Believe it or not, there is something that
is even more predictable than Buffett's success in the stock
market. It is that when the market is at record highs, there
will be a rush of books and articles saying that you ain't
seen nothing yet. And when it is at a low, the naysayers
will be rushing into print saying that it is going to go
It was only a few years ago when the Dow
was at record highs that we had books on the best seller
list such as Dow 40,000: Strategies for Profiting from
the Greatest Bull Market in History by David Elias.
Or, if that was not enough, how about a Dow of 100,000?
This is the claim of Charles Kadlec and Ralph Acampora in
their book Dow 100,000: Fact or Fiction.
Now when it has settled down to lower levels,
many authors are rushing to print saying that it is going
to go much lower. In Conquer the Crash: You Can Survive
and Prosper in a Deflationary Depression by Robert.
Prechter Jr we read that the Dow is going to go below 1,000.
The same applies with individual companies.
When Amazon.com was at its record highs, many analysts were
falling over each other recommending it as a buy. For example,
when Amazon was selling for just over $200 a share back
in 1999, a little-known Merrill Lynch analyst, Henry Blodgett,
predicted it would go to $400 - even though Amazon had never
made a profit. As we know, a little later Amazon started
its slide to as low as $12 allowing for a 2-for-1 split.
Blodgett has said his prediction was based
on sound analysis using new ways to measure a company's
performance. Wall Street even coined a new verb: to "blodgett"
The point is that neither Blodgett or anyone
else could value Amazon in a rational way. It had no earnings
back then, and it has not had any earnings over a full year
since. It was a speculation back then. It continues to be
a speculation now.
It was a similar story with Pricelline.com.
Mary Meeker of Morgan Stanley initiated coverage on Priceline.com
in April 1999 with an outperform rating shortly after Morgan
Stanley brought the company public in March 1999. Her initial
outperform rating came when the stock was trading at $104
a share. The stock then advanced as high as $162 before
starting its deep decent to $1.125 by December 2000. Ms.
Meeker reiterated her outperform rating five times over
the next two years.
Salomon Smith Barney analyst Jack Grubman
was another person who strongly recommended dubious stocks.
It certainly gives you great faith in the
marketing instinct of these authors and analysts. Play on
the hopes, or the fears, of the average investor and you'll
sell books or get hefty commissions.
Seriously, what are we to do? Actually it
is so simple. Just stick to companies with a history of
selling quality products and services that the general public
use and want. Make sure that they have at least 5 years,
preferably 10 or more, of stable and growing sales and earnings.
Look for companies with not too much debt and a high return
Conscious Investor filters through over 6,000 USA companies
doing just this. We also provide a check list with questions
in six categories to make sure that all the points are covered.
We think of it like the check list used by
an airline pilot before taking off. Unless everything checks
out, then the plane is not cleared for take off. Similarly,
unless everything checks out with a company, then we do
not even consider purchasing it.
Once you have found a company that meets
your requirements, the next step is to determine a sensible
price for it. As Buffett has said, even for a great company
you can still pay too much. Once again, Conscious Investor
has the tools to help you do this. For example, it has a
proprietary functions that determines the expected percentage
profit on a stock. In this way, you can quickly compare
different stocks in terms of their investment potential.
And just imagine the peace of mind to be
free from the wild, and often willful, claims by authors
and analysts such as those above.
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