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July, 2015


Money experts indicate that the aim of wise common stock investing is to acquire part ownership in good businesses, ones that provide significantly better accumulation of purchase power per share than must be given up to inflation and taxes.

This sounds reasonable enough. Yet few of us achieve that straightforward goal. Why not? The answer reminds me of how Adolf Hitler lost the campaign against Russia: he did not heed the advice of experts; he changed his strategies repeatedly instead of giving any single one a chance to succeed; and he was led more by emotions than a well reasoned outlook.

Similarly, most of us when trying to invest show poor impulse control, strike off in new investment directions as if we have attention deficit disorders, trade frequently and so incur extra commission costs as well as not giving a winning approach a chance to make us real money, and too often try to avoid (a misunderstood concept of ) risk by selling early, even at a loss, what should really be left for the long-term. Such tendencies are a major reason that, despite thereby usually paying higher brokerage and money management fees, many would be better off letting a professional handle our investments than trying to do it ourselves.

Yet there are methods which, were we to stick with them steadfastly, could make the difference for us in being our own money management winners vs. losers. A common fact seems to be that few if any can sustain better than about 15-20% a year in average common stock profits. There may be temporary exceptions, yet this rule applies over time, so if we are shooting for the moon, chances are we shall waste our ammunition or worse, have unintended and costly consequences. On average, even the S&P 500 index only provides compound annual returns of 9-10% a year. So if a strategy comes along that offers fairly reliable total returns of 15% or better without great risk, I sit up and take notice. One is to buy good growth investments when they are a bit beaten down in the market.

Thanks to the power of compounding, an individual only needs one or two decent investment approaches to make a large and positive difference in that person's financial outcome. On the other hand, if we keep investing the way the average guy or gal does, even the power of compounding will not offset a lifetime of monetary sins.

I submit that this technique of buying stocks in winning companies when they are a little depressed in price yet still have excellent prospects could be a superior long-term technique, all one might need for financial independence, sort of the lazy person's guide to wealth without a lot of hassle or risk.

Warren Buffett suggests from his experience that an exceptionally lucrative method combines the growth investing principles of Philip Fisher (author of Common Stocks and Uncommon Profits) with the value investing tenets of Benjamin Graham (The Intelligent Investor). He seeks assets that are nicely and consistently profitable, do not have substantial debt, yet which offer great value for their current cost, i.e. safe growth at the right price.

How are such stocks to be found? One's financial consultant can come in handy here. We can let him or her know the sort of investment we are seeking and ask for ideas. What we want are fairly stable companies with good earnings and return on shareholder equity over at least the last five years, ones that also look like they have great business models going forward, but that are low-priced compared with similar stocks or the market as a whole. If they also have momentum, such that the share price is lately going up relative to, say, the S&P 500 Index, so much the better.

Another way of locating this type security is by using an investment service with a good reputation. An example is Value Line. Abbreviated Value Line data bases (and sometimes complete hardcopy formats) are available for free through many public libraries. In addition, one can subscribe to both paper and digital versions of the services' reports.

The investment company provides weekly its top 100 growth stocks list. Among these, I look for ones that are favorably ranked for both safety and recent price performance (what Value Line calls timeliness). From these, I pick the top four or five in terms of risk-adjusted projected returns, then buy shares in one or two of them per month. With dividends included, such an approach has a good chance to provide the average 15-20% a year overall return I am seeking.

Here are five stocks that currently look like excellent prospects for low cost and relatively safe growth investing:

Growth At A Good Price
Cerner Corp.CERN$71.330.00%15.27%
Cognizant TechnologyCTSH$60.590.00%25.64%
Dollar Tree, Inc.DLTR$81.670.00%14.71%
Google, Inc.GOOG$672.930.00%22.78%
Starbucks Corp.SBUX$55.691.10%10.97%

Of them, my present favorites are Cognizant Technology (CTSH) and Google (GOOG). A portfolio of all five probably would do well too.

The next question is when to sell. Buffett says that for many stocks, ones bought at a good level compared with their potential, the correct response is "never."

This implies, though, that one has sufficient extra dollars to keep investing without funding new purchases from the sale of old ones. If instead one needs to redeem some in order to purchase others, the first thing to remember is that one hardly ever with this strategy needs to sell at a loss. A good company is a good company, and its price having gone down might be reason to buy more but almost never should be an occasion for selling. As Buffett suggests, if one had bought a nutritious loaf of bread, and the next day the loaf is on sale for 50% off, one would not throw out the first loaf, though one might buy a second one at this now bargain price.

If one finds he or she has a lot of stocks that after purchase routinely go down a lot compared with the market, it may not be reason to sell them, but could very well be cause for reviewing the buy strategy. Value investing, without special care for the profitability of one's purchases, can too often involve a lot of these "falling knife" kinds of assets, ones that are down for good reason and will thus keep going south. Maybe they will turnaround eventually, maybe not, but in the meantime one might have poor overall returns.

Assuming, though, one has a portfolio of stocks with solid earnings, in my experience a good time to sell is when each has had good price performance yet is now no longer a bargain. An advantage of using a service like Value Line is that the sell point can be quantified. I do best when the criteria for redeeming a stock is more objective than subjective.

If I bought Cognizant Technology when it was listed among the top 100 growth companies, had close to the best timeliness and safety ranks, and was projected to have total returns of 15% annually over the next 3-5 years, I feel very comfortable setting my eventual sell point for when it has provided 50% or greater price performance since I bought it and also now has projected annual returns averaging less than 10% a year. I can then use the proceeds from that sale to buy another safe growth asset that then has 15% or better projected total returns. Such a sell/buy strategy can be repeated over and over with good long-term results.

A novice investor may learn best by simply investing. Both losses and profits are great teachers. Good luck with your own investing experiments and with setting what for you seem to be the proper sell points for your own approach to this intriguing hobby.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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