Tad -

FINAL EXAM, Finance. (Time limit two hours.)

Question:

"Any way you cut it, a company's earnings are what you are "buying"
when you "invest" in shares of common stock; this stream of earnings
will determine whether or not you make money on your investment." Is
the statement true, or false? Explain.

Elle wrote:
- quote -

Elle,
I retract from this discussion to keep with the MIFP mandate of
"sound-bite financial planning".

Briefly: Dreman's book addresses your questions, a lot of it describes
the practices of analysts and institutional investors, and it's
interesting if only for that. My main point in posting was to offer it
as a reading suggestion. I think it's a strategy with appeal to DIY
investors, and especially, skeptics, both of which are denizens of MIFP.
If someone doesn't believe stock picking can work, or is analogous to
gambling, reading it would be a waste of time. But I encourage
challenging that viewpoint regularly, if only to solidify it.

Fin.

-Tad

Elle -

Sorry to hear about your relative - it's a huge amount of work and
care. Congrats to your sports activities - snow or water skiing?

I tried sending you some info using one of the "options" - guess it
didn't go. Basically, since you mentioned that you are looking more for
growth than retirement, I passed along some stocks that in the past
have done well over the past 10 years, to illustrate. The point is not
to recommend these issues, but to give examples of characteristics to
look for in companies. FAST PDCO MSM ESRX APOL. You can just as easily
make up your own list from stock screeners. Oh - here are some losers I
found: ANAD ATML EFII.

You mentioned you hadn't found any funds that really attracted your
attention as possible good buys - I just sort of half-way looked and
got GABEX and FAMEX as possible leads for funds with dividend increases
considered. One of the parameters I used was low turnover. I would want
to look at their current holdings (and of course study the prospectus).

Your 20 year investment planning horizon is spot on. I will read the
article you mentioned - I bookmarked betterinvesting.com. And ... I
don't want to tick Mr Weldon off, so I'll conclude here.

"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

It's an article about the _history_ of growth investing, with few specifics
on how to successfully pick stocks.

Betterinvesting.com does provide its own counsel at its site on basic stock
picking. It expects its affiliate investment clubs to use this.

- quote -

Your post seems full of contradictions. "If implemented properly"? There are
a lot of TA articles out there and the majority of them will fail, based on
past data.

If they make money, it's due to luck.

- quote -

Naturally that something doesn't exist. Because as soon as such a strategy
became publicized on the net, it would alter the game.

- quote -

Funny, but this is precisely something BetterInvesting.com does emphasize:
Look strictly at a company's numbers. Doesn't matter what the company's name
or products are.

- quote -

Invariably? Doesn't this depend an awful lot on the analyst? Or do you have
something to back up this claim?

Is there data that demonstrates that analysts' recommendations in total
really push up stock prices?

It seems to me that rarely is there much of a consensus from analysts on
stocks to buy, anyway. Really, there shouldn't be, if they are evenly
divided among value proponents, growth proponents, etc.

- quote -

That's good to read.

- quote -

Preferably it's just one well-cited post demonstrating that these timers
lose more often than they win.

Though IIRC I did read one article not long ago demonstrating that timing
could be successful, IF there were no transaction costs.

snip
- quote -

Yet betterinvesting.com seems to claim the opposite.

- quote -

One point I'm surprised you didn't mention here is the virtues of
buying-and-holding vs. constantly seeking deals (be they "value" deals or be
they "growth" propositions). When you buy a stock, how long do you intend to
hold it? Only as long as it's still rated "value"?

Elle wrote:
- quote -

Looks like that article is subscriber only but wanted to throw out
comments on stock picking, which is actually one of my favorite topics.

If you bother to pick stocks with new money you have to invest,
assumedly it's because you want to make more money. All the "efficient
market" stuff says that you're going to fail at the task. More
specifically: it says that more than half of market participants, over
long time periods, will fail at the task because of the various costs
they take on. So the key is to get yourself into that small group of
relative winners, who are ahead of the two-second investment decision
which is "Vanguard Total Stock Market Index Fund."

OK so how to do that? A google search is going to turn up dozens of
strategies and approaches and of course, any of them could make money if
implemented properly. The key is finding something that is more likely
to succeed because it doesn't rely on low-probability kinds of events,
or hard-to-obtain information or trading advantages.

Back to growth investing. Unfortunately I think this is the tough side
of the market for an individual investor to work in. Pricing of growth
stocks is highly dependent on assumptions about future earnings growth
rates. Minor deviations result in very large adjustments in share
values...ie "the stock drops".

Also I think human nature works against you here. There's a web site
where I've answered questions for some time and I got a lot of these: "I
hold AOL, Nokia, Microsoft, Amazon, and Intel" etc etc. "I use all these
companies products and..." you know the rest. I admire Peter Lynch but
unfortunately it can lead people to buying some really overpriced
companies without understanding a fundamental aspect of investing: the
detachment between liking a company and liking its stock. Krispy Kreme
anyone?

Another aspect of the growth side of the market is that while I think
the concept of "inside Wall Street" kind of info is largely a myth, we
can't ignore that there is a certain cycling of buy/sell recommendations
and we can't tell in advance what the next move will be. Invariably the
buys are focused on the growth side of the market and this creates
demand for the stocks, the downgrades reduce it. So to a certain extent
you are putting yourself at the mercy of upcoming assessments by the
analysts, and perhaps of the momentum traders who play off of this activity.

Technical trading stuff I just dismiss at complete nonsense, but that's
a whole thread in itself.

What's left? I think an individual investor who wants to bother stands a
good chance with picking out-of-favor stocks - "contrarian" stocks.
There's an intuitive appeal to it, it's as basic as buy low, sell high -
you look for stocks whose prices have dropped, ideally well-known
companies, not nobodies that are simply "fallen growth stocks" headed
for the penny stock pages. A great introduction to this is David
Dreman's "Contrarian Investment Strategies." He also writes a Forbes column.

I think it dovetails well with the basic cheapness (for lack of a better
word) of the typical DIY investor. You know who you are: buy Xmas wrap
in January and store it until the next December. And why not? You save
80%. Carry the philosophy over to stock picking and I think you're in
the value camp. And if you're stock picking from among value
stocks...well, it's likely you'll have your eye on stocks that have
dropped in price, that aren't exactly getting glowing reviews.

A nice aspect of this is that at worst, as long as you're diversified
across enough issues, you're probably buying mostly value stocks, which
historically have had higher returns as a group than the growth side of
the market. Contrast this with the "buy what you know" stuff - back to
AOL, Nokia, Intel, Krispy Kreme, etc.

"Random Walk"/Malkiel fans take note - he doesn't leave much room for
beating the market, and largely advocates index funds. But at least in
my edition of the book, he gives a nod to contrarian strategies and
mentions Dreman specifically. I think that's interesting given his
general "efficient market" belief.

On the flip side, it's not as easy as just buying stocks that go down,
so it doesn't do away with the basic research issues with stock-picking.
But at least - IMO - you're fishing in a potentially fertile pond.

-Tad

"dapperdobbs" <GeorgeCFL[at]hotmail.com> wrote
- quote -

Great line.

(But do people really pay that much for a fridge?? Where's everyone's copy
of _The Millionaire Next Door_?)

- quote -

If I were an expert stock picker, or had the gumption to look thoroughly at
a company's promise, I would encourage him.

But I'm an amateur stock picker, who has seen some nice gains but some
sizable losses once in awhile, too. Plus I am invested strictly for the long
run.

- quote -


I plan to die of cancer at about age 78, so I don't let the incredible costs
of these places get me down. ;-)

Having supported (labor-wise) a dear relative of mine recently through all
this, I agree independent living centers (typically morphing on the other
side of the property to full-care facilities) are cool. Other, wise
relatives of mine are booking themselves into them. Wait lists can be long!

Meanwhile, I am playing one heckuva lot of softball and have resurrected my
dilettante skiing career.

Elle -

P.S. I bookmarked the link, but have not read the article yet. I shall.

Elle -

Wanted to post a reply to you here - I replied to your posting under
"Rate My Fund Picks Please" (it's closer to the top of the stack). Your
long-term perspective is what I tried to point out to Robert Anderson
under "mutual funds v. stocks", and I think you made a really good
point here, about the NAIC condemnation of mutual funds being dangerous
and unhealthy for newbies. Somebody else emphasized the point that
study and research are both necessary before investing - not at all
away from Peter Lynch's point that most people put more work into
selecting a new $1,000 dollar refrigerator than they do "investing"
$20,000 of their savings. I just figured that since Mr. Anderson had
asked about stocks, he obviously had some interest, so, as long as he
studies up and tries a "paper portfolio", why not encourage him?

IMHO (and per most sound investment advice), your over-all long term
perspective, and careful and realistic planning, is correct. Tri-level
care retirement communities probably offer the best alternative to
those not wealthy enough to plan for a full-time nurse, or 'round the
clock sitters. The current entry fees for those currently range from
$150,000 to $500,000, with monthly rent, depending on the level,
usually $1,800, $2,500, and $4,500. Not cheap. From my experience,
these places are surprisingly interesting places to "hang out" for a
while - there are some very sharp cookies who live there. I met one guy
in his 70's, who looked more robust and fit than a lot of guys half his
age, who told me a story about parachuting into China "over the hump"
before the formal outbreak of WW II. And I met a lady in her 70's who
was really one of the nicest people I've met - a real gem, very
outgoing, very sweet. And then a guy I never met - he was too quick for
me - wearing an English style golf cap and heading for his Morgan
(vintage two-seat convertible). There's sadness around retirement
communities, too, especially in nursing wings - enough to make you
wonder if it's worth it to hang on to the body that long. My point in
all this being, that a retirement community before the age of 80 isn't
out of the question, since the independent living sections are a lot
like condos - not like your house, but not too shabby, either.

I have always held far more stock (individual picks or mutual funds) than
bonds. But a few years ago I needed a safe place to sock away the proceeds
of a home sale for at least two years. Subsequently I bought a greater
diversity of bond positions than I'd ever held. Specifically, I bought all
investment grade individual bonds and one short-term bond mutual fund. These
were nothing fancy; just what my discount brokers happened to be offering
that made sense to me at the time. I bought my second home. Then for other
reasons I began re-focusing my portfolio for more income and better
diversification. So I keep a fair amount in bonds/CDs right now. Plus
recently I had positions in a junk bond fund and an emerging markets income
fund. Still, around 70% of my portfolio is in stocks and stock mutual funds,
and I think will remain so for some time. The reason for the stocks of
course is to keep up with inflation. My goal is not to have to cash in
principal until I need long-term care in, say, my 80s. Based on my family
health history, in my early 70s is probably when I'll shift a lot more to
short term bond mutual funds and short term individual bonds, likely in a
5-year ladder with rungs 6 months apart, plus maybe some hybrids.

I am a DIY-er. A friend of mine recently bought me a membership in the
NAIC-whatever that entitled me to a subscription to its magazine. The
arguments this organization puts forth compel me to come up with exact
counter-arguments for why I'm making the investing decisions I have been
making, hopefully with some objectivity. So it's been helpful. But I am
otherwise not terribly impressed with the idea of investing clubs. It seems
to me they made more sense decades ago when stock commissions were higher;
information was harder to find and process; and free fora like the internet
provides were not available.

I loathe how the NAIC generally (albeit not completely) condemns mutual
funds. That philosophy is dangerous and unhealthy for newbies to read,
AFAIC.

What is your assessment of this article on growth investing? Did it sway you
to consider shifting your portfolio more towards growth? Or reinforce
already held views of yours?

"dapperdobbs" <GeorgeCFL[at]hotmail.com> wrote
- quote -

Elle - Nice post, thanks. I checked out the site. I thought you were
into bonds - whatever in the world are you doing messing around with
stocks?

"Better Investing" magazine has an article in its August issue titled "The
Birth of Growth Investing." The teaser for the article states "The roots of
the BetterInvesting methodology are explored... " The article segues into
how one George Nicholson and Fred Presley developed the growth stock
investing principles on which investement clubs of the NAIC would presumably
operate.

BetterInvesting's web site lists four principles for its basic philosophy of
investing. One of them is, "Invest in quality growth companies-Once you know
what to look for, they're easy to spot."
http://www.betterinvesting.org/inves...cs/basics.html

Of course, this is just more of the value vs. growth debate that's been
around for some time. I am not now a proponent of investment clubs
affiliated with the NAIC (and so BetterInvesting). But I did find the
emphasis this particular investment-club-related organization places on
growth investing an interesting rebuttal to those who are proponents of
value investing.