Wednesday
May042011
Simple Investment Principles: Big Money
Wednesday, May 4, 2011 at 2:01PMAs the market marches higher, I must keep reminding myself that it is not the bull market that is making me money but the good investment decisions I made a few years back. The decision you make today about what to buy or sell will drive your results two to five years out. Lately, we have been doing some selling and getting ready for the next big opportunity.
In addition to increasing the level of cash in our portfolio, we are getting ready by going back to basics and revisiting some of the investment principles that have made us big money. They include:
- Understand what makes a company great. Always be on the lookout for the exceptional companies. Learn about them at all times. New players come on the scene frequently: develop the process to identify them. Get ready for the day they go on sale.
- Are the customers going bananas over the experience? This is the WOW factor. Learn how to recognize it. McDonalds, Amazon.com, Apple, Lululemon, Crocs, and many others are WOW companies.
- Great companies generate high return on capital.
- Remember the destructive value of debt. Leverage kills. Great businesses don’t need much debt. Stay away from too much debt.
- Develop a feeling for how big the economic ramp facing the company is: $CROX (2008), $NFLX (2004), $AMZN (2001), $PCLN (2001), $MCD (1965).
- Learn simple valuation techniques. Keep it simple.
- Bear markets create extreme undervaluation. Some stocks will trade at lower than $.10 on the dollar in an environment under stress.
- Recognize the results of buying a great company under extreme undervaluation during a bear market: the price you pay might be equal or lower to the company’s earning power five years out. Eventually, you could receive the price you paid in the form of an annual dividend.
- Be patient.
Anything else I should add to this list?
Written by Michael Bigger, author of How Traders Achieve Creative Flow.
Reader Comments (8)
Awesome post. I am kool-aid drinker of the shelby davis principle.
My first investments multiplied two to three times (San Miguel, Tesco Plc) were success in mid 2009 mostly to do with luck. The question is why was I lucky?. Because I bot them right after the bottom of the bear market. At that time barely understood what bull, bear market and investment were. A bit naive really. But the one thing I learnt here is that bear market is a money multiplier phase as long as you buy good companies.
Come to think of it, had I invested $10000 on Crox in those times, I would be sitting at $200,000 after three years. Isn't it easy and less stressful than day trading!
- Aris
Exactly. Your advantage...You are young and you know the principles. You will have many opportunities in your life to execute on this...many times. If you maintain your discipline you can triple + an amount invested during the bear market.
What are some ways to learn simple valuation techniques?
Hi Eric, I asked this question to Michael once...here's the answer I got
"Elimination of the complicated. The trick is not to understand everything. The trick is to simplify. It is important to focus on simple business”.
Aris, Thanks. Will keep that in mind when the opportunities roll around again.
Example: let's say Crocs has 10$ of share per sale and a reasonable net (bottom line) margin is 10% for that business, then you know that earning potential is $1. Crocs had $7.54 of sale per share at the trough in 2009. The stock traded as low as $.89 in early 09.
Excellent. Maybe I will find my version of CROX during the next bear market. WIll surely share my findings. Thank you.
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