• Six categories of stocks
  1. Slow growers – Large and ageing companies expected to grow slightly faster than gross national product. Started off once as fast growers but mature now. Paid generous and regular dividends, stock price fluctuate within bounded range at slow pace. Sell when fundamentals deteriorate.
  1. Mid growers (Stalwarts) – Faster than slow growers, 10-12% annual growth in earnings. Buy for 30-50% profit and sell to repeat process. Sell when p/e gets too high.
  1. Fast growers – New enterprises that grow at 20-25% annually. Higher risks associated with these stocks. High fluctuations in price. Sell when p/e gets too high, check growth story and sales.
  2. Cyclicals – Company whose sales and profits rise and fall in regular if not completely predictable fashion. Expand, contract pattern. Coming out of recession and into a vigorous economy, cyclicals flourish, their stock price tends to rise much faster than prices of stalwarts. Timing is everything in cyclicals, only buy at the right cycle. Sell at end of cycle e.g. oil price goes up, inventory build up.
  3. Turnarounds – These are potential fatalities, waiting to spring a rebound. Sell after it turn around.
  4. Asset plays – These are company that’s sitting on something valuable that everyone has overlooked. It could be cash or real estate. It takes time to unlock the value, investors need to be patient.

Avoid:

• Avoid buying hottest stock in the hottest industry, it can fly and fall just as quickly. Profit could very quickly turn in to losses if you aren’t clever at selling hot stocks.
• Beware the next something stocks e.g. “Next Apple”, “Next netflix…” the list goes on…

Take note of:

• Earnings – earnings and stock price go hand in hand and in tandem. If one deviate from another, they will always return to normalization. Use PE ratio of compnay to determine valuation.
• Assets – Liquidate all your assets and minus off your debts – long term and short term and this is your book value.
• Understand the P/E of the market to determine the valuation of the market
• Understand future earnings of the company by:
  • Reduce costs
  • Raise price
  • Expand into new market
  • Sell more of its product in old market
  • Dispose of losing operation

Numbers to note:

• If growth rate/PE by 1.5 is okay, >2 is better. Growth rate is defined by (growth of annual earnings compared to previous year earnings + dividend yield). I wondered how many such companies exist nowadays.
• E.g. $38 share with $20 in net cash/share. $38-$20=$18. If company is expected to earn $6/share, PE = 3 instead of 6.33.
• Watch out for debt: Equity to debt: 75/25%
• Buying stock based on book value need to understand what exactly was counted as part of book values.
• A 20% growth rate company A selling at 20 PE is always better than 10% growth rate company B selling at 10 PE.
• High profit margin for long-term stock. Low profit margin more advantageous in a successful turnaround.

Capturing notes from reading of this investment book that is applicable to my investment journey.

15 points:

1. Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company’s research-and-development efforts in relation to its size?
4. Does the company have an above-average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins? Fisher stated, “It is not the profit margin of the past but those of the future that are basically important to the investor.” Because inflation increases a company’s expenses and competitors will pressure profit margins, you should pay attention to a company’s strategy for reducing costs and improving profit margins over the long haul.
7. Does the company have outstanding labor and personnel relations? According to Fisher, a company with good labor relations tends to be more profitable than one with mediocre relations because happy employees are likely to be more productive. There is no single yardstick to measure the state of a company’s labor relations, but there are a few items investors should investigate. First, companies with good labor relations usually make every effort to settle employee grievances quickly. In addition, a company that makes above-average profits, even while paying above-average wages to its employees is likely to have good labor relations. Finally, investors should pay attention to the attitude of top management toward employees.
8. Does the company have outstanding executive relations? Just as having good employee relations is important, a company must also cultivate the right atmosphere in its executive suite. Fisher noted that in companies where the founding family retains control, family members should not be promoted ahead of more able executives. In addition, executive salaries should be at least in line with industry norms. Salaries should also be reviewed regularly so that merited pay increases are given without having to be demanded.
9. Does the company have depth to its management? As a company continues to grow over a span of decades, it is vital that a deep pool of management talent be properly developed. Fisher warned investors to avoid companies where top management is reluctant to delegate significant authority to lower-level managers.
10. How good are the company’s cost analysis and accounting controls? A company cannot deliver outstanding results over the long term if it is unable to closely track costs in each step of its operations. Fisher stated that getting a precise handle on a company’s cost analysis is difficult, but an investor can discern which companies are exceptionally deficient–these are the companies to avoid.
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competition? It is critical for an investor to understand which industry factors determine the success of a company and how that company stacks up in relation to its rivals.
12. Does the company have a short-range or long-range outlook in regard to profits? Fisher argued that investors should take a long-range view, and thus should favor companies that take a long-range view on profits.
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholders’ benefit from this anticipated growth? As an investor, you should seek companies with sufficient cash or borrowing capacity to fund growth without diluting the interests of its current owners with follow-on equity offerings.
14. Does management talk freely to investors about its affairs when things are going well but “clam up” when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity?

When to sell?

1. When mistakes are made, own up to mistakes and sell even at loss.
2. When failed the above 15 points.
3. When better opportunities arise.
4. Do not sell simply when price becomes overvalue because it is expected that growth companies are trading at higher valuation due to expectation that it will outperform in future.
5. Do not sell simply because the stock has huge advance and it has lost it’s “potential” and it’s time to switch to another stock that hasn’t gone up.

Dividends

Many people in the personal finance community are enamored with dividend paying growth stocks, and with good reason. However, Fisher talks about why he prefers to invest in companies that don’t pay out dividends. His argument is that companies should focus on allocating their assets towards what will be most beneficial for their long-term growth. If a company pays out a significant amount of earnings to investors it limits the cash flow they have available and potentially slows the company’s growth. Ultimately Fisher doesn’t look for companies paying out the highest amount of dividends, he looks for consistency in a company’s policy.

Don’t

1. Don’t quibble over eights and quarters – Buy at market price right away instead of saving that few dollars that could attribute to the stock running away. Should the stock not having potential in the first place, the investor wouldn’t be looking at it in the first place.
2. Don’t over-diversify –
   • (A) Large growth stocks – <20% in single counter
   • (B) Mid-young growth stocks – <10% in single couner
   • (C) Small companies with potential growth or loss <5% in single counter
3. Don’t be afraid to buy during war
4. Don’t focus on historical PE too much for growth company, but focus more on future earnings and growth

To be continued..