Last week we noted many stocks that generated exceptional profits. Investors who held on for years were set for life, and even those who held for just a year or two, or in many cases just a few months, still enjoyed very hefty gains. After reading that article one can easily get the impression that making a killing on the stock market is easy. Unfortunately, it’s not.
But let’s say someone is optimistic. Where should he or she start looking for a great stock? And what makes a stock become great? We’ll consider these questions this week.
Many years ago, the head of a small research department said that very high potential stocks could be found in different industries, and very often they shared three characteristics. They were: among the three leaders in an emerging industry, had potential to do a humongous business, and were still in the very early stages of growth.
This approach has worked very well over the years, and especially so during the 1990s. That is because there was a bull market during most of that decade, one that lasted until the dot com crash began in March 2000. Also, during the ‘90s amazing new industries were coming onto the scene and everybody wanted to buy their products.
There was tremendous demand for PCs, for the Internet, cable TV and cell phones. And even the people who had already purchased them came back a few years later for more because they wanted to have the newest and most powerful units that were available. Needless to say, the leading stocks in these industries soared and their shareholders made fortunes.
The Best On The Street?
Years ago, I met an investor who claimed to have the best investing record on Wall Street, and while boasts like that are a dime a dozen, he produced documents to back up his claim. Whether or not his record really was the best is not the point; the statements he proudly waved clearly showed that the stocks in his account had fantastic percentage gains. And he also had letters from Ivy League universities who studied those results and lavished praise on his approach to investing.
This investor, call him John, was frequently invited to parties thrown by the exceptionally rich and powerful and, always on the lookout for a way to make money, noticed something curious: the wives of those exceptionally wealthy people, although they had access to as much money as they wanted, were nonetheless unhappy because they felt dependent on their husbands; they wanted to earn money on their own.
John decided to come to their rescue. He showed them his investment record and promised he could do the same for them if he were in charge of their accounts. Handing their accounts over to John gave them the feeling of independence they wanted. John enjoyed the feeling of making a fortune in commissions.
John refused to answer detailed questions about how he made investments, but I did pick up a few important points. First, he was heavily invested in the leading stocks in the new industries of the 1990s. Second, he was not concerned when they corrected; he held on to them for the very long term, confident that these stocks would continue growing along with their industries they were in. Patience was not just a virtue, it was an essential ingredient. In this regard, at least, his approach was comparable to the one the head of the research department mentioned earlier had outlined.
I also learned that he attached tremendous significance to the capability of management, which he believed could make or break a company.
How To Find Great Ideas
Where should an investor looking for a great company begin to search? Some of the places are surprising.
Trade journals are one of them. These publications are not well known to the general public – a fortunate thing for investors. Nevertheless, they do a great job in reporting the latest news and developments of companies in the industries they cover.
And there are trade publications that focus on all kinds of industries: jewelry, aviation, toys, pipelines, outdoors, hobbies, gardening, craft, and food and drinks, to name just some of them. True, most of the news they contain are not useful to investors, such as earnings that companies reported the previous month, promotions, and the like.
But sometimes they cover stories that could be very profitable to investors, such as updates on amazing new technologies being developed, a company’s plans to enter new markets, or news about a company that is slashing its costs. Trade publications are available online, at better business libraries, and some offer free samples. Of course, they can be purchased by subscriptions, too.
This approach has worked very well over the years,
and especially so during the 1990s
There’s another place to find undiscovered gems. When traveling or vacationing, check out local newspapers or magazines (yes, these still exist) and, not surprisingly, they have features about local firms. In most cases, those local companies are not significantly different now than the way they were years ago and probably are similar to the way they will look years from now.
But sometimes these publications feature developments at local firms that investors certainly would want to know about – developments that are not noted anywhere else. This means checking out these publications could put you a step ahead of the herd.
The Virtue Of Patience
An uncle and aunt, a”h, who were very interested in the market, had a broker whom they trusted completely. One day the broker told them to buy a Japanese penny stock. The broker said it would take time until the stock made a big move but that the company was extremely promising, that they should buy the stock now while the price was still cheap and hold for the long term. They followed his advice.
Over a year later, this uncle and aunt had nothing to show for their efforts, were thoroughly disillusioned with even the name of the company and, despite the broker’s objections, sold all of their shares. Literally the following day, Fuji Photo began a tremendous move higher. They had owned a great number of shares of this exceptional stock yet had not made even one cent of profit.
Hail To The CEO?
As noted above, John (and other sharp analysts) believed that one of the most important considerations in a stock is the company’s management. Here are some ways to determine if management is capable:
*Does management have a proven record of accomplishment?
*Have they met their stated goals?
*To what extent has the company profited under their leadership?
*Has the stock increased during the time they held the reins?
*Have they successfully completed new projects on time and without breaking the budget?
It’s also possible to learn a lot about management by Googling their names and checking into their past performance.
It’s also possible to learn a lot about a company and, in some cases, what it envisions for itself by looking at the following:
*How much is the company increasing the amount of money it is spending on R&D?
*Is the company working on any significant products it has announced? Has it introduced any in the past?
*Is the company competing successfully against other firms in its industry?
*Is management stable or does the executive suite have a revolving door?
*Are any senior managers buying shares in the company?
*Is the company heavily dependent on one or two major customers?
*Are there any major lawsuits that are draining management’s time, energy, and the company’s resources?
Investors should always check a company’s 10-K, a report that is crammed with essential information and that puts a different perspective on developments than the PR approach that an annual report provides.
Of course, what looks like a rare opportunity to armchair analysts may actually be a terrible idea, so always consult with an expert before making any investment decision.
Bottom line: everything that happens on Wall Street (and every other street) comes from Hashem. Buying a stock at exactly the right time doesn’t make anybody a genius, and selling right before it makes a huge move doesn’t mean the investor is foolish. Let’s hope Hashem helps us make the right decisions with everything we do.
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Gerald Harris is a financial and feature writer. Gerald can be reached at firstname.lastname@example.org