Whether you celebrate Christmas, Hanakkuh, Kwanzaa, or whatever, there’s an almost universal commonality among faiths—and non-faiths—that this is the season to give.

In that spirit, I’ve spent some time putting together as concise a summary of our investment approach as I could. And, because it’s so simple, I’ve been able to cram everything I think anyone needs to know about investing into my thirty-minute broadcast on Take Stock with Ellis Traub this evening at 7:30PM Eastern (6:30PM Central).

As you know, my intent is to separate as many folks from “the herd” as I can; and I’m hopeful that this offering might help them to understand why our way works and the herd’s doesn’t. Read more…

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Has the market yet fully recovered from the beating it took? Everyone who cares, raise your hand!

Now look around. Everyone whose hand is up is a member of the herd!

“Well, I care if the stocks I own haven’t yet recovered,” you might say. But why should that even make a difference? Unless you have a need to sell them right now for some personal reason, you need only to wait a little longer—provided those underlying companies meet the standards for high quality we’ve talked about. And, if they do, you might even consider buying some more!

We’ve just been experiencing a “market correction”; and, as with any “correction,” something that was wrong is made right. Generally, as is the case today, the “wrong” is that stock has been in the hands of those who don’t have a clue as to its real value, expecting someone else to pay more for it than they did.

What’s “right” is that the shares of the well-managed companies are now being gathered up by those who know their real value. And the prices of shares in those companies are rising nicely to regain their true, rational value.

Because there are relatively few companies that meet our high standards, the market average continues to languish. And, as happens in most down markets, it will continue to do so for some time while the quality companies recover smartly.

Are we there yet? Heck, “we” business owners ain’t never left!

But it might be a while yet before “they” come back.

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As typically happens, interest in investing declined in lock-step with the Dow. But there are signs that some color is returning to the cheeks of a nearly moribund body of amateur investors.

Many investment clubs—microcosms of that larger body—attest to the same phenomenon in their ranks. Members lost interest as the market value of their clubs’ portfolios seemed to evaporate while they stood helplessly by; and many clubs lost members or, worse, fell by the wayside.

In view of this, the question must arise in the minds of some whether clubs are even relevant any more.

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All of us know that it’s not smart to put all of our eggs in one basket. It just makes good sense.

What makes no sense to me. after all these years of being  advised to diversify by industry and by company size, is the potential dilution of return that this practice produces. So I quit doing it! For the same reason I don’t invest in index funds or EFTs.

I’m looking for a return of as close to 15% as I can get. Therefore I invest in companies whose operations are capable of consistently producing the highest earnings growth possible. And, once I own them, I’m happy to let their managements do their jobs and keep that performance rockin’ until they can’t do it any more.

Diversification, for me, is nothing more than having enough of those excellent companies in my portfolio.

Warren Buffet says that six are enough for him because, once he’s found that many good companies, he’d only dilute his return by adding others that are not quite so good. I find it more comfortable to have at least eight, but no more than fifteen in my portfolio.  I don’t dig into the research nearly as diligently as he does [understatement of the week], so I accept a little sacrifice in my return, just to have enough to cover me when the inevitable Enrons and Worldcoms come along to prove that the “rule of five” works.

Any other effort to diversify by market sector or size—to compensate for down markets—tends to produce a lackluster return over time. Certainly investing in indexes, EFTs, or other broad “market baskets”—even mutual funds—guarantees you  no better than the average return, which is lousy, compared with the performance of the undiluted cream of the crop!

You don’t need to compensate, you just need to be patient!

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PE Expansion—big deal! Lots of talk about it recently among “our kind of investors.” More than I think it warrants.

The price/earnings ratio or PE is a unit cost—much like the cost of a pound of coffee or a gallon of gas—which allows one to assess a price by comparing it with a typical, historical unit cost. You can certainly tell if a pound of coffee or gallon of gas is higher or lower than normal.

In this case, it’s the cost of one dollar’s-worth of that company’s earnings. And PE expansion is an increase in that cost—and a very good way to illustrate the difference between the intelligent investor and the herd.

The intelligent investor knows what his share of stock is worth because he’s aware of its “normal” PE. We actually quantify this multiple as the mid-point of PEs over a significant historical period. Assuming the company continues to operate satisfactorily and grow its earnings as expected, prices (and therefore PEs) should fluctuate comfortably above and below this midpoint.

When we buy shares in a company, we’re concerned mostly with buying our shares at a reasonable price—at or below that “normal” PE—so our investment will grow as earnings grow going forward. If, however, we find that the shares are selling at a lower-than-normal multiple, we can happily add the benefit of PE expansion to our estimated return and consider it a bonus or a discount!

Want to chat about this? Join me on Take Stock with Ellis Traub, Thursday evening at      7:30PM Eastern (6:30PM Central). Call (347) 857-3608 to listen.
Dial “1″ to join the conversation.

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First of all, let me make it clear that I absolutely love the herd!

They are those wonderful gamblers who provide us with most of the bargains we come across when we actually invest. So, while I’ve chosen to dedicate myself to trying to convert as many herd-members as possible to become solid and successful investors, I would hate to think of what this investing arena would be like without them!

Before I say anything, you’ve got to know that I was once very much the herd-member. So I can speak with some authority.

That said, here are ten ways you can tell if someone runs with the herd:

Reminder: Join me on Take Stock with Ellis Traub, Thursday evenings at 7:30PM Eastern (6:30PM Central). Call (347) 857-3608 to listen. Dial "1" to chat. This week we’re going to talk about "risk," and why there should be none.

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Let’s talk about unrealized gains. Are they real? Or are they “only on paper?”

As you can probably tell, I’m spending more and more time trying to widen the gap between us “real investors” and the herd out there whose members think investing is gambling on the stock market. So, this topic provides a good opportunity to highlight that distinction.

When the typical trader out there buys a stock, her sole focus is on buying it at a low enough price so she can sell it to someone else at a higher price and make money on it.

Read more…

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A while ago, my wife, Dianne, came home from an afternoon of shopping and couldn’t wait to show me something she’d had her eye on in the department stores for a long time but would never spend the six-hundred bucks they wanted for it. She had come across it for $29.95—a price at which it had come to rest after a series of automatic markdowns in one of the outlets she occasionally visited. The item was still selling in the mainstream stores for the original price; and, after carefully checking to be sure it was not counterfeit, imperfect or irregular, she had triumphantly carried it home.

That item—I think it was a leather, vanity-labeled purse—had a value of around $600 because the department stores could buy them at wholesale, mark them up enough to make a decent profit, and there was plenty of demand for them at that price.

Read more…

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Yesterday was a big day on Wall Street, wasn’t it! The Dow plummeted more than 186 points (about 2%) and the other indices were hit about as hard.

It’s days like yesterday that make me grateful that I don’t really care what the market does. The newspapers chalked the stampede up to concerns that the consumer-driven economy is not recovering as fast as everyone—read “the herd”—thought it was because people aren’t buying stuff as fast as they need to, to revive the economy!

Read more…

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The rational price of a stock is the price investors would pay if they were thinking clearly. You can learn all you need to know, and more, in my earlier post that deals with “Rational Value.” So I won’t take the time for that now.

This value is very useful when dealing with good quality companies whose operations have been consistently healthy and whose value has grown predictably. With it, you can tell when the stock of that company is selling at, above, or below a reasonable price. Needless to say, the ability to place a specific and absolute value on a share of stock makes the whole process of long-term investing less of a gamble and more of a business—which is precisely what it ought to be. Read more…

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