Without A CFA, You Can Still Find Good StocksDon Shaughnessy
When seeking investment opportunities you have ways available that do not require advanced training and deep research. They are indicators not conclusions. You will still need to think about financial stability, industry position and other factors but it is better to start looking for those within a company that seems to make sense as a business.
What to do?
Yesterday I talked about volatility and how it was that people who acquired securities with incomplete or wrong information tended to become motivated venders eventually. In investment thinking volatility is a proxy for risk. Warren Buffet has said, “Risk is what happens when you don’t know what you are doing.”
I think it is safe to say that you cannot know everything about any investment so today I will try to show you some ways to overcome that defect.
First recognize that you are not immune to your feelings. You have an advantage when you know that feelings will lead you astray. You can be a Martian. Try to be objective.
Second, minimize reliance on pundits and analysts. Most are entertainers, some have an agenda. If you can find a few that make sense, maybe follow them but others are unlikely to change their mind when their ill-informed or biased call turns out wrong. They may become more shrill or ignore it.
Third, take your time. Be very cautious when you are following the market. Unless you are a high velocity trader, there is no urgency. More research tends to dampen emotions.
Fourth pay some attention to the market as whole. Warren Buffet suggests that the market is bipolar. “When Mr. Market is feeling badly you should buy from him. When he is euphoric, you should sell to him.” Sounds easy enough.
Fifth have some objective factors. Personal experience is good. Do you use the product? Do you understand the product and its competitors? Do you understand the business structure? Is the company financially stable? Is there free cash flow? Do they pay dividends? Paying dividends keeps managers from having too many homeless dollars splashing around. With dividends there is less compulsion to spend money just to get rid of it.
This last one is a bit harder. Who are the mangers working for? I have four things other than total compensation as a share of net income that I look for here.
- What kind of corporate jet, if any,
- How long have they been here and are they emotionally invested,
- Do they sponsor golf or tennis tournaments?
- Is it a family business with competent managers
You would be surprised how often the, “Do I like their product?” question will lead you to good investments. If you tried and liked Titleist golf balls, LuLu Lemon yoga wear, the first iPod, Gillette razor blades, EBay and dozens more, why would you not buy some of the stock? Or maybe market leaders with a long history. John Deere is my current favourite even though they sponsor a golf tournament.
If you want to feel secure, you might look at the Lindy Effect. Things that have lasted a long time tend to last longer still. With businesses, growing market share is interesting. When using the Lindy Effect, you will need to be on the lookout for disabling technological change. Kodak did not. Quit Quick.
When you find some that look like candidates, you can get fussy.
You don’t need to buy everything. I know one portfolio manager who starts by looking at financial statements. Hundreds of them. He uses a simplifying heuristic to minimize the deep research. He reads the management report at the front of the package first. If he finds the words challenge or challenging he discards the company. In his words, “I have only 40 securities in my portfolio, I don’t need businesses that have challenges.”
You do not need an advanced degree to find good stocks, although it might help. Use common sense. Stocks with good finances, good market position, moderate to no debt, disciplined management and growing productivity or product lines tend to do well enough for most investment purposes.
Or you could find a manager with a common sense approach.
Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.