Saturday, May 18, 2013

Where to Find Stocks

Conventional wisdom says you can find stock ideas in stock screeners, on TV and the internet, from friends-coworkers, Wall Street analysts-economists-strategists and newsletters-magazines. You can also rely on hot tips, self appointed experts, well known investors and a multitude of famous and not so famous soothsayers.  In other words, from so called experts and typical sources. The benefit of these sources is that an individual may be able to extend their research reach. A challenge with this approach is that an idea sourced this way may be too late to be of any significant value due to market efficiency and rapid modern day information flow. It may also be hard to implement due to the backgound of the investor and source of the idea. Investors will also need to make stock picking and investment ideas of others their own in order to increase their level of conviction in a way that increases their overall chance of success. In this brief essay I will outline an alternative approach that I have found to be both practical and profitable.

In my experience some if not many of my best and most profitable stock pick ideas have been sourced from my bathroom, kitchen, garage and retail store shelves, doctors offices, car, restaurants, casinos, construction sites, roadways, offices, movie theaters, grocery stores and gas stations, etc. In short, based on my own experience and with my own mouth, ears, nose and eyes. By doing this I have at times identified trends and patterns long before Wall Street and the so called experts have. I have also found that it is easy to be lazy and lapse into the passive state of looking to others for guidance. However far more often than not I have found that it can be very profitable to implement my own ideas based on my personal experience within my circle of competence. I am specifically talking about both short-term and long-term trends. The key here is to do some homework to relate what you are seeing firsthand at ground level to the set of expectations embedded in the stock price connected in some way to what you are observing. Yes while it does pay to read quarterly and annual reports it also pays to take a shot about figuring out what is yet to be written in future reports by the company and so called experts who write about them.

In “One Up Wall Street,” Peter Lynch provides personal examples of this approach of sourcing ideas based on his and/or his wife’s firsthand knowledge. Lynch tells the story of identifying growth stocks that became multi-year, multi baggers. Before I do the same I must point out that there have been plenty of opportunities I have identified on Main Street that I have missed or not capitalized on in the stock market due to attention lapses and/or outright error.
In 2003 my wife obtained our first Costco membership and dragged me into the local store that had just opened.  Over the next several months/years I witnessed a slow but steady increase in store traffic. At the time I was working in an investment fund focused on reading Wall Street research so I was too busy to recognize the investment opportunity in Costco. After about one year of being a member, I read my first Costco annual report. In typical Costco fashion the report contained a chart that showed the long term trend of business increases for vintage year stores. The historical pattern laid out in the annual report was consistent. As year two rolled around in my local Costco store I observed a pattern of traffic increases that were consistent with trends discussed in the annual report. The year two pattern was followed by the same in years three and four. By then I had personally owned the stock for a couple of years but did not own it professionally as it was unfortunately “outside of our charter.” During the Fall of 2008, I observed a collapse in traffic in approximately 35 local restaurants, retail stores, casinos and other locations (that I had patronized for years) before I was reading about this trend. At the same time, I was also continuing to see strong traffic in my neighborhood Costco store so I held onto the stock. As of May 2013 the rest is history as Costco has been about a 5 bagger and is now somewhat of a darling on Wall Street as I now read sell side buy recommendations after the stock has made a 50% - 100% upward move. The key to understanding Costco was spending time in their stores and observing what went on. Without time spent here I would have not likely ever bought the stock and may not have held onto it.

The pattern that was observable in my local Costco store was the long steady multi-year increase in traffic and member renewals (over time we consistently bumped into more of our neighbors on Saturday’s). Reading the report data confirmed the trend I had observed firsthand in my local store. This served multiple purposes which included aiding my level of conviction especially during times of overall market volatility.The observations also provided a feel for judging future duration and persistency of cash flow as basis for judging increases in future intrinsic value.In Costco’s case the rest is history and I was fortunate to have observed it firsthand for several years before the folks in New York had figured it out and were writing about it with the level of enthusiasm they do today.
There are more multi bagger-multiyear Costco’s out there on main street so I encourage you to push back from your computer screen and go out and find them.

Saturday, April 13, 2013

Peter Lynch on Equity Investing

Below is a discussion investing by Peter Lynch, one of the most successful investors of all time and an inspiration for me from the 1980's.  In 1989 Lynch published one of the best and most famous investment books known as, "One Up Wall Street." I recently re-read my 1989 copy for about the tenth time.  Most if not all that he wrote about in 1989 is applicable today. Folks cannot go wrong reading this book and will likely be better investors for having done so.

Peter Lynch, the retired famous fund manager than ran Fidelity's Magellan Fund. Lynch was one of the best investors of all time. His approach is as relevant today as it was when he published the runaway investment best seller known as "One Up Wall Street" in 1989. Lynch's book dealt with how individuals can improve their performance as investors based on his investing principals. Listed below is the introduction from the book and the opening paragraph from chapter one. Having recently recovered from Boston jet lag, Lynch is on my mind and seems like a good place to start.

The themes and messages in these paragraphs are timeless and are applicable today.      

The Advantages of Dumb Money
"This is where the author, a professional investor, promises the reader that for the next 300 pages he’ll share the secrets of his success.  But rule number one, in my book, is: Stop listening to professionals! Twenty years in this business convinces me that any normal person using the customary three percent of the brain can pick stocks just as well, if not better, than the average Wall Street expert.

I know you don’t expect the plastic surgeon to advise you to do your own facelift, nor the plumber to tell you to install your own hot water tank, nor the hairdresser to recommend that you trim your own bangs, but this isn’t surgery or plumbing or hairdressing.  This is investing, where the smart money isn’t so smart, and the dumb money isn’t really as dumb as it thinks.  Dumb money is only dumb when it listens to the smart money.

In fact, the amateur investor has numerous built-in advantages that, if exploited, should result in his or her outperforming the experts, and also the market in general.  Moreover, when you pick your own stocks, you ought to outperform the experts. Otherwise, why bother?

I’m not going to get carried away and advise you to sell all of your mutual funds. If that started to happen on any large scale, I’d be out of a job. Besides, there’s nothing wrong with mutual funds, especially the ones that are profitable to the investor. Honesty and not immodesty compels me to report that millions of amateur investors have been well-rewarded for investing in Fidelity Magellan, which is why I was invited to write this book in the first place. The mutual fund is a wonderful invention for people who have neither the time nor the inclination to test their wits against the stock market, as well as for people with small amounts of money in invest who seek diversification.

It’s when you’ve decided to invest on your own that you ought to try going it alone. That means ignoring the hot tips, the recommendation from brokerage houses, the latest “can’t miss” suggestion from your favorite newsletter-in favor of your own research. It means ignoring the stocks that you hear Peter Lynch, or some similar authority, is buying.

There are at least three good reasons to ignore what Peter Lynch is buying: (1) he might be wrong! (A long list of losers from my own portfolio constantly reminds me that the so-called smart money is exceedingly dumb about 40 percent of the time): (2) even if he’s right, you’ll never know when he’s changed his mind about a stock and sold; and (3) you’ve got better sources, and they’re all around you. What makes them better is that you can keep tabs on them, just as I keep tabs on mine.

If you stay half-alert, you can pick the spectacular performers right from you place of business or out of the neighborhood shopping mall, and long before Wall Street discovers them. It’s impossible to be a credit-card-carrying American consumer without having done a lot of fundamental analysis on dozens of companies-and if you work in the industry, so much the better. This is where you’ll find the ten-baggers.  I’ve seen it happen again and again from my perch at Fidelity."
Part 1
Preparing to Invest
"Before you think about buying stocks, you ought to have made some basic decisions about the market, about how much you trust corporate America, about whether you need to invest in stocks and what you expect to get out of them, about whether you are a short-or long-term investor, and about how you will react to sudden, unexpected and severe drops in price. It’s best to define you objectives and clarify your attitudes (do I really think stocks are riskier than bonds?) beforehand, because if you are undecided and lack conviction, then you are a potential market victim, who abandons all hope and reason at the worst moment and sells out at a loss. It is personal preparation, as much as knowledge and research, that distinguishes the successful stock picker from the chronic loser. Ultimately it is not the stock market nor even the companies themselves that determine the investor’s fate. It is the investor."