Winners Wanted

In my last post, I discussed the market 'doldrums' and how I'm preparing during this achingly slow period to ready myself for some buying in the next few months. But what does that mean in real terms? What exactly should I be looking for? I'll need a checklist of attributes I want my businesses to have as well as resources with which to research the companies in question.

First, I'll need a place to start. For that, I often turn to The Motley Fool's free podcasts, of which my favorites are Rule Breaker Investing and MarketFoolery. Respective hosts David Gardner and Chris Hill break down simple stock selection methodology and their favorite companies in brief understandable segments, providing a perfect jumping-off point for beginning investors looking to get the basics, as well as for the more experienced who want fresh ideas.

Next: data and other information. I've said previously that my favorite starting point is Yahoo!Finance. Online today you can't find a more comprehensive, up-to-date, easier-to-navigate stockpile of free public company info. You'll discover recent financial statements, basic criterial calculations, insider (executive) histories and stock positions, and a broad-reaching searchable database of articles on every American public company, plus hundreds of internationals.

(A portion of what follows was originally published last summer. It's been edited and updated.)

Hopefully by now a few specific businesses look promising. When I'm thinking of investing my hard-earned money to buy into one of these businesses, I want to be able to

• Describe in one sentence exactly what the company does
• Identify the CEO by name, and whether she or he is a founder of the business
• Identify primary marketplace competitors 
• Recall how the stock has done over the past 12 months

The next step is to start examining specific criteria— contrary to a lot of what we read, I generally find it more helpful to search qualitatively than quantitatively— that will help me decide if this company is one I want to own. Here's what I look for:

1. Sustainable Advantage, or 'Wide moat'. What kind of a gap exists between the business I'm looking at and other players on that field? For example, Amazon has a huge moat against every other internet retailer— even every bricks and mortar retailer— due to its sheer scale, which lends it buying power, shipping efficiencies, and brand recognition. Which means in every theoretical matchup between Amazon and Walmart, or Chinese e-tailer Alibaba, Amazon is the odds-on winner. The moat generally makes it a safer investment. 

But a competitive advantage could be anything difficult to replicate, whether another company is currently competing or just thinking of getting into that market. Proprietary technology for example— or actual patents— can keep competition at bay for years. Think of what happened to the Sony Walkman line when Apple introduced the iPod. Plain old momentum, too, provides a hell of an advantage: look at the the uphill battle faced by anyone— including deep-pocketed Amazon— who tries to challenge Netflix in streaming TV.

2: Smart, transparent leadership. I also want to learn about the executive team. Every company's 10K (annual report, written by the execs) is available for free, and many execs routinely make themselves available for interviews with the financial press. Are they smart? Does what they say make sense? Do they seem genuine, or phony? Are they likable, or trustworthy? Confident? Slimy? Egotistical? Do they talk about their customers and their employees— or just about their board members and stock price? I'm looking for how they think, whether they duck hard questions or obfuscate their answers. I want to get to know them because ultimately they run the businesses I'm buying into, so largely they will decide the success of my investments.

3: Low debt. I generally don't like businesses which are capital-intensive: they require a lot of expensive equipment or facilities which drag on their cash reserves and profitability. As an example let's look at airlines. An airline has extremely high fixed costs for equipment, fuel contracts, parts, logistics systems, and lots of trained personnel and retirement/pension expense. An airline has to take on huge debt to finance these costs, and the payments on that debt take a fat chunk out of profits. Because airlines sell a commodity (a seat on this plane is largely no better than a seat on that plane) they face brutal price competition, and when the economy dips, customers travel less, and the airlines and their stocks frequently take a pounding.

So I look for the line item Long Term Debt on any business's most recent balance sheet, and what I want to see is total debt around 25% or less of the company's annual revenues (this information is on the Balance Sheet of any public company and is easy to find). I want to know is how much the company is borrowing compared to how much they're selling, so I can get a napkin-sketch idea how much the debt payments (usually 5-10% per year) drag on profitability. 

It's everywhere

4: Be a customer. Many investors are interested only in what they can learn from financial statements, leadership 'guidance', or from technical analysis of charts and graphs. All of which is useful. But unlike them, I believe the customer experience is perhaps the most fundamental measure of a company's values and future opportunity. I'm pretty normal. So when my customer experience is substantially flawed (bad restaurant service, a crappy or crashing website, cheap fabrics, a lousy return policy) I am unlikely to come away feeling good about the company's prospects; that company's values would seem misaligned with mine. But when the customer experience is stellar, I imagine other customers will be as delighted as I was. I start to see possible future trajectories for that business, and I get interested in owning a piece. So whenever possible I prefer to buy companies I do business with directly (Amazon, Netflix, Apple, Starbucks, Chipotle, Twitter) or whose products I've used extensively (Under Armour, Visa, Disney, Imax). While I can research the financials and leadership and competition and operational efficiency, only being a customer gives me the ability to properly judge its products or its value proposition to other customers. Without that piece I have a lot less to go on.

The original 1997 logo

5. Climbing stock price. We've all heard 'buy low, sell high,' so it's counter-intuitive that you'd want to buy a business whose price is climbing. The truth is that buying low often means buying a company which has lost value and might never regain it. There are usually very good reasons why a stock gets hammered down, and the market is brutally efficient. The odds that you'll buy a company whose price is unjustly low— one which has been oversold by unnecessarily fearful investors, so its price is currently below its 'real' value— are slim. Instead, look for businesses with rising prices: these are companies the market has decided are winners, and in the words of David Gardner, "Winners tend to keep on winning." It's more difficult to go wrong with fast-growing businesses, for which revenues are increasing year-on-year and profitability is improving with them.

6. A great brand. This qualitative assessment is more art than science, and it requires me to look around at my community, at the news, current music, at my family, at teenagers in our circle, at colleagues, friends and neighbors. Is this brand popping up more? Are celebrities photographed using their products? Do my kids want me to buy something they make, or does it seem like their prices are rising a little faster than competitors? Am I noticing their stuff product-placed on TV? Does the company ever come up in general conversation? These are all signs that the business in question is hot or heating up, that it's coming of age. Good signs. 

The important thing to bear in mind through this process is that I'm not simply buying something which represents the future success (or failure) of a company. It's not a bet. I'm becoming an owner of this business. Which means the business itself should be fun, exciting, and compelling for me. Otherwise I'll tire of it in a couple of years when it hits a rough patch, and that will make me want to sell. But real investing gains come only over the long term. So buy smart.

Doldrums

My dad was a sailor. When I was young I had to take sailing lessons first thing in the morning every summer, then on weekends sit with the family, bored out of my mind, on his tiny sloop as we tacked back and forth across Boston Harbor. A typical boy, I wanted speed: speedboat, ski boat, jet-ski, really anything that made a wake. But he was never more content than he was in that open little boat, mainsheet in one hand and steering with the other, sun on his face, a Heineken between his fingers on the tiller.

The worst for me, however, was when the wind died completely. He called it the doldrums, which was technically inaccurate (the doldrums are an actual location near the equator, sitting between trade winds) but he nailed the spirit. As does the word itself: it sounds tired, slow, dreary, which of course it is. When you hit the doldrums, there's nothing much to do. It's a sailboat, after all, and-- ever the purist-- Dad didn't have a motor. So we sat.

After a few dull minutes, Dad would start getting busy with all the nothing. He'd put one of us on Scout duty, scanning the distant surface for any sign of an incoming breeze. He'd have someone else coiling lines and sheets, putting away winch handles and empty soda cans and hats left around the cockpit. Eventually he'd pull out nautical charts of the area and ask Mom to fix a snack or something. It could be a while, he'd tell us. He'd teach us again about the sails and the wind indicators, called telltales. He'd quiz us on terminology. It was all just filler, trying to keep us engaged and interested until the wind returned.

But really he was preparing us, himself, the boat. Because on the water, weather can change suddenly and violently, and then things often happen fast. A sudden a squall, a rogue wave, even just an unexpected gust, and your little boat is rolled and you're in the water.

Welcome to the US stock market doldrums. A real banner year, with all major indices down so far in 2016 after a flat 2015. If you're one of those who finally pulled the trigger and started investing in the last couple of years, take heart.

Technically, of course, we're in year 7 of a bull (rising) market. This is true because, while 2016 to date has seen a correction (short drop), it's not enough to knock the market out of bull status. But that's pointless advisor-driven wordplay. Here on the ground in real time, nothing seems to really be moving much. We got whipped at the start of the year, and now it's up a little on Tuesday, down on Wednesday and Thursday, up again Friday through Wednesday, then down again. No celebration, no panic, no excitement at all.

Sadly, this is the stuff of successful modern investing. It's tremendously tedious, punctuated by tiny moments of action when you buy or sell something. Nearly all of the rest of the time, it's this. Just nothing.

From all that sailing training I know to use the time. And I am. I've been on Scout duty. Of course I'm not just looking for signs of a market wind, but for specific opportunities: businesses that have been repriced by the market correction in January and early February which haven't recovered yet and so represent good values going forward. I'm also inspecting my holdings for signs of weakness: businesses which-- if ultimately a sudden gust comes over my gunwale-- I'll need to sell because they don't necessarily have the products or the distribution or the branding or the management experience to weather a real storm. I've been moving money around, selling some older investments which I believe have had their run, and socking away cash with which to buy when I identify new targets. I've been doing a lot of reading about business, economics, investing practices, media, and the hot mess we're calling a political campaign season. I'm coiling my lines, bagging my empties, readying my winch handles.

Dad would be proud.

I'm getting killed in 2016-- and that's OK

I don’t know about you, but my portfolio is taking a beating so far in 2016.

As of this writing, I am down more than 20% in the last 6 weeks. That wipes out my +15% for all of 2015 and puts me at about at the level I was in September of 2014 (net of any additional purchases made since then). Which, I think, is better than most … but it sure feels lousy. I think about my kids’ college money burning like a pile of leaves. The plan to pay for my elderly mom’s future medical bills, circling the drain. My own retirement, receding into the distance.

So this is it. We in the investing community—and that’s by definition with a long-term bias, as opposed to the trading community—we often talk about withstanding the downturns in order to realize the big gains which follow. We talk about adding to our existing positions on the dips, to lower our average per-share cost and position us for future rises. We talk about the grit and strong stomach required to hold, even to buy, in times exactly like this. All the practice, all the articles, the books, mentors, the courage we’ve mustered to get into this crazy sandbox in the first place, it all comes to this moment. Right now is why most people can’t invest for themselves. Right now is what they are afraid of. Right now is the origin of the horror stories.

But here’s the truth of it: we are stronger than they are. We can overlook today and focus on tomorrow. My all-time favorite Warren Buffet quotation isn’t the one about fear and greed. It’s “the stock market is a device for transferring money from the impatient to the patient.” Right now is the moment the impatient are fleeing, and the patient get to keep the money behind.

The irony is that, awful as it is, we knew it was coming. We didn’t know when, or how bad or how long, but we knew it was coming because it always comes. That’s what it is to be an investor: a series of downs and ups, heartbreaks and triumphs. Following the stock market run that began in 2009, we’ve had a helluva ride, turning victory laps as the broader market more than doubled in 7 years (really only 5 years since we’ve now erased any gains made since 2014). So of course this would happen. And in fact it needed to happen to reset the overpriced businesses, to clear out the high-trading speculators and gamblers, to make prices attractive enough again for the rest of us to buy—which sets up the market to rise again to a higher level.

My friend Morgan Housel just wrote a piece this week about how it is that the markets gyrate as they do, and why that is not only normal but necessary. And my friend Ben Carlson just posted an article about how we view bull and bear markets differently, despite our commitments on each cycle not to do exactly that. Finally, if you’re still panicky, re-read my post from last July about when to sell—and when not to sell.

And get your clicker finger ready to hit the Buy button. Because this won’t last forever, and prices are getting more attractive every day.

Drifting to Fifty | Random unrelated nugget of the week

If inside your suitcase you roll your carefully-folded slacks and shirts around a pile of underwear, socks, pajamas, and shaving kit, the folded clothing will be less wrinkled when you arrive.

A Calm Voice and a Steady Hand

In my twenties, at a time when my marriage was new, my career was stalled and my father’s illness was worsening, I was fortunate to get to know a gifted man. He was a spiritual leader and a counselor, and among his talents was a rare ability to soothe, and calm, using only his kind eyes and gentle voice. When he turned to you, for that moment you were his entire world, and he made you feel safe. He must have been an amazing counselor.

The markets this month have been a roller coaster from hell, all big drops and loops and fast hairpin turns, not a single steady climb to be seen. A little soothing and sense of security would be welcome.

As I’ve said in previous posts about studying the market and where investing ideas are born, I like to read about business. Clever and observant writers give me most of my ideas not only about what to invest in, but about how those businesses are performing, who they partner with, what their leaders are up to, how they compete, what products are coming down the pipe, and on and on.

And I’ve mentioned before, at least in passing, who I read. But it’s not just academic: these individuals offer analysis, experience, wisdom and also something else: in difficult market moments, these people are the cool and steady hand on the wheel. They reassure me. They remind me that no matter how far the broader market falls, no matter the beating I take on my positions, it will all come back. That I’m playing the long game, measured not in quarters but in decades. That no market rout which lasts a few weeks can shake my foundational belief that over time, the market rises. Without them, I am lost, sleepless, panic-selling into a dropping market.

In no particular order, followed by links to their work and their Twitter handles where applicable:

Morgan Housel, The Motley Fool, @TMFHousel

With a deep understanding of markets, the economy and history, as well as the psychology of the individual investor, Morgan stands alone. He possesses an uncanny ability to simply reframe complex concepts and turn the impenetrably technical understandable. He posts two or three columns a week and is routinely a guest on the Motley Fool podcast series.

Barry Ritholtz, Bloomberg and The Big Picture, @ritholtz

A seasoned money manager and award-winning journalist, with a terrific 10,000-foot view of what’s happening and why you should care. Barry also hosts the Masters in Business podcast series for Bloomberg, offering excellent long-form interviews with the pillars of finance and the economy today. 

Chris Sacca, Lowercase Capital, @sacca

Chris is a former Googler who made some prescient early-stage tech investments when he left, and one thing led to another and he just kept going. He's a venture fund manager, advisor, and entrepreneur, and now appears on Shark Tank. Among his angel plays: Uber, Kickstarter, and Instagram. He spreads his wisdom primarily on Twitter and via his many appearances and interviews.

Tadas Viskanta, Abnormal Returns, @abnormalreturns

An investor, blogger and author, Tadas operates the site AbnormalReturns.com, where you can find one of the best curated daily must-read lists on the financial web. What's pertinent to today's investors. Check him daily.

David Gardner, Rule Breaker Investing, @DavidGFool, @RBIPodcast


David and his brother Tom founded the Motley Fool in the mid-90s following a remarkable stock-picking run, and they continue to run the advisory and wealth-management firm today. David prefers smart, disruptive, low-capital businesses with huge potential, which he buys early and holds for 5 years or more. His personal returns have been extraordinary over the last 2 decades, and his engaging new podcast teaches how replicate it in a fun and approachable way. Tune in.


Chris Hill, Market Foolery and Motley Fool Money, @TMFChrisHill 

I actually don’t read Chris as much as I listen. He hosts two podcasts, MarketFoolery (daily) and Motley Fool Money (Fridays). With the input and analysis of his guests, Chris asks questions we'd ask, distilling daily business news and stock moves into understandable bullet points—so investors quickly learn what’s happening and what do about it.

Jason Moser, The Motley Fool, Motley Fool Money, Market Foolery, @TMFJMo 

A straight up “stock” analyst, and probably Chris Hill’s most-often guest. Jason is not just another business expert: he looks at the market like a consumer, deriving many of his excellent specific opinions and recommendations less from the performance of the stock than by the performance of the business, against its competitors and for its customers— which is a better indicator.

Ben Carlson, A Wealth of Common Sense, @awealthofcs

With keen observation and a wisdom belying his youth, Ben provides grounding to the financial community with his buy-and-hold doctrine and get-rich-slow values. Ben’s blog offers intelligent analysis not of individual stocks but of the current environment, what drives him crazy about his industry and the potholes we all fall into. His book, A Wealth of Common Sense, is the best investing guide I’ve read in years.

Josh Brown, The Reformed Broker, @ReformedBroker

Josh offers a clear-headed and entertaining perspective on the money-management industry as well as on markets and the economy. One recent post related the current volatile bear-market environment to Leonardo DeCaprio's repeated survival trials in The Revenant.

Then there are those who don’t write a column, but who have outsize impact in the capital markets. These investors have sufficient gravity to pull in board members, executives, journalists, and people like us, who watch them for ideas and perspectives. Just by keeping your eyes peeled for news with their names you’ll gain all sorts of useful insight:

Warren Buffett, @WarrenBuffett

You already know who he is, because he’s the biggest of them all. Warren is in the financial news somewhere every day. No one on the planet has more market wisdom or stock-picking expertise, or more patience. Personally I've been underwhelmed with his purchases lately, and I sold shares in his company, Berkshire Hathaway. But there is still no one in the industry more wise, or more worthy of my trust. His instincts and clarity are astonishing. check out his annual letters.

Charlie Munger

Warren Buffett’s 50+ year business partner and number-one counsel, Charlie has long been the more acid-tongued and entertaining of the two. The smarts and experience of Warren but with a good dash of pepper. Find him giving interviews on YouTube.

David Einhorn, @davidein

Hedge fund manager with a mixed record, but dependably well-researched and frequently does a deep dive on one troubled business or industry a year which he then bets against, and presents his findings as a slide show at investor conferences. Always a fascinating perspective. 

Carl Icahn, @Carl_C_Icahn

Phenomenally aggressive and talented activist investor who just about always gets a huge business in which he buys a big stake to cut costs and improve efficiency, thereby driving up the price of the shares owns. An investor could do worse than to routinely follow him in.

Bill Ackman

An activist investor with a lot of losses, but even more wins, Bill likes to stir it up and he’s not shy about going public with it. A great source for background information or just for the viewpoint of a smart man who does what we're doing, but on steroids. See his interview with Bloomberg from last autumn.

Dan Loeb

Like Bill Ackman, Dan will get aggressive, writing public letters to execs and board members when he’s unhappy about returns on his holdings. His research team could win awards: the discovery that then-Yahoo CEO Scott Thompson had padded his resume ousted Thompson and won Loeb a couple of Yahoo board seats. You can find him on YouTube as well.

There are many others, of course. I follow dozens of executives, investors, and journalists on Twitter, and their tweets lead me to hundreds of articles a month: I read about my businesses, the industries they compete in, about the larger economic trends, about the day-in-day-out of investing, of searching and questioning, of remaining clear-eyed, and keeping my focus on the horizon.