INTRODUCTION

When you sell in desperation you always sell cheap

1) don’t let nuisances ruin a good portfolio 2) don’t let nuisances ruin a good vacation

any normal person using the customary three percent of the brain can pick stocks just as
well, if not better, than the average Wall Street expert

dumb money is only dumb when it listens to the smart money

mutual funds are good for people with small amounts of money to invest who seek to
diversify

tenbagger = a stock in which you have made ten times your money

the more right you are about any one stock, the more wrong you can be on all the others
and still triumph as an invesetor

Dunkin Donuts, Wal-Mart, Toyrs R Us, Stop and Shop, Subaru are all tenbaggers

Power of common knowledge – L’eggs example

When you try on the stockings or sip the coffee, you’re already doing the kind of
fundamental analysis that they pay Wall Street analysts to do.

Visiting stores and testing products is one of the critical elements of the analyst’s job

People think “If you don’t understand it, then put your life savings into it”

Finding the promising company is only the first step. The next step is doing the research.

It is personal preparation, as much as knowledge and research that distinguishes the

The investor determines his own fate.

CHAPTER 1 The Making of a Stockpicker

Small investors tend to be pessimistic and optimistic at precisely the wrong times, so it’s
self-defeating to try to invest in good markets and get out of bad ones.

Caddying reinforced the notion that it helps to have money

As I look back on it now, it’s obvious that studying history and philosophy was much better
preparation for the stock market than, say, studying statistics. Investing in stocks in an art,
not a science, and people who’ve been trained to rigidly quantify everything have a big
disadvantage.

All the math you need in the stock market you get in the fourth grade

Even liberal arts majors could analyze a stock

Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then
sell it. If it don’t go up, don’t buy it.

CHAPTER 2 The Wall Street Oxymorons

If a stock is down but the fundamentals are positive, it’s best to hold on and even better to
buy more

Wall street – “you’ll never lose your job by losing your clients money in IBM”

CHAPTER 3 – Is this Gambling or What

In stocks you’ve got the company’s growth on your side. You’re a partner in a prosperous
and expanding business. In bonds, you’re nothing more than the nearest source of spare
change.

An investment is a gamble in which you’ve managed to tilt the odds in your favor

Jump in earnings, sale of an unprofitable subsidiary, expansion into new markets

Miracles happen just often enough to keep the losers losing

6/10

CHAPTER 4 Passing the Mirror Test

Only invest what you could afford to lose without that loss having any effect on your daily
life in the foreseeable future

60-50-40 fluctuation analogy

not to learn to trust your gut feelings, but rather to discipline yourself to ignore them

CHAPTER 5 – Is this a Good Market? Please don’t ask

Things are never clear until it is too late

Don’t prepare for the last thing that happened, prepare for the future
I don’t believe in predicting markets I believe in buying great companies

Don’t by tech companies, buy companies that use technology

CHAPTER 7 – I’ve Got it, I’ve Got it – What is it?

Treat initial observation as an anonymous tip

Investing without research is like playing stud poker and never looking at the cards

What effect will the success of the product have on the company’s bottom line?

Big companies don’t have big stock moves

Six categories – slow growers, stalwarts, fast growers, cyclicals, asset plays, and
turnarounds

Growth in sales, growth in profits, growth in earnings, bottom line the company is
expanding

Slow growers are electric ultilities

Stalwarts are companies like coca-cola with 10-12% growth. Ralston Purina and Kelloggs
are both safe in a recession

In minor tragedy there is great opportunity

Shaky companies in cyclical industries are not the ones you sleep on through recessions

CHAPTER 8 – The Perfect Stock

Any idiot can run this business is a characteristic of a perfect company

Look for spinoffs and turnarounds

Obscure names that do boring things

Find stocks institutions don’t own – look to banks and insurance

Vicker’s institutional holdings guide, melson’s directory of investment research, the

Value line investment survey and s/p stock sheets (tear sheets)

Bottle caps, coupon-clipping services, oil drum retrieval, motel chains, rock pit, look for
niches
Look at Vulcan materials, calmat, boston sand and gravel, dravo, florida rock

Monsanto

Developed public confidence in soft drinks and cough medicine is just as good as a niche

Stuff that people need to keep buying – recession proof

Don’t invest in tech, invest in those who benefit from tech

Look for management heavily invested in shares, a company buying back its own shares

Crown, cork, and seal

Waste management, pep boys, safety-klean, Cajun Cleansers

Good growth rate, not having a down quarter, no debt on the balance sheet, doing well in a
recession

CHAPTER 9 – Stocks to Avoid

Stay clear of the next IBM or McDonalds

You can get ten baggers from companies that have already proven themselves

Earnings and assets. Value always wins out

Look at masco corporation

Value line

Avoid stocks with excessively high p/e ratios

When interest rates are low investors are willing to pay more for stocks

Companies can increase earnings by reducing costs, raising prices, expanding into new
markets, selling more of its product in old markets, or dispose of a losing operation

CHAPTER 11 – The Two Minute Drill

Should be able to give an elevator pitch as to why you should buy the stock

Examples:
Slow Grower – In it for the dividend. This company has increased earnings every year for
the last ten, it offers an attractive yield, it’s never reduced or suspended a dividend, and in
fact it’s raised the dividend during good times and bad, including the last three recessions.
It’s a telephone utility, and the new cellular operations may add a substantial kicker to the
growth rate

Cyclical – There has been a three-year business slump in the auto industry, but this year
things have turned around. I know that because car sales are up across the board for the
first time in recent memory. I notice that GM’s new models are selling well, and in the last
eighteen months the company has closed five inefficient plants, cut twenty percent off labor
costs, and earnings are about to turn sharply higher.

Assets – The stock sells for $8, but the videocassette division alone is worth $4 a share and
the real estate is worth $7. That’s a bargain in itself, and I’m getting the rest of the
company for a minus $3. Insiders are buying, and the company has steady earnings, and
there’s no debt to speak of.

Hotel and restaurant over tech stocks

Look at annual reports for total assets and cash and debt reduction

Chapter 13 – Some Famous Numbers

Percent of sales – how much of the company does it make up?

Price to earnings ratio – if the p/e is below the growth rate, you’ve found yourself a bargain
use value line!!!

Take the long term growth rate, add the dividend yield, and divide by the p/e ratio. 1 is
poor, 1.5 is okay, but 2+ is great.

Cash position – look at annual report, ford example, having lots of cash on hand +++

Debt versus equity usually 75 equity to 25 debt

Bank debt is the worst kind

Look for hidden assets and earnings

Look at companies who own shares in each other, find foreign owner

Invest in companies that don’t rely on capital spending

Annual cash flow 10-1 is standard

When inventories grow faster than sales it’s a red flag

Growth is not synonymous with expansion

20 percent grower with a 20 p/e is better than 10/10

pretax profit margin

recheck the company story every couple of months

when I’m down 25% I’m a buyer