Certain Wealth in Uncertain Times  ®

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Q: How do you select stocks to recommend?
A:  We don't -- at least not initially. First, we ask the question, "Is this the right time to be investing in the stock market?"

         If we conclude it's a better time to be short or buy gold or buy bonds or restore classic cars, we tell you so. A big part of our job is keeping you and your money OUT of harm's way! Then, we rebalance our portfolios by reducing our equity exposure as traditional value barometers like PE Ratios, Price/Book Ratios, Price/Sales Ratios and Dividend Yields enter seriously overvalued territory, and we increase our equity exposure as these barometers enter undervalued territory.
         Then we verify the company's leadership position in its industry, the moat it has around its business, and the quality of its management and its finances. Finally, we check stock prices and determine the value indicators of Price/Earnings Ratio, Price/Book Value Ratio, Price/Sales Ratio, and Cash Flow for each company we are considering.

 

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Q: What are the financial and price parameters investors should look for in stocks in which they invest?

A:  The same way we do! We buy stocks among the lowest quartile in terms of p/e ratios; price-to-book ratios; price-to-sales ratios; and, where appropriate, where earnings aren't the best indicator, as in the real estate industry and often in the energy industry, the lowest quartile in terms of price-to-cash flow ratio.

                  We also look for stocks, all other things being equal, that have strong enough finances to pay a dividend. If we're reviewing two stocks in which to invest our money and both have great management, low P/Es, low cash flow ratios, low price-to-sales ratios, and low book value ratios, but one of them pays a 4.8% dividend and the other 1%, we'll buy the higher-yielding stock or mutual fund.

 

 

 

Q: What about takeovers -- does that come into play in your consideration of a stock?
A:  Yes and no. No, it isn't part of what we think about when we buy a stock, but clients regularly ask us if we have some kind of inside information or stock tips because so many of our companies are acquired.      

           Honestly, we don't have any information beyond what is available to anyone willing to tear into an annual report, a 10-k and a balance sheet! It's just that we're looking for the same financial and stock price qualities that potential corporate acquirers look for. Potential acquirers want to find companies that sell at a fair valuation so that they can tell the public shareholders: "Look, we can give you a 40 percent premium over the current price of your stock. Existing management sees this as a good deal and, by the way," (they say to themselves) "we think we're still getting a good deal at these prices."

           Since we look for the same things that many acquiring firms look for, we have lots of stocks taken away from us at a premium. We don't need inside tips or information; we simply have an investing style that results in lots of our companies being acquired by other firms.

Q: Do you believe in top-down or bottom-up analysis?
A:  I wish the world were that simple! Too many professional money managers answer that question in the most sonorous tones, "Well, we are basically top-down macro-economic investors," or, "Our analysis leads us to believe that a bottom-up approach yields the most compelling returns." (They go to a special Trust-Me School to learn to talk like that!)

         The truth is, while we at Stanford Advisory certainly think of ourselves as first, asset allocators, then industry observers, then stock selectors, we're going to try to make money for our subscribers the best way we can. We are a top-down manager, but if we see a company that excites our interest, we will immediately begin researching their stock, we'll talk to their management, we'll find out all about them, and then we'll recommend it or advise you away from it. The honest answer is, we consider ourselves top-down investors -- and we still buy special situations for our clients.

Q: How does an investor handle bear markets and market corrections?
A:  Lots of ways! Too many people react by hiding their heads in the sand. That's not one of the ways we protect you in bear markets at Investor's Edge!

         First of all, a lot of market decline is transparent to us in our portfolios because we already have stocks selling at real low price/earnings ratio, low book value, etc. They tend not to be hit as much. Having said that -- in a severe bear market every long position in common stock (except maybe gold) gets hit to one extent or another.

           So another way we protect our clients is to seek out convertible bonds, or convertible preferred stocks, issued by a company we really like, in an industry we really like, at a time when we think that industry and company is going to do well. That gives us an income kicker; as a result, when the rest of the market goes down, the underlying stock may go down, but often the fact that we're getting a good interest rate of return, provides an investment floor.

           And, finally, we might buy some puts on the S&P, as a little insurance. If we're wrong, well, we paid a very small premium; and if we're right, that gives us the hedge against a decline in our other issues.

Q:  I don't get it. How do you make these kinds of returns buying stocks that aren't popular with the public?
A:  One man's treasure is another man's trash.  I think it's most accurate to say that we buy stocks that aren't popular with the public at that moment -- but our research and experience leads us to believe it will be The Next Big Thing.

         People often confuse good management and a "great stock" with fortuitous external events. This is especially true when a company is on the cutting edge of a new idea. Of course the CEO is brilliant and the stock is popular –- until it faces competition, a down market, cheaper imports, a recession, and so on. Good management can weather all that. But good management and "great stocks" are sometimes beset by disastrous external events and bad management is often lauded when they just happened to be at the right time in the right market environment. We look for great management in unpopular companies, not crummy management in popular companies! And that has made all the difference in the world to our clients...

Q:  Let's cut to the chase. Where is the stock market going?!?!?
A:  I can't tell you how happy I am you asked. We haven’t a clue — in the short term.  In the long term, we believe that the world is becoming more capitalist and free trade is growing and those two trends ensure continued growth in capital markets. 

         I will, however, make educated guesses based on history. I am on record predicting Dow 10,000 by 2000 and on record predicting a decline below 8000 in 2002. Based purely on history and experience, I believe we will probably see Dow 20,000 within another 10 years or so.

           But there are three things in this world I know I will never know: where the stock market is going tomorrow, what women are thinking today, and why teenagers do whatever they do. So I stick with what I do know -- how to find undervalued companies in any market environment.

Q: I like your approach. How can I subscribe?
A:  Call us at 800 253-2088 or e-mail us at investorsedge@stanfordwealth.com. One of our staff will take your order and get the most recent copy to you ASAP!