This is one of the book that is recommended in many other books. So had to listen to it and go through it as well. Its a pretty old book but definitely worth like its a must read or listen. Below are some of the notes i had taken down and thought its important.
Those of us who ask little of life get little. Those who ask much get much. those who ask too much get nothing.
Nowhere is this more true than in investing. Most try to make a few points quickly on their stock market speculations, or content themselves with 4 or 5 percent on their savings. Not one in a thousand seriously plans and acts as one must to make a fortune.
Worst slogan is "You'll never go broke by taking a profit."
What nonsense it is to say that Opportunity knocks but once. That beautiful lady has been banging incessantly on Everyman's door for more than a quarter century.
Don't buy what you will sell later
Mr.Garrett first goal was to increase his capital in order to increase his power to help others. Having no children he was not heir-selfish. He decided the way to increase his savings fast enough to count at his age was to invest in a fast-growing-company. He began his search for one that met these four criteria:
Mr.Garrett was looking for stocks that professional buyers liked but were not sure of. It came around 50 stocks and since his goal was to make big money he did not make the common mistake of buying a little of each of the fifty. People who bet on all of the horses in a race always have a winner but never make any money. Mr.Garrett winnowed out all the but 3 by studying financial reports and analysis then he made what security analysts call field trips to those three and visiting their CEO. Finally settled on Haloid now called Xerox invested $133k and above his purchase price was $1 per share and he sold at $125 per share.
Unless a company operating in a foreign country is conducting itself so that the people of that country are better off net, after the company has realized its profit, than they would be if they nationalized the company and ran it themselves, that company is living on borrowed time
-- Mr.George V. Holton, retired chairman, Mobil Oil Corporation.
Except to learn from experience, one should never waste time looking back
In 1925, i personally owned 6500 shares of Computing-Tabulating-Recording(now IBM). At tht time there were only 120k shares outstanding. I sold mine for more than a million dollars, thats a lot of money those days. Today it would be worth $2Billion dollars. What i learned from that experience is two things:
Try to be associated with people whose self interests are almost parallel to yours. Therefore it is probably more important to see who is talking, rather than what he is talking.
Late George F.Bakers dictum: To make money in stocks you must have "the vision to see them, the courage to buy them and the patience to hold them.". Patience is the rarest fo the three.
When i was paying my way through equatorial Africa by shooting elephants for ivory, i learned this simple principle: *When looking for the biggest game, be not tempted to shoot at anything small. Elephants ears are very keen. Never after firing a single shot at a guinea hen, a colobus monkey, or an antelope did i see an elephant that day. This forest story is a variation of of the story of 5 arabs. When i asked for one guinea hen, i got one guinea hen - no more. Basically, when looking for the biggest game, never ever, shoot at anything small.
Focus only on multi-bagger ideas, ignore the 100% profit opportunities.
Every sale is a confession of error. Shorter the time a stock has been held before it is sold, the more palpable the error in buying it.
In the Bull market stocks look best to so many of us when their prices are highest and worst when their prices are lowest.
The notion that cash is safe and stocks are unsafe is a fallacy. Inflation loss is real.
Another fallacy is that avoidance of risk is more important that seizure of opportunity. Opportunity can reward you 100 fold, risk on the other hand can only make you loose 1x of your capital.
Some non-investment reasons for which tens of thousands of investors go wrong ? Let me cite just a few:
To make the most money in the shortest possible time, you should buy a good stock when nobody likes it. The difficulty is that good stocks seldom are without friends.
What makes a stock good ? Most common answer is earnings, thats right. But a stock can also be good because of assets even though those assets are earning nothing at the moment. Good assets are potential earning power.
Patience is a virtue, have it if you can, seldom found in a woman, almost never in a man.
No one can foresee for sure what the future holds
What one buys in the stock market is much more important than when he buys it.
When you pay for a stock you are not only paying for average growth, but more importantly for superior growth over the future. Therefore you have to evaluate the company in a size 5-6 times its current size, after 6-8 years and check if it still makes sense.
You can win any argument if you are permitted to make the assumptions. Recognition of this simple fact is essential to an understanding of the stock market.
Experience have taught me,
I wish i knew where i was going to die. I'd never go near that place.
It is simply a recognition that in investing we deal always with probabilities and possibilities, never with certainties. It follows as night the day that in investing the odds are all important.
For every buyer there must be a seller. For every sellers there must be a buyer. Sometimes an informed buyer has the good luck to meet an uninformed seller and vice versa. But it is a good guess that most of the time -- practically all of the time where institutions are on both sides of the trades -- both buyer and seller are informed. If information is everything how two informed professionals come to opposite conclusions about the same security at the same price at the same instant in time.
There are several answers
Fact without truth is false. Always connect.
How can you tell whether the information is fresh or stale ? Actually there is no way to be sure. Even if 10k investors have heard the news ahead of you, it may still prove profitable to you if 10M investors are going to hear it and act on it after you.
Really fresh news -- news to which the stock market has not reacted -- can indeed be golden.
A stock can rise one hunderedfold if its earnings increase twenty-five fold while its price-earnings ratio increases fourfold.
The business of the stock market is to cash in on the future now.
A man who will steal for you will steal from you. Ask yourself whether the company is which you contemplate investing is contributing to making this world a better place.
In the stock market as in poker, one must only bet when the odds are heavily in your favour.
If the price is already down by discounting the worst, there is very limited downside risk, focus on the upside and take a call.
Risk is an essential element in the quest for capital gain. Don’t be dismayed by a loss. Recognise it as one of your costs on the way to a net gain.
When you read a paper in the morning, never forget that your homework has only just begun.
Ask yourself if the company you plan to invest into is going to make the world a better place. If no, avoid it like the plague.
Bet on individuals and organisations fired by the zeal to meet human wants and needs, imbued with enthusiasm over solving mankind’s problems. Not just ones that are there for the profit.
The corporate economist thinks of making the company bigger than more profitable.When you see a company delivering a low return on capital and continuing capital expenditure year on year to improve market share – you probably are dealing with a corporate economist.
The last emotion to die in humans is pride.
Check if the Main man has people smarter than him or is he always hogging the limelight. Generally people who share limelight with CFO’s and other heads tend not to be egomaniacs.
Profits are the reward of human spirit and high endeavor – of great leadership.
To increase one hundredfold in value in forty years a stock’s price must advance at the compounded annual rate of 12.2 percent. The rates of increase required to multiply a stock’s value by 100 in fewer years than forty are these:
35 years – 14 percent
30 years – 16.6 percent
25 years – 20 percent
20 years – 26 percent
15 years – 36 percent
"Don’t marry a man to reform him", a wise mother counselled her daughter. It is seldom profitable to marry a stock to reform it either.
Perhaps the greatest advantage of all in buying top quality stocks without visible ceilings on their growth is that when we do so we give ourselves the chance to profit by the unforeseeable and the incalculable.
The investor dedicated to buying right and holding on picks managements, products, and processes he thinks able to cope with the unforeseeable as it hoves into view.
One of every man’s primary investment objectives should be to make as much money as possible while paying as little taxes as possible under whatever laws are in effect at the time.
If we knew in advance that a research project was going to pay out, it was not research but only product development.
When a stock persistently fails to act the way it should on the basis of the information i have. I conclude that i am missing something and redouble my efforts to find out what it is.
"Never do business with a man you do not trust," is a rule that would have saved many a fortune and many a heartache. No matter how tempting the prospect, how alluring the chance for a quick profit, stay away from men, companies, and ventures based on defrauding rather than helping their customers.
Man is the creature most difficult to keep in jail because man makes the jail. What one man can make another man can unmake. No matter what laws are passed, no matter how big the SEC, there will always be men able to hoodwink and defraud others. The best defense against them is to run away from them as fast as possible at the first hint of sharp practice. With more than 50k different stocks available to investors in this country, it is not only unnecessary but downright stupid to buy into a company run by men of doubtful integrity.
Buy stocks as if you knew all markets would be closed for the next 10 years.
To invest sensibly, we must try, however humbly, to answer these practical questions:
Fiat money is worth what we say it is because we are big enough and strong enough to make what we say stick.
Inflation is cheating. It results solely from efforts to get something from nothing. If the government did something for the poor - or for our military forces in Vietnam - by taking something equal from you and me, no inflation would result. The poor or the military would have more. You and I would have less. The balance between supply and demand would be unchanged.
When the government gives money to anyone for nothing without taking it from someone else for nothing, demand is increased relative to supply. Higher prices - what we call inflation - follow as night the day.
The practical question is not whether we should have inflation or not but how much, how fast. What does this mean to common stocks? The short answer is that inflation makes stocks rise.
Inflation is most bullish on common stocks when it follows a deep depression and is not generally expected. Rising demand for goods and services can be met by putting idle production facilities to work. But when inflation persists for long enough so that everyone is aware of it, and when the rate of inflation becomes high enough to be a political liability for whoever is in power in Washington, it is no longer automatically beneficial to corporate earnings and may become detrimental to them.
Interest is the price of time. It measures the cost of having or doing now what we hope to be able to pay for later. Thus everything bought with borrowed money costs more than it would if bought for cash.
The buyer of time takes on an obligation to return the borrowed property at some agreed date in the future, or on demand of the lender. Such obligations we call IOUs, debt, indebtedness, loans, mortgages, debentures, or bonds. They all mean essentially the same thing. For the right to have money now.
Borrowing is like renting money, the borrower must promise to return what you borrow and pay the rent too.
There is nothing good or bad about debt and interest per se despite the Puritanical injunction, "Neither a borrower nor a lender be." Many people have been ruined by debt. Many others have made their fortune with borrowed money. … To my mind it is just as bad a mistake for a businessman not to borrow when he could do so profitably as it is for him to borrow unprofitably. A businessman, did I say? I mean anyone.
If own a stock in a company, you are a partner in the business. If you own a company's bonds, you are one of its creditors.
As a shareholder you own a piece of the business. As an owner you are entitled to your share of whatever it makes whenever the directors vote to distribute it. You are promised nothing.
As a creditor you are entitled to be paid whether the comany makes any money or not. No one as yet has found a way to get blood out of a stone, however so a prudent bond buyer examines not only his rights but the issuing company's ability to live up to its bargain.
In a sense stocks are the buffers which protect bonds from the slings and arrows of outrageous fortune.
The best bonds have such a strong coverage of earnings and such substantial backing of assets as to make default almost out of the question. AAA bonds are like that.
Convertible bonds ? These are bonds that may be exchanged for stock of the issuing company, usually at a price above the market at the time the bonds were issued. If the stocks has a prolonged and substantial advance in price, the convertible bondholder profits by it. On the other hand if the company gets into rouble and its stock declines, the convertible bondholder usually continues to collect his interest and enjoys a somewhat protected position. The fact remains, however, that if the stock advances, the stockholder makes more money than the owner of the convertible bonds.
One thing to watch out for, is call protection. Companies issuing bonds naturally and properly seek to have their cake and eat it too. Hence they offer bonds with high interest rates to attract buyers when everyone else is paying high interest rates, yet they reserve the right to pay off the bonds and issue new ones in case of interest rates decline. You may own a bond paying 9% and due in 1990, but if it is callable in 3yrs, don't count on it any longer than that. If interest rates generally should drop to 6% by 1975 - certainly not an impossibility through this is not a forecast - your 9% bond probably will be called(paid off) and you will have to reinvest the money at then "going rate" of 6%. May bonds are not callable for long periods - 10yr call protection is not uncommon, and even longer call protection is available at times. A rule to bear in mind is that callable bonds will be called if it is to your disadvantage.
Another question we must answer before deciding whether we should buy the stock at 50 times earnings is how many times earnings we expecct the stock to sell 7-8yrs from now. If our stocks earnings quadruple as we expect, but the stock then sells 12-1/2 times earnings. our investment will have producted neither capital gain nor income. Clearly the 8% bonds would have been the better buy.
If our stocks earnings quadruple and the stock then sells at twenty-five times earnings, our stock will have doubled in price. A doubling in price in 7-8yrs is equivalent to a yield fo 10% compounded annually. On this assumption, the stock would be a better buy than the bond yielding 8%.
The master plan is to buy right and hold on.
To make intelligent assumptions about the future, we must try to preceive the tendency of events. That involves us in consideration of money, interest, inflation, bonds versus stocks, and the political situations generally, before we even begin to compare the values available in various kinds of securitites.
It all boils down to practical imagination - the ability to see what is not there but will be soon enough to matter to you.
Where does one look for 100-to-1 stocks ?
Here are some of the questions you should ask yourself before you decide to do it yourself:
Do my education, training and contacts in finance and industry equip me to do an above average job of investing my own money, or would i be playing the order fellows game ? Most of the time money is made by people who know more, work harder, think better than their rivals and competitors. Having such an advantage in one business, they stick to it rather than run the risks of competing in other activities where they have no edge.
Am I prepared to do the vast amount of screening necessary to find a stock with 100-to-1 potential? Tirelessly review and analyze stocks and narrow your list.
Am I strong enough, financially and emotionally, to risk a major investment in one, or even two or three stocks i have chosen myself? or will i lose faith in my judgement the first time the market goes down, as it often does even in the case of stocks which ultimately advance 100 for 1.
What if despite all my efforts to buy right i end up buying wrong ? Have i the facilities and the knowhow to wach the stock or stocks of my choice and its competitors, closely enough to discover my error before all is lost.
One of the simplest tests is "advantage-disadvantage", based on just on market prices but on earnings and dividends or interest. The only justifiable reason for making any change in your investmentsis to make you richer. Keep track of what is sold. Compare what you would have had if it had not been sold with what you do have after the sale. But don't do this for atleast a year. It often takes that long, and sometimes two or three years, or even more, for good investment decisions to prove themselves. Finally, compare your overall results over several years with good general market averages such as those of Dow-Jones or Standard & Poor's. But don't compare bond investment results with a stock average, or stock investment performance with a bond average!
Good example in page 242 ( Hens and Eggs )
What makes a stock grow ?
What is the difference between earnings and earning power ?
Earnings are simply reported profits no matter how obtained. As we h ave laready seen, earnings may rise because of a sudden non-recurring surge in demand, because of a price advance, because of a change in accounting practies, because of improvement in business generally which permits utilization of what previously was excess productive capacity. None of these reflect earnings power.
Earning power is competitive strength. It is reflected in above-average rates of return on invested capital, above-average profit margins on sales, above-average rates of sales growth. Earnings power can be indicated by below parameters and one should record these data year by year and alert himself for significant trend changes.
A little learning is a dangerous thing
Trends are important and 10yr record is desirable.
Two of the most important questions in buying for great growth are these:
Two reasons so few of us profit by 100-to-1 stocks are first that we do not try to do so and second that even when we are wise or lucky enough to buy one we do not hold on.
In Alice in Wonderland one had to run fast in order to stand still. In the stock market, the evidence suggests, one who buys right must stand still in order to run fast.