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- Don D., California
Buy Low, Sell High
Buy low, sell high! That, indeed, is the truism on Wall Street and the goal of every equity investor that I have ever met. That is save for the short sellers, whose purpose is to do the exact opposite. To illustrate this truism, the noted author and investment icon, Ira U. Cobleigh wrote a best seller in 1967 entitled ``Happiness Is A Stock That Doubles In A Year.'' The book spotlighted a surprisingly high number of stocks that had actually doubled in that time period. It was a book that I couldn't put down, although my own experiences, both in and out of the stock market, have shown that things do not always work out as planned, nor are they as easy as the proponents make them out to be. That is the wisdom of age, perhaps.
Even though buying a stock in the hopes of seeing it double in a year is not an easy task and rarely--even in the giddy speculative days of 1967 when the stock market was notably less effiicient--easily achievable, the goal of buying low and selling high should always be kept in mind when investing. One should aim high, because if our goals are too modest, little of note will ever be achieved. Such an approach may well be a carryover from my youth, but it is a goal I have always maintained. It is one that I have also emphasized with my two sons and hope to do with my five grandchildren, the oldest of whom is now enjoying his first experience as a Little Leaguer.
With this in mind, a good investment approach in selecting stocks is to scan the new lows list published daily in many newspapers. Now, just because a stock is low-priced or on that infamous list does not automatically qualify it as a good investment. Indeed, many an investor has bought what he or she believed was a cheap stock only to suffer the indignity of seeing that equity get cheaper and cheaper after purchase--at times even going down to zero, as the rumors and facts driving that equity down prove well founded. I have been there, and believe me it is not gratifying to the ego, nor the net worth.
That said, one should, before selecting that out-of-favor stock, do a careful analysis of that issue's track record and price history over a several-year period. For example, has the stock really underperformed the market during this stretch or has it not really stood out from the crowd? Is the price-earnings multiple, or P/E, really suggestive of undervaluiation, or are earnings suffering to such a degree that the P/E is actually rising as the stock is falling. Also, why are the earnings falling? Declining profits can be cyclical, that is, resulting from some reversible trend in the economy. Conversly, the problem can be structural or secular in nature, and indicative of a long-term malady. If that is the case, your money is best put elsewhere. The notion of throwing good money after bad applies here.
Before taking one's money and putting it into an out-of-favor stock, investors also always should check the company's financial health, including the debt-to-capital ratio, the amount of cash on the balance sheet, the debt due in the next year or several years, the returns on capital and equity, the tax rate (a low tax rate often signals poor earnings quality), and the profit margins--operating, pretax, and net. Also, how is this stock performing in comparison with its peers. Is it just the equity in question that is underperforming, or is the entire sector in disarray. Such an approach can uncover the rare gem--but it can also help us avoid the lump of coal in the stocking.
In buying a so-called cheap or undervalued stock, one wants to be as certain as possible that the company is in a reversible slump, and not on a long road to ruin. In the latter case, that is where our money is headed. In most instances, the market knows that there is a problem, and the coming months may bring proof of that knowledge in further new lows. However, the stock market and the seemingly savvy traders do not always know, and uncovering those instances when the market is less effecient than the self-praising experts attest, can uncover potential gems and, indeed, the stock or stocks that can double--or more--in a year.
Is buying from the new lows list always a good approach? Clearly, it is not in every case. In fact, most of the time, it is a poor idea, as stocks making such an appearance--unless we are in a raging bear market when the new lows list is a very frequented locale--usually have some serious problems. Experience teaches that seeking out stocks that have a good story to tell and are getting recognized for it is probably the best and most conservative approach. However, you might want to play the so-called contrarian game with a portion of your capital, just so that you hedge your bets and seek out that possible exceptional rare gem that can double in a year.