FINDING GREAT COMPANIES IN THE MOST LIKELY OF PLACES
When you scanned the headline to this column, did you have to stop and take a second look, just to make sure you’d read what you’d thought you had? Instead of “Finding Great Companies in the Most Likely of Places," did you perhaps expect to read “Finding Great Companies in the Most Unlikely of Places?”
If you did, you’re not alone. Most investors -- novice and seasoned alike -- are under the impression that in order to find the next Microsoft, Wal-Mart, or McDonald’s, you will have to resort to some rather unsavory means, such as:
* Sneaking yourself into a meeting of the top investment analysts at Standard & Poor’s,
* Getting yourself invited to be part of a foursome – flanked by three successful and very wealthy investors – on the golf course of the local country club,
* Shamelessly eavesdropping on every conversation within range, with the hopes of gleaning a “hot stock tip.”
Not so. In fact, I’ve got some good news and some bad news on this front. The good news is actually great news – you’re more likely to find the next hot stock by following your teenagers around the mall or looking at the products and services you use every day in a new light than via any of the above-mentioned methods. The bad news (and it’s really not so bad, after all) is that there are so many great companies out there that you’re going to have to work hard to narrow the field and choose the ones that are the best match for your club’s philosophy and goals. Good thing you’re not in this alone.
Peter’s Principles
When I first began writing articles geared toward educating and inspiring beginning investors, someone wiser and more experienced than me turned me on to the writing and philosophy of investment guru Peter Lynch. In case you’re not familiar with him, Peter Lynch managed the Fidelity Magellan Mutual Fund from 1977-1990, with results so extraordinary they were almost magical.
Following his retirement from Fidelity Magellan, Peter wrote two best-selling books: One Up on Wall Street – which remains one of my all-time favorite books on investing – as well as the follow-up, Beating the Street. Peter’s advice on how to find great companies is not only simple to understand and apply, but it’s also timeless. Though he offers dozens of guidelines for finding top-notch stocks, there are a few that are so good that I can still name them off the top of my head whenever there is, say, a lull in a cocktail party conversation.
My favorites among the 21 principles sprinkled throughout Beating the Street are:
* "Never invest in any idea you cannot illustrate with a crayon."
I love this one; from the day I first read it, I’ve never forgotten it. This is Peter’s response to the adult tendency to invest in a company because its business sounds “high-tech” and seems to be the wave of the future. “Surely [this principle] would have kept investors away from Dense-Pac Microsystems, a manufacturer of ‘memory modules,’ the stock of which, alas, has fallen from $16 to 25 cents,” he writes. “Who could draw a picture of a Dense-Pac Microsystem?” Some of the best things in life are the simplest. Ditto for great companies.
* "You can't see the future through a rearview mirror."
Do I wish I’d invested in Microsoft in the late 1980s? You betcha. I can’t tell you how many times I’ve kicked myself for overlooking that one – especially since the day I heard the statistic that $5,000 invested in Microsoft stock in the late 1980s would be worth a bazillion dollars about now (rough scientific estimate). Keep in mind that while a company’s track record can offer valuable information as well as guidelines for its future performance, history is unlikely to repeat itself.
* "The best stock to buy may be the one you already own."
When your club is ready to add to its holdings, don’t overlook what’s right under your noses. One of the best stocks to buy may already be in your portfolio. Why not consider purchasing additional shares?
Crayola, Please
Peter’s message is as simple as his strategy. It’s not so far-fetched to think that you and the members of your investment club can not only rival -- but perhaps even beat – some of the best professional money managers out there. You are, after all, already an expert in the products and services that you use on a regular basis. Throw some serious research into the pot and your club might have itself a real winner.
That said, I’ve got some homework for you. Before your next investment club meeting, challenge your club members to look at the everyday world around them – the mall, their kids’ favorite toys, games, or clothing brands, the grocery store -- with fresh eyes and to jot down, in crayon, three new investment ideas that came to them as a result.
Then, at your next meeting, once again in crayon (A dry erase board and marker is also acceptable), ask your members to illustrate the company’s business.
Finally, please keep me in the loop. After your next club meeting, report back here in my new Join the Club! Forum, and give me the scoop on how this exercise turned out for your club! |