascinating to see how savvy marketers effectively employ compliments, clothing, and social acceptance to get you to buy a product. Better yet, Cialdini offers a game plan to better withstand their sly advances. I can't say it will prove successful in negotiating a lower price for my next Ford (NYSE: F), but the lessons the book has taught me so far are definitely eye-opening.

So if you want to learn from the investing masters, consider picking up some of these books. As Munger and Buffett would attest, sitting on your rear end cozied up with a good read has its advantages.

Ten Roads to Riches

Repost: http://www.think-differently.org/2009/07/ten-roads-to-riches.html

For Ken, true "riches" start at around the $100M plus point. You have to have some standards! This book is about what kind of paths you can take to get there.

Ken's thesis is that, putting aside factors he considers beyond our control such as winning the lottery or benefitting from an inheritance, there are really only 10 ways that people get really wealthy: 10 roads to riches! These are illustrated in his diagram:

The 10 roads, in a nutshell, are:

1. Build your own business ("the richest road") - and to build it either to sell or to last
   
2. Become a CEO
   
3. Become a "ride along" - a trusted second in command the CEO needs and trusts who profits with the firm
   
4. Become excellent and successful at what you do (sport, writing, music) and famous - or better yet manage a portfolio of other people who are excellent and famous
   
5. Marry really really well
   
6. Steal it legally - become a Plaintiff Lawyer
   
7. Manage other people's money well, and both win
   
8. Invent income - create an ongoing income stream you own, from an invention, a song, a merchandising line, movie rights to stories, and other means
   
9. Become a real estate Baron
   
10. Save and invest wisely, consistently and effectively ("the road most travelled")
    

The roads can be combined: for example Ken founded his own company (road 1) which focused on managing other people's money (road 7).

The first thing I did after buying and opening this book, of course, was to scan through and see which road or two I related most strongly to.

But the most fascinating thing was how much I learned from and enjoyed each chapter, even those I did not expect to gain a lot from. For example, I have no intention of becoming rich by marrying really really well (if I marry really really well my first criteria for "really really well" is not how much money my potential partner has). But the chapter contains a story about a young woman who developed a strategy for meeting wealthy men and put this strategy in to action in a way that was fascinating.

On another note, his strategies for gaining the CEOs job are terrific!

The best thing though was the pithy insight. Ken has clearly learnt a thing or two along the way after 24 years of running his company.



Preface: Why Ten Roads?

Acknowledgments.

Chapter 1 The Richest Road.

Picking a Path.

Newer or Better?

Built to Sell or Built to Last?

Bootstrap or Finance?

Public or Private?

The Big Bulls Eye.

Founders Are Quitters-Just Do It.

Chapter 2 Pardon Me, Thats My Throne.

Gray Hair and Dues Paying.

A CEO volution (Through My Fathers Eyes).

How to Lead.

How to Get the Job.

The Big Payday.

CEOs and Superheroes.

The Best Part.

Chapter 3 Along for the Ride: Ride Alongs.

Why Ride Along?

Pick the Right Firm.

Be the Right Guy.

Chapter 4 Rich . . . and Famous.

The Talent Show.

Potholes Ahead No One Sees!

Mogul Meandering.

Chapter 5 Marry Well. Really Well.

How to Marry a Millionaire Billionaire.

Like a Fine Wine-Well Maintained.

Men Can Play Too!

Love, Marriage, and Money.

Chapter 6 Steal It-Like a Pirate, but Legally.

Crusader or Pirate?

Raiders Road.

The Richest Legal Road.

Tort Us and the Scare.

Target Practice.

When a Pirate Becomes a Villain.

The Inside Track.

Chapter 7 OPM-Not Opium: Where Most of the Richest Are.

Basic OPM Career Rules.

Steps to OPM Wealth.

Hedge Your Bets.

Private Equitys Big Bucks.

Dont Break the Law.

Love Capitalism, Not Social Acceptance.

Chapter 8 Inventing Income.

The True Inventors.

Writing for Dollars.

Political Pensions-and Good News.

If You Cant Be President . . . .

Think Tanks Run Amok-a Sham Scam.

Chapter 9 Trumping the Land Barons.

Monetize It.

The Fools Bargain.

Getting Started.

Buy, Build, or Both?

Where to Be and Not to Be, That Is the Question.

Chapter 10 The Road More Traveled.

Income Matters.

Saving Grace.

Get a Good Rate of Return (Buy Stocks).

The Right Strategy.

Bonds Are Riskier Than Stocks. Seriously.

Like Hetty?

Conclusion.

Notes.

Index.

Venture Capital's Open Secret Forbes.com 8/09

Velocity

Venture Capital's Open Secret

Brian Caulfield, 08.25.09, 04:30 PM EDT

TheFunded.com pitches a streamlined term sheet

BURLINGAME, Calif. -- Sell a company for $50 million and you'd think the company's founders would be some very rich people.

Not necessarily. That's because conditions in the term sheets many start-ups sign in order to raise funding can quickly leave a founder's equity "sliding towards zero," says Adeo Ressi, founder of TheFunded.com, an online community for entrepreneurs looking to raise venture funding. Here's how it works. Start with a common clause called a "liquidation preference." It gives an investor the right to, say, 30% of the proceeds of a sale if they own 30% of the company. Fair enough, right? Well, many start-ups agree to terms that give investors 1.5 or even two times that amount.

Now add such a 2x liquidation preference to a "participation clause" that returns the investors money to them, in full, on top of their out-sized share of the proceeds of any sale. That lets an investor double dip, pushing the investors take to $39 million, and everyone else's down to $11 million.

Now add in a clause awarding certain shareholders "dividends" that result in investors getting a bigger chunk of the company over time. After a while, the numbers no longer work out for those working at the company. "The management looks around and says 'I could continue working 70-hour weeks, and I'm not going to make any money,'" Ressi says.

The terms basically give investors a much bigger share of a company's upside than their chunk of the company's equity would imply. Ressi experienced this firsthand when he sold a company he founded. On paper he owned 20% of the company. In reality, he walked away with less than 5%.

That's why Ressi is pitching a streamlined term sheet. The terms include a 1x liquidation preference and no participation clause. In short, the term sheet is a way for Ressi to express his point of view, which, considering the state of the venture capital industry, might be worth listening to. Particularly if you're an entrepreneur.

Forbes 9 09 Armageddon averted?

Armageddon Averted, or Was it?

David Malpass, Forbes.com 9.09

U.S. economic activity is in a bottoming-out process, with increased auto production offsetting the declines in services. After their worst plunge since the Great Depression, GDP and industrial production are down 4% and 15%, respectively, from their peaks, both probably hitting troughs in the second quarter.

This doesn't mean the damage is light or the outlook rosy. Unemployment topped 14 million--nearly 10% of the labor pool--due to sudden job losses, from which many won't recover. Even assuming that an expansion started on the Fourth of July, when auto plants began reopening, nominal GDP in 2010 will be $1.2 trillion less than was projected in many 2008 forecasts ($14.4 trillion, not $15.6 trillion), a devastating setback equivalent to 60 million $20,000 cars.

Taking full advantage of the crisis, Washington has increased its already strong control over jobs and the allocation of capital. Employment nationwide is down 4%, yet the Washington, D.C. area has managed to maintain head count throughout the crisis. Housing, mortgages, the accounting system and bank lending decisions all suffered Washington takeovers. The government is now deciding which companies may issue FDIC-guaranteed debt, which chemical to use to destroy clunkers and whose auto dealerships to close. First mortgages normally take strong precedence over second mortgages, but even that key principle of contract law is at risk in Washington's vote-driven haste to modify mortgages and delay foreclosures.

Post-clunker auto demand depends more on Washington's next generation of expensive environmental subsidies than on designs or production costs. Giant corn markets hinge not on rainfall but on whether Brazil and the environmental lobby can get Washington to lower the tariffs blocking ethanol imports.

In one of its most intrusive expansions, Washington has become the nation's allocator of capital, setting detailed capital requirements and accounting rules in ways that channel credit to favored states, industries and uses. Small businesses and consumers are bearing the brunt of this credit market shift.

The alternative has been clear from the beginning: a focused credit market reopening after the Lehman fiasco, based on faster Fed asset purchases and more global capital to offset losses and deleveraging. This would have stopped the credit crunch suffered by small businesses and kept unemployment lower.

A good jobs and investment environment depends on a strong and stable currency, restrained federal spending, less harmful legislation, dependable contract law, limits on taxation and countercyclical capital regulation. These steps need to be supported by market processes that tend toward lower, not higher, equity and commodity volatility. On most points the Bush Administration went the other way: It spent heavily and encouraged market volatility by free-floating the dollar, repealing the uptick rule and protecting the opaque big-bucks credit-default-swap market. Paradoxically, it imposed pro-cyclical mark-to- market limits on regulatory capital as the bubble built and then deadly capital dilution after it popped. Instead of reversing these mistakes, the Obama Administration has maintained most Bush policies, while adding tax risks and even more spending.

Reversing the Capital Outflow

As a weak recovery takes hold, some will pat themselves on the back for averting Armageddon, even though the actual outcome is worse than almost any 2007 prediction. Instead of flooding our markets with capital, global investors will think of getting as far away from the U.S. and the dollar as possible. Commodities, currencies and foreign debt and equities have been hugely out-performing investments in the U.S. This lowers the cost of new capital abroad, even as we systematically increase our own cost of capital with tax increases, volatility and the erosion of contract law.

The flow of capital away from the U.S. is broad, deep and long-term. Investors can buy 20-year debt denominated in Brazilian reals or Chinese yuan, a monumental shift in the allocation of long-term capital. U.S. companies are shifting operations offshore in order to build and innovate more profitably. Meanwhile, the U.S. government is trapping billions of tech dollars--the lifeblood of innovation--offshore through an excessive repatriation tax. This is blocking much-needed industry consolidation, because an acquirer is forced to pay for the offshore cash without getting access to it.

A costless starting point for breaking the U.S. out of the Bush-Obama malaise would be to stabilize the dollar. In June 2008 Federal Reserve Chairman Ben Bernanke advocated a "strong and stable" dollar, a revolutionary step had it been implemented. Unfortunately, the idea was forcefully shelved during the subsequent G8 meetings.

The rush to buy commodities despite high prices and no yield is a loud speculative bet that Washington will keep pushing the dollar down in an extravagant attempt to save manufacturing jobs in toss-up states. As with the regulatory credit crunch, Washington's weak-dollar policy mistake could be reversed. If this happened, jobs and GDP would recover faster than they will on the current big-government, weak-dollar path.

David Malpass, global economist, president of Encima Global LLC; Paul Johnson, eminent British historian and author; Lee Kuan Yew, minister mentor of Singapore. To see past Current Events columns, visit our Web site at

Use Multiple Metrics: Ken Fisher June 25 09 Forbes Column

Portfolio Strategy

Quarter-Century Mark

Ken Fisher, 06.24.09, 06:00 PM EDT
Forbes Magazine dated July 13, 2009

To avoid overpaying, use multiple metrics--not just price-to-earnings but price-to-sales and price-to-book.

More From Ken Fisher

This issue marks the 25th anniversary of my column. That's a long run in columnland. It's been a blast. Thanks for your attention. Reviewing my first year's columns, I pondered: What would I still say? What would I say now that I didn't then?

In the still-say mode: Avoid overpaying. Use multiple valuation metrics--not just the ratio of price-to-earnings but the ratios of price-to-sales and price-to-book. Compare a company with both the whole market and peers. Buy quality cheaply. The title of my second column was "Glamour Doesn't Pay," meaning that the higher growth rates of the most obviously desirable companies didn't justify their premium prices. Still true.

I've done well over time but made lots of mistakes, too. Learn from your mistakes. My Dec. 31, 1984 column, "Big Bloopers of 1984," was a sort of mea culpa, along with lessons learned. The editor liked the notion well enough that a few years later he began requiring all columnists to issue annual retrospectives.

A constant in my approach to investing: You should think politically but unconventionally. Last month I was arguing why Obama will be good for stocks.

Think about size. There are times for big stocks, others when small ones are better buys, and times, like now, when size doesn't much matter.

In the didn't-say-then category: Invest globally. The column started out with a domestic focus. That doesn't work in a more globalized economy. Including foreign holdings gives you more opportunities and better diversification.

There are times to go to cash, but they are rare. This column has recommended pulling back in three bear markets, beginning first in June 1987, then beginning in September 1989 and then in February 2001. Good calls, but then I was dead wrong with a bullish stance in 2008. Usually getting out is the bigger risk.

In the early days I promoted the idea of spending time in libraries to gain facts that other investors didn't have. Not many people did that kind of research, so it worked. We have a reverse problem now: too much information that's too accessible and not too reliable. There's a lot of mischief and manipulation on the Internet, masquerading as fact or as casual commentary. Beware.

Every month for 25 years (except when I was bearish) I've brought you fresh stocks. Here's another batch.

Yanzhou Coal Mining (12, YZC) is the only Chinese coal stock you can buy. The company extracts 35 million tons annually. Coal is to China as oil is to America, the motivating force of the economy. Superbly managed and rapidly growing, Yanzhou will benefit from rising prices as the global economy recovers. It sells at eight times my estimate of 2009 earnings, five times cash flow (in the sense of net income plus depreciation) and 1.8 times annual sales.

Suntech Power Holdings ( STP - news - people ) (17, STP), also Chinese, is the largest maker of solar cells using silicon wafers. Its products are 10% more efficient than those of competitors. It sells at 14 times my estimate of 2009 earnings and 2.5 times book value.

Brazil's Votorantim Pulp & Paper (11, VCP) is down 63% from its 2008 peak. It's the leader in paper made from eucalyptus pulp, with big exports to emerging markets. It sells at eight times my estimate of 2009 earnings, less than five times cash flow, one times book value and 1.6 times sales.

India's Infosys Technologies ( INFY - news - people ) (35, INFY) delivers data processing services like software development, systems integration, product engineering and testing. Even in this weak economy it is growing, increasing both the number of customers and revenue per customer. It costs 16 times a reasonable forecast of 2009 earnings and yields 1.2%.

Cruise lines suffer mightily in a recession, since vacations are a deferrable purchase, but come out of it roaring. One I like is the Miami, Fla. firm Royal Caribbean Cruises ( RCL - news - people ) (13, RCL). It sells at ten times depressed 2009 earnings, 40% of book value, 40% of annual revenue and three times likely cash flow for this year.

Precision Cast Parts (81, PCP) in Portland, Ore. makes tricky metal castings for aerospace, automotive and power generation markets. I told you to buy quality cheaply; this firm fits the bill. Over the past ten years it has been expanding revenues at a 12.3% annual pace. It sells at 11 times 2009 earnings but in a few years will see a somewhat higher multiple and much higher earnings.

Money manager Ken Fisher's latest book is The Ten Roads to Riches (John Wiley & Sons, 2008). Visit his homepage at www.forbes.com/fisher.

Graham & Buffet Inspired Discounted, Fundamental, Seasonal Analysis

by

Glen Bradford and his Mentor Doug Hall

Mission Statement:

Beat the market by buying undervalued, fundamentally strong comanies with growth potential, minimizing downside risk and maximizing upside gain taking into account the market trends, as well as everything that could impact the stock price utilizing intuition.

Addendum: To do whatever it takes to maximize expected returns.

Glen’s Simple Truths:

Buffet determines the value of a company by projecting its future cash flows and discounting them back to the present with the rate of long-term U.S. government bonds. We do too.

Focus your portfolio on a few good companies. Concentrating on good stocks is safer than diversifying across mediocre ones. That said, just as a business puts more money into its most successful ventures, you should invest more money in your stocks that are expected to perform well.

Sales are the key to everything. Profits must follow sales.

Stop losses and add more money to winners, pyramiding their gains. Ideally, sell losers and keep winners.

Avoid debt and companies with debt.

A company's value is not defined by what it has done, but what it is able to do. The key to getting bargains is looking ahead, not looking back.

People hate risk when it threatens gains, but they love risk when it could prevent losses. We're odd creatures, so intent on averting loss that we're willing to risk losing even more to do so.

Stocks drop twice as fast as they rise. Loss is painful, on average twice as painful as gain is pleasurable in matters financial.

The basis, or the individual cost of the stock should not affect decision making.

You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets.

Recommended Readings:
Joel Greenblatt The Little Book that Beats the Market
Mary Buffett Buffetology
Benjamin Graham The Intelligent Investor
Security Analysis Co.A. David Dodd
Philip A. Fisher Common Stocks and Uncommon Profits
Peter Lynch Beating the Street, One Up on Wall Street
Franses, Philip Hans Time series models for business and economic forecasting
Introduction to Business Statistics

Technical Strategy:

Step 1: Have some idea of where the economy that you are investing in is headed.

Read the news occasionally and watch some television just to gain an understanding of what is going on.

Step 2: Find potential companies

Scour magazines and internet articles for lists of top companies. Sort out the ones with decreasing net income trends or negative net incomes without justification. There will be times where there are 1-time exceptions.

Step 3: Keep the predictable ones (only linear and semi-log)

Chart their fundamentals and keep the ones that are predictable in nature. Note potential seasonality. Predictability should be charted across company revenues.

Step 4: Read the news and bios and investor opinions on each of the companies.

Give a grade for the probability that the stock will outperform the market and/or actually meet your forecast. Look for weaknesses in cash flows and high debt.

Step 5: Put your money where your mouth is.

Buy the best stocks that you’ve selected and read the news on that particular stock in order to avoid owning a stock that has taken a turn for the south too long. Follow industry news and economist forecasts. Understand the business cycle and how interest rates affect business valuations.

In Greatness I Trust:

Joel Greenblatt founded and managed Gotham Capital with average annualized returns of 40% for over twenty years.

Risk is permanent loss of invested capital, and not any measurement of volatility developed by statisticians or academicians.

All investing is value investing and to make a distinction between value and growth is meaningless.

Looking at the numbers best way to learn about management. What have they done with the cash? What are the incentives? Is the salary too high? Is there heavy insider selling? What is their track record?

Special situations are just value investing with a catalyst.

Independent thinking, in-depth research, and the ability to persevere through near-term underperformance, are three keys to being a successful value investor.

Peter Lynch managed the Fidelity Magellan Fund from 1977 to 1990, during which time Lynch reportedly beat the S&P 500 Index benchmark in 11 of those 13 years, achieving an annual average return of 29%.

The person that turns over the most rocks wins the game. And that's always been my philosophy.

I think you have to learn that there's a company behind every stock, and that there's only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies.

I've found that when the market's going down and you buy funds wisely, at some point in the future you will be happy. You won't get there by reading 'Now is the time to buy.'

Jim Cramer paid his dues in the '80s as a Goldman, Sachs & Co. (GS) broker, followed by 14 years at Cramer Berkowitz, his $450 million hedge fund, where he earned an average return of 24% a year after fees.

Speculation: Making a calculated bet with a limited amount of capital that turns into a monster home run. I believe speculation is not only healthy and terrific, but is vital to true diversification.

Warren Buffett achieved an above-average 20% compounding annual return for the last 30 years placing Buffet as arguably the most successful investor ever

“A public-opinion poll is no substitute for thought.”

Risk comes from not knowing what you're doing.

Al Frank launched the Prudent Speculator in 1977, eight years after he began investing. Hulbert Financial Digest named it the best-performing stock advisory newsletter for the last 20 years with a 19.5% annual return through the end of February this year.

All of the forces of the market aren’t conspiring against you. You are conspiring against you.

Martin Zweig wrote the top market advisory for the 15 year period between 1980 and 1995*. Zweig Forecast delivered a 16 percent per annum compounding return, the highest risk-adjusted return of any market advisory service during that time.

When it comes to stock-picking, Martin Zweig screens many fundamental numbers. He gives greatest weight to two parameters - the earnings trend and the pe ratio (price/earnings ratio).

He shares Warren Buffett's wariness of highly indebted companies

Benjamin Graham started his career on Wall Street in 1914 and was a millionaire by the age of 35. Benjamin Graham was a seminal figure on Wall Street and is widely acknowledged to be the father of modern security analysis.

"I think we can do it successfully with a few techniques and simple principles. The main point is to have the right general principles and the character to stick to them.”

Joseph Piotroski compiled a screen; an investment strategy that buys expected winners and shorts expected losers generates a 23 percent annual return between 1976 and 1996.

Score one point if a stock passes each test and zero if it doesn't. The maximum score is 9.

1. Net Income: Bottom line. Score 1 if last year net income is positive.
2. Operating Cash Flow: A better earnings gauge. Score 1 if last year cash flow is positive.
3. Return On Assets: Measures Profitability. Score 1 if last year ROA exceeds prior-year ROA.
4. Quality of Earnings: Warns of Accounting Tricks. Score 1 if last year operating cash flow exceeds net income.
5. Long-Term Debt vs. Assets: Is Debt decreasing? Score 1 if the ratio of long-term debt to assets is down from the year-ago value. (If LTD is zero but assets are increasing, score 1 anyway.)
6. Current Ratio: Measures increasing working capital. Score 1 if CR has increased from the prior year.
7. Shares Outstanding: A Measure of potential dilution. Score 1 if the number of shares outstanding is no greater than the year-ago figure.
8. Gross Margin: A measure of improving competitive position. Score 1 if full-year GM exceeds the prior-year GM.
9. Asset Turnover: Measures productivity. Score 1 if the percentage increase in sales exceeds the percentage increase in total assets.

William J. Ruane launched Sequoia fund; in the 38 years in which Sequoia has been operational, the fund has averaged a return of approximately 15% versus about 13% for the S&P 500.

People think they have to be doing something when the prudent thing might be to not do anything.

Jesse Livermore shorted the markets and was worth $3 million and $100 million after the 1907 and 1929 market crashes, respectively.

Do not trade every day of every year. Trade only when the market is clearly bullish or bearish. Trade in the direction of the general market. If it's rising you should be long, if it's falling you should be short.

Continue with trades that show you a profit, end trades that show a loss.

Markets are never wrong - opinions often are.

Pertinent Information for the Crash of 2008 – December 23, 2008:

Goldman Sachs

The S&P 500 tends to bottom:

One quarter before the GDP bottoms
3 months before the ISM manufacturing survey bottoms
7 months before the peak unemployment rate
4 months before the largest decline in non-farm payrolls and
4 months before the bottom in consumer confidence surveys

Addendum:

My dad ran a computing business for 15 years (retail). My grandfather annualized 20% for 25 years turning farm land into a golf course (real estate). My great grandfather ran 3 businesses for 20 years (fertilizer, trucking, feed). I don’t see why I shouldn’t be able to harness these genes and make something great happen.

ventureblog.com: Advice for Angel Investors

loved his post:

Fantastic Advice for Angel Investors

By David Hornik on March 6, 2009 3:08 AM | Permalink | Comments (0)

I had the good fortune of participating in the first (hopefully of many) AngelConf today. AngleConf was the brainchild of Paul Graham of YCombinator fame (although, you never know, it may well have been the brainchild of Jessica Livingston, so my apologies if that's the case Jessica). Not only is Paul a prolific angel investor, but he is also a thought leader and a mentor by nature. His AngelConf was an attempt to share the collective wisdom of the angel investor community with would-be angel investors.

The speakers at AngelConf were a veritable who's who of the angel world. Among those speaking were Ron Conway (Angel Investors, Baseline Ventures), Dave McClure (500Hats, Founders Fund), Paul Buchheit (Google, FriendFeed), Andrea Zurek (Google, XG Ventures), Naval Ravikant (The Hit Forge), Michael Dearing (Ebay, Stanford Design School), Mike Maples (Maples Investments), Ariel Poler (Textmarks, numerous startups), Aydin Senkut (Google, Felicis Ventures), Jeff Clavier (SoftechVC), and Jim Young (HotOrNot). Like YCombinator's rapid-fire demo days in which companies are given only a few minutes to present, each angel investor was given seven minutes to share his or her wisdom with the crowd. And this impressive group did not disappoint.

AngelConf was part training session, part confessional, part group therapy. Virtually all the speakers were in agreement that angel investing is not for the faint of heart. As one investor after the next stated, you have to be prepared to lose all your money. If losing your money is going to keep you up at night, perhaps angel investing isn't the thing for you to do. That said, there were plenty in the speakers lineup who have every intention of making money. Folks like Jeff Clavier and Mike Maples are investing other people's money. For them, the goal is assuredly to make money. For many of the others it was a fantastic mix of geeky pleasure at building great things, the need to stay engaged in the tech world, a desire to give back to the entrepreneurial community, etc. While for most of the speakers angel investing is essentially a full time job (even if they have another full time job), everyone in the room seemed to be there for the love of the game.

What was some of the most interesting advice imparted? Here are a few thoughts from the speakers:

* It's a small community -- if you screw one entrepreneur, you'll be out of the angel business because entrepreneurs talk (Conway)

* Angel investing is about learning on the job, which means that you can plan on screwing up your first 10 deals at least (McClure)

* If you assume that the money is gone once you've invested it -- that it is like a lottery ticket -- then you will have a better time angel investing (Buchheit)

* Work with other angel investors so that you can get the advantage of their expertise (Zurich)

* There is no rational way to arrive at valuation, so don't be overly concerned about getting it right (Graham)

* Don't worry if the idea seems crazy -- if it didn't seem crazy, it would be too late to invest as an angel (Graham)

* The lifeblood of angel investors is deal flow -- you need huge deal flow to find enough stuff that is worth investing in (Ravikant)

* The best deals come from other angels (Ravikant)

* Don't be afraid to throw a little dynamite into the status quo and see what comes out of it -- often times interesting stuff emerges (and sometimes nothing does) (Dearing)

* The Rule of 12 -- you need to invest in 12 companies to have statistical diversity -- invest in fewer than 12 deals and you run the risk of them all failing (Maples)

* Like in the movie "Oceans 11," you want to pull together the best team of angel specialists there are out there -- it increases the likelihood that the company will succeed (Maples)

* Help bring your entrepreneurs together so that they can learn from one another (Poler)

* By being a connector, you will see the most interesting stuff and work with the most interesting people (Senkut)

* Angel investing is all about the syndicate -- you can lead if you want to but it can be lonely until others join in the syndicate (Clavier)

* Angel investors need to distinguish themselves from others with money -- what do you bring to the table? Contacts. Experience. Advice. (Young)

* Only invest in stuff you actually know something about -- otherwise you're just buying a lottery ticket (Young)

All in all, a pretty jam packed few hours. The energy in the room was great. It felt very much like being in a room full of entrepreneurs. Because, in the end, like entrepreneurs, angel investors are company builders. They love technology. They love company creation. And, like me, they thrive on the fun and excitement of the startup world.

I hope that Paul will have another AngelConf some time in the future. It was a fantastic way to spend the afternoon.

Categories

Conferences , Entrepreneurial Success , VCs Around The Web

Tags

• andrea zurek
• angel investors
• angelconf
• ariel poler
• aydin senkut
• dave mcclure
• jeff clavier
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• mike arrington
• mike maples
• naval ravikant
• paul buchheit
• ron conway
• ycombinator

The Black Swan: The Impact of the Highly Improbable

by Nassim Nicholas Taleb

This is a great narrative about the narrative fallacy and other conventions of thought prone to Gaussian distribution representation of a non-linear world. Taleb takes the book debunking why we risk and future theory do not conform to modern day predictions, as if any prediction of the future would hold sway in chaos and randomness. Because nature recurs in geometric patterns of nonlinearity the term factal describes this non-gaussian pattern. Just as a Black Swan catches an observer off guard who previously had only seen white swans, one cannot preclude the future will be full of the pasts observations.

One ought to be aggressive in exposing oneself to the positive upside of these huge nonlinear payoffs of a positive black swan (usually by the fraction of ones wealth one can afford to lose, as these are rare birds, or the fraction of likely success or appearance of the Black Swan). The lottery does not qualify because it is actually a very calculated and limited reward with high odds stacked against the player compared to the reward.

Negative Black Swans are outside gaussian prediction (see for example the casino going bankrupt because of a poorly reporting accountant or employee, or lawsuit due to construction, etc. e.g. the irony of prediction and control is subject to Black Swans). Risk calculations and economists have significant blind spots as the world becomes more complexingly interrelated exposing us to unforeseen consequences and larger Black Swans.

It was a good book. Experts are not experts who deal with a moving future (financial investors, economists, politicians, etc.)

You Too can become a Successful Income Investor

This book by Stein & Demuth is a great read on conservative investing for those near retirement.

I totally enjoyed its concise description to make market principles easier to understand.Here's a few pearls for my future memory:70% of stock gains are from the dividends!

Buy when there is blood in the streets!
As Buffett has said, "Be fearful when others are greedy, and greedy when others are fearful."Be on the hunt for above average dividends!

The Yield = Payout / Share PriceRisk:If you buy a bond (an I-Owe-You, or IOU) the rate paid to a more current bond buyer could fall, making your bond more valuable.

Interest Rate Risk: If you buy a bond and the rates of payout RISE, yours is worth less (if you had to sell it). So interest rates and bond returns USUALLY are on a teeter totter.

Bond trading then is guessing that rates will fall, and your bond will be worth More.Fidelity has a listing of a bonds last sale price.

Credit Risk: the risk the issuer of the bond could default, highest in junk bonds and some low rated corporate bonds. The best ground is a portfolio or a mutual fund of individual bonds.

Sector Risk: The risk a portfolio of bonds all in the same sector could suffer a demise together.

Marketability Risk/Liquidity Risk: the risk of resale, which is least in Treasury bonds. Its the difference between owning 1000 house you would have to resell, or owning part of a fund which owns houses which is more easily traded.

Callable Bonds: Meaning the issuer of the bond can recall the bond and "refinance" if rates drop, right when you'd like to have the interest you invested for.

Reinvestment risk: Means bond returns rise and your money is tied up, the opportunity costs of other investments during your bond maturity period.Event Risk: the corporation goes under.

Lehman Brothers Aggregate Bond Index: the gold standard to beat by other bond issuers, like the S&P 500 index for Stocks. This was 7.1% for the 21st Century. Use AGG or VBMFX.

Best Ways to Avoid Risks above: DIVERSIFICATION, LADDERS, TREASURY bonds

Bond Ladders:You can spread your bond rates by creating a ladder over years so that a five year ladder would mature 20% of your investment every five years. The same can be done for annuities but takes more shopping and effort on part of the buyer.

TIPS:Treasury Inflation Protected Securities:Deflation is hardest on corporate bonds to repay, because companies have a harder time paying you back. Deflation makes Treasury Bonds the investment of Choice, the government can always print more money to pay you back.

Short term interest rates correspond to Fed. When long-term loan rates are cheaper than short term bonds beware of a pending recession!

INVESTMENT OPTIONSUltra Short Bonds: 90-180 days, will give you 1% above a money market fund return usually.

Money Market Funds: try bankrate.com or ibcdata.com. Returns were 1-2.5% in 2004.

Corporate Money Market Funds: 1.5-2.5% returns but most not FDIC insured. Ford, GE, & Caterpillar are four large corporate finance divisions that do this. "GMAC bank" is the only FDIC insured fund here.

Short Term Bonds: 2 years, 2-3% return, 5 year ladders you can set up yourself at treasurydirect.gov and no charge or expense.

TIPS: These have no Purchasing Power Risk! Immune from Inflation! But their return is reduced by the expected inflation the Fed decides it anticepates at the outset, and so overall returns are reduced by this. Best during Inflation when stocks tank, because the TIPS still go up. Also good in deflation because the rate of return is locked in. These are best in tax-deferred IRA's or you'll pay tax on the phantom income the Fed calculates from inflation! Some Good TIPS Bond Funds are = VSGBX, VIPSX, or try TIP, ACITX, FINPX, TCICX.

Corporate TIPS can be cash flow friendly as they payout every 2 weeks, adjust by their CPI every payday, and have shorter maturity at 5,7,or 10 years, shorter than government TIPS (pay every 6 months, adjust for inflation at the end).I-Bonds: these bonds are not taxed until redemption, but they are not practical so do not use them.

Municipal bonds (Munis) High Grade buy for taxable accounts (federal and maybe county or state tax free)3-6% return, risk that congress might repeal their tax exemption.National munis diversify away local risks. (FSTFX, VMLTX, FLJMX, USATX, VWITX)

Mutual Funds Closed Funds: Shares issued only once, trade anytime market is open, same manager may have many similar funds, trades high initially, then discounted usually a few months later. Do not compound dividends.ETF's: low management fees, trade very close to underlying securities value, closed funds but hybridized. Morningstar.com is useful to find open end funds information and stats easily. Closed end funds require digging to find their stats, yields, leverage, P:E, but try on ETFconnect.com & cefa.com. Most are closed-end Muni bonds.Higher Yielding Bonds: have more Tabasco (can give spicy returns or can burn)

Foreign Bonds: Sovereign Risk means their government can fail to repay you.Currency Risk: Means their currency can fall relative to the dollar, and the worth is less.

Currency Risk is the Joker in the Deck in Foreign Bonds Trading. If you think the dollar is going to get weaker then buy more foreign bonds now, but the dollar is already weak relative to the Euro, but ?

Chinese currency may get stronger in the future?

Hedged Foreign Bonds means their returns are lower but equivalent to US dollar payout, and US Bonds trade almost the same anyway. Unhedged foreign bonds can have much higher returns.

UK, Can, Aus, New Z, Japan are some friendlier foreign bonds. If the dollar slides, these bonds act like a play on the dollar b/c their value is stable relative to that. Consider RPIBX, CIFIX, FCO, yields are 3-6% and 1-2% expense. FCO is a large global income fund, uses alot of leverage to raise the yield.

Carry Trade: means to borrow at short maturity, repay at long maturity, and make money on the difference in rates. This will magnify gains or losses much quicker either way!

For aggressive fixed income investing, the monthly price volatility should be acceptable for the increased returns as long as higher yields remain constant. Time diversification occurs with largely leveraged funds because in high yield environments many sources of high yields abound and in low yield environments the higher rates leveraged can improve quality of life and pays you more when you need it more.

Closed-end municipal bond funds can go on margin to buy tax free securities but you legally cannot borrow money to buy tax free bonds. Compare NUV vs NMD for leveraged vs unleveraged example from 1990-2003.Emerging Market Bonds: Uruguay, Nigeria, Bulgaria.10-25% yields with extreme volatility, repayment risk.

Open: FNMIX, PREMXClosed: GHI, MSD, EDF, EFL, LBF, TEI 7-10%

Leveraged Municipal Bond Funds:Too much risk for the long-term yield return.
Bond returns rise when interest rates fall. Now the rates are so low and bond returns are low, so there is not much room for bond returns to be affected from a rate reduction.

Overall, avoid Bonds in a low interest rate environment.

Junk bonds are bad and municipal junk bonds are toxic. :)

Stocks for IncomeStock yields since 1918 are 6%, but now are 2% for the S&P 500 (in 2004).

C-corp dividends are taxed twice, so companies buy back their stock and hold dividends in order to increase the "relative" payout to shareholders.

Taxes on dividends decreased under Bush from 39% as income to 15% as a capital gains.
Now that dividends are taxed at the same rate as capital gains, companies may increae their dividends.

Some good open end dividend stocks: VWINX (4%), BERIX (5%), HIEFX (2%)

Closed end stocks did better here: DVY (3%), BDV (6%), BDT (6%).BDV buys the 60-80 highest dividends

BDT buys the small and mid cap dividends on the BDV list.Stein-Demuth Strategy: put 20% of your portfolio into dividend bearing stocks, and half of that in DVY

Pick the remaining half as different sector dividend stocks, perhaps a dozen.

Rule Makers, Rule Breakers

The Motley Fool's
Rule Breakers, Rule Makers
by David and Tom Gardner,
1999 Simon & Schuster

A great read by the Fool.com founders and sellers of investment advice! This is their 3rd investment book and one meant to differentiate rare investment opportunities from their by-the-numbers approach in their other books.

RULE BREAKERS

David begins the first half the book explaining how to find Prince Hal (who became King Henry V in Shakespeare's Henry the Vth). Prince Hal was a drinking and chumming renegade who broke the rules but later used his daring to become King and then made the rules, much like today's struggle of smaller corporations trying to unseat corporate behemoths who got there by reinventing the business game. It's a perpetual struggle in business evolution to produce efficiency and productivity for all of us. 'Got to love capitalism.

Rule Breakers are unusual birds, but can be 100-baggers in your portfolio if you find them. Buying and keeping one in your lifetime will be enough to beautify your portfolio through retirement!

1) They are top dog and 1st mover in a new and important emerging industry
2) They have sustainable advantages through business momentum, patents, visionaries, or inept competitors
3) past price appreciation equivalent to relative strength performance of 90 or greater
4) smart management and good backing (see Doerr in Silicon valley)
5) branding done well (strong consumer attraction, profits off them, habituates them, protect its business, positive tone, accepts all, great character and internal attractiveness/authenticity).
6) writers will at least once claim the stock is grossly overvalued in media (trade higher than normal Price:Earnings ratios from the get go)

More on Branding:
--Authenticity is Key
--Remind the public your positivity, openness, habituates them to your use automatically--Leadership counts now, improving internal management validates external claims--mindshare is the belief or opinion of using you that you're establishing
--being in the publics eye is a long-term affair, you can waste and outspend now and crash if business model is not productive now (budget carefully and efficiently for marketing)--speed = convenience = repetitive use
--the winner makes someone feel better, have a positive attitude, outlook--habituating means frequent use, every day (Coke = 'always')
--Pavlovs law: habituating means addressing your logo/theme/name with positive images they want to associate themselves with as well (Bud = cool river, mountains, party, people, attractive)
--tolerance means everyone is welcome, non-exclusive is key, openness (Coke = 'buy the world a coke')

My brand: quality, authenticity, technology care, efficient and smart, safe and reliable
--tie to economic engine (cataract experts, enhance eye ctr, or enhance optical ctr, etc)
--'Your world, your Vision."
"See your World Today".
"Clearly Your World".
"Eyecare & Surgery".
"Helping You see Your world". Show lots of people with happy good vision (old, middle, Yups).
"The biggest risk is not taking enough risk."

RULE MAKERS
A developing Rule Maker:
1. systematically absorb all the competition
2. patience: they want the lead and authority down the stretch, put up with short term flames
3. consistent improvement in finance and outlook, >1 $billion in sales, improving cash, gross margins, net margins and less debt
4. an absolute commitment to convenience
5. probably being sued by smaller competition

Best Stocks
1. repeat purchase products frequently (razors, Coke, food, jeans)
2. high gross margin (profit / cost of good > 60% or better)
3. net margin (profit / distribution and sales costs) 20% or better
4. sales growth 10% yearly or better
5. Cash: debt Ratio > 1.5X
6. Foolish Cash Flow (lower is better) < .6, no higher than 1, and 1.5 is very bad = (assets - cash) / Liabilities {debts owed out accumulate with more market power}
7. 2 points if you use the product, know it well,

0-2 points for any above, > 14 points is a winner.also: no new shares outstanding (<1% yearly is good)also: future possibilities, ~ is market cap likely to double, triple in outlook, economy and your opinion of importance of emerging market? can this group stay on top?
See Goog, KO, PEP, KFT, K, MRK, XOM.


In review, By category, Rule Makers:

A. Rule-Making Message (0-1 per item)
1. Familiarity
2. Openness
3. Optimism
4. Legitimacy
5. Inevitability
6. Solitariness
7. Humor

B. Rule Making Location (0-2 points per item)
1. Mass-market repeated purchasing
2. Gross margins
3. Net Margins
4. Sales growth
5. Cash-to-debt ratio
6. Foolish Flow Ratio
7. Your familiarity and interest (or what you see in public's use nearby)

C. Rule-Making Direction (0-3 points per item)
1. Rising gross margins2. Rising net margins
3. Share buybacks
4. Cash outgrowing debt
5. Lowering Foolish Flow Ratio
6. Expanding possibilities

D. Rule-Making Authority (0-4 points per item)
1. Gross-margin lead
2. Net margin lead
3. Cash-to-debt lead
4. Foolish Flow Ratio Superiority
5. Name-brand through convenience

E. Your Pure Enjoyment (0-1 point)
1. Yes or noTotal Score Analysis

Use Rule-Breaker analysis for under 1 Billion benchmark in sales, and giant companies with this Rule-Maker analysis.

Top Tier 50-60 points: keep em for a decade.
2nd Tier 40-49 points: solid companies, need to tell which direction they will be heading by market competition, emergence of industry, can be some of your greatest investments if headed toward the throne.
3rd Tier: debt, low margins, little cash, doomed for mediocrity or worse, ignore them.
4rth Tier: sell.

This individual investor stock approach with awareness to Rule-Breaker-Tweener-RuleMaker status will beat any mutual fund! If the mutual funds even came close they would absorb you in fees. For $200 you can start up 10 to 20 stocks and let them go for as many years as they appear to be growing.

"Steve Forbes's father once told him that you make more money selling advice than you do taking it."

Fool.com Entry on Investing Advice

by Goldenpiggy

I've been investing since 13 thanks to my mom. It has taken 25 years and countless mistakes to hammer some very basic things (actually common sense) into my thick skull:

1) If it's too good to be true, it is. Case in point: DRYS and NT (NTRLQ.PK now). DON'T MESS WITH P.O.S companies. You have 10,000 better ones to choose from. REAL companies.

2) Never buy into a rally. I don't know how many times I've been burned this way. Be patient and wait for the right time. Buy low, sell high. Not the other way around.

3) Valuation is everything. I was one of the dot.com bust casualties. Lost everything. It has taken 8 years to recover. Yeap, I was out of the market for 8 years repaying debt and missed the biggest bull market of all time. All because I ignored "P/E ratio"

4) Diversify! You have to diversify your portfolio between different sectors. Yeah you can make a killing by betting the farm on one horse, but chances are more often that that horse is going to kill your first.

5) Study the company, industry, and financial statements as if your final exam. I can't stress this enough. Reading blogs and newsgroup postings is fine, but you have to do your own due diligence first. Facts don't lie (well, sometimes I wonder...) Other people's opinions are just that -- opinions.

6) Greed will kill you. This is so difficult for investors. For your short term holdings, if you've met your goals, take the profit and run.

7) Take a loss when you have to. Capital preservation is the key. If you've made a bad buy, you need an exit. Don't let emotion get in the way. It is only money and you can make back the loss. But if you lose all your principle, game over.

8) Last but not least: Your family comes first. You must alway think what would happen if you lost it all. Where will your family live? How are you going to feed the kids? With that in mind, you will realize that (1) you can only invest what you can afford to lose; (2) you can't do crazy things like use credit card cash advances or margin the account to the max; (3) you cannot make risky investment decisions for the hope of a jackpot. Fine, if you're on your own and you lose everything, well it's only you. But if you have a family depending on you, you just can't do that sort of thing because the odds are against you.

Good luck to all and God bless.

Buffettology Workbook

BUFFETOLOGY Workbook Steps

1) Find a consumer monopoly. Don't worry how long it takes to find the perfect pitch, just be patient.
2) Understand the business product - respecting product obsolescence is a huge factor in avoiding losing your money.
3) 20 year test: if people are unlikely to be using this product in 20 years then move on.
4) Conglomerate test: is this a monopoly or collection of weaker commodities? Identify which direction management is heading in buying more consumer monopolies or fixated on the commodity side of things?
5) EPS strong or weak? erratic only once or often?
calculate past 10 years EPS growth rate - TI BA-35 Solar Calculator, Present Value PV = year 1 earnings; year 10 earnings = FV Future Value, 10 for years, hit the CPT compute key
then the %i key (or interest key) then annual compounding growth rate per share will appear

6) are managers earning a high return on shareholders equity?
15% minimal or walk away. If its there, get out your Value Line and gather together the return on shareholders equity figures for the last 10 years and calculate the average.

7). Is the company conservatively financed? the earning power of a business is the only real judge of a company's ability to retire its debt. Calculate how many years of the past 10 years nets earnings would be required to pay off this years long term debt? calculate Years of earnings to pay off debt. (1 is okay, 2 is marginal, 3 not good)

8). Is the company buying back its own shares? (increases ownership tax free) Value Line is one of few companies that offers this information. Take the number of shares 10 years ago and subtract todays number of shares to see if there are less (a positive number are shares bought back, a negative number are shares added, consider stock splits as well).

9). Is the company free to rise prices with inflation? Consumer monopolies can raise their prices, commodity businesses cannot compete with rising prices. A good barometer is 4% price increase per year is ballpark for a consumer monopoly business. Use the TI BA-35 calculator, PV = price 20 years ago, current price = FV, 20 = years, hit CPT and %i keys and annual compounding in price growth is calculated.

PRICE ANALYSIS

10.) Is the companys stock price suffering from market panic, business recession, or individual calamity that is curable? If you can't buy during these events then chances are you are paying full price for the stock. Getting rich means learning to exploit bad news situations and the markets short sightedness.

11.) What is the initial rate of the investment and its expected annual rate of growth? How does it compare to rate of return on US Treasury bonds? Divide EPS by share price, this is your initial return. Couple that with EPS growth rate you calculated and you get the initial rate of return and expected annual growth rate. (e.g. Coke's initial rate of return was 6.8% in 1988 but grew as EPS grew at 17% annually). If Treasuries are better, stock is overpriced.
Initial Rate of return _______
Growth Rate ________
Rate of Return on US treasury bonds _______

12.) The company's stock as an equity/bond calculation:
Take the company's annual per share return on shareholders equity value for last 10 years (number 6.). __________
Subtract the average annual percentage paid out as a dividend. ________
Use the resulting difference as the growth rate that the company's shareholders equity will grow at ______

Use the company's per share shareholders equity value in this year ________ as the PV,
Use the calculated rate of growth for shareholders equity as the rate of interest (&i).
Punch in 10 for the number of years out you want to make your projection (N), hit CPT key and FV key
This will calculate the future per share value of the shareholders equity __________

To calculate future selling price of the company's stock, take the per share value of shareholder's equity ________
multiply it by the average return on shareholders equity ________
This will give you the company's projected per share earnings: ________.
Then multiply the projected future earnings ______ by the company's average annual price to earnings ratio (P:E) for the last 10 years ________
This will give you the company's per share projected future trading price _______

Using the current market price as your PV ______ and the future trading price as FV ________ and the number of years between the two (N key),
then hit the CPT key and %i key to calculate the projected annual compounding rate of return the investment will produce.


Average Annual growth rate: ____
Average % paid out as dividend: _______
Company's shareholders equity per share in current year: _______
Company's average annual P:E ratio for 10 years: _______
Projected growth rate of shareholders equity over next 10 years: ______
Projected future trading price of company's stock: ______
Current trading price of company's stock: ______


13. Projecting an annual compounding rate of return (EPS growth rate over past 10 yeras) using the historical annual per share earnings growth figure:
To calculate ACRoR on investment from 2009 to 2019, first calculate the annual compounding per share growth rate form 1999 to 2009:
Per share earnings in 1999 ______
Per share earnings in 2009 ______
Use the 1999 per share earnings as the PV, 2009 per share earnings as the FV, and 10 for N years. hit CPT and %i to compute EPS growth rate.

Now use the company's per share earnigns for 2009 for PV, the EPS growth rate as the interest rate (%i) and 10 for years.
Hit CPT and theen FV key which will project the EPS for the company in 2019.

Take the projected EPS for 2019 and multiply it by the average annual P:E ratio for the time period 1999-2009
This will give you the projected trading price for the company's stock in 2010.

Do You Make the Buy?

To buy or not to buy is always the question. If its a consumer monopoly you can buy it at a price that makes business sense, then you should jump on to it. If it's too high, wait for a market correction, industry recession, or business calamity. If its not a consumer monopoly then put it out of your mind (unlike Coke, Pepsi, Kraft, Kellogg's, See's Candy, Wells Fargo Bank, railroads, etc.)

The Only Investment Guide You'll Ever Need

The Only Investment Guide You’ll Ever Need

By Andrew Tobias

A nice overview of personal financial independence and market and money savvy for the interested and motivated to be free of their financial handicaps and mistakes.

I found a few nice nuggets of information for myself:

-- trust no one, everybody is selling you something with their cut influencing your choices being offered to you. Its true even if you don’t want to believe it.

--invest, don’t speculate. Undervalued companies with steady growth are the best bet. You may have a weakness for beat down companies that need to work out their problems, and you quintuple your value, but the risk here is great and you lose a lot, so be ready to lose.

--taxable holdings hold your risky bets (the losses here are written off up to $3000 per year; and the gains if held > 1 year are at long-term capital gains tax rates, better than income tax rates).

--your steady money should be in tax-sheltered accounts (401K, Roth IRA, deductible Traditional IRA) and should hold steady income stocks. Dividend and interest paying securities here will grow slowly and nicely over time. They will be taxed as ordinary income when withdrawn.

--Tobias advice if you inherit a 5 million dollars

go out to a nice dinner

put 1 years normal living expenses in a money market or bank fund

put equal sums into U.S. Treasury securities maturing in 1,2,3, and 4 years

put the remaining bulk into stock index funds, split domestic and foreign

buy a country place or bigger house if you want one, but not so big that the cost of carrying it will in any way strain you

if inclined you can find value, small rental property, tax shelter, etc.

do not buy a boat

put at most 3% into silver—bags of silver dimes (easier to buy a loaf of bread with a silver dime in a calamity than a $6000 gold coin) see investmentrarities.com

do not tap into the investment principal but do enjoy the extra income it throws off.

If that is too hard split your funds into 3^rd with 1/3 diversified international fund, 1/3 diversified U.S. stock fund, and 1/3 money market or CD funds; rebalance the growth every year back to 33% each.