HOW TO PICK GREAT STOCKS (By The Big Money- Frederick R. Kobrick):
FIRST: WITH MICROSOFT, DELL, HOME DEPOT, CISCO, AND STAPLES, I KNEW SEVERAL KEY THINGS WHEN THEY WENT PUBLIC.
(A) THE TOP GUY HAD VISION AND COULD TRANSLATE THAT VISION AND INTO A STRATEGY TO MAKE HIS COMPANY A LONG-TERM WINNER, NOT JUST A GOOD STORY FOR A YEAR OR TWO.
(B) THE PERSON AT THE TOP WAS VERY COMPETITIVE, BUT NOT SOMEONE WHO WOULD TAKE RIDICULOUS RISKS, AND HE SHOWED INVESTORS A SOLID PLAN TO DOMINATE HIS INDUSTRY AND BECOME NUMBER ONE.
(C) EACH COMPANY HAD ALREADY DONE SOMETHING RIGHT AND SEEMED TO HAVE WHAT LOOKED TO ME LIKE A SOLID BUSINESS MODEL THAT DESCRIBED HOW IT WOULD EXCEL IN THE INDUSTRY, COMPETE AND GROW WELL, AND BE PROFITABLE
(D) EACH COMPANY WAS IN AN INDUSTRY THAT WAS JUST TAKING OFF, AND LOOKED AS THOUGH IT WOULD BE HUGE－AN INDUSTRY OPPORTUNITY FOR THE FUTURE.
(E) EACH ONE EITHER ALREADY HAD, OR LOOKED AS IF IT WOULD HAVE, A LOT OF COMPETITORS WHO WANTED A PIECE OF THAT EXCITING INDUSTRY.
THE BUSINESS PLAN HAD TO BE LOGICAL, SHOW COMMON SENSE, AND BE PRESENTED IN A WAY THAT MADE IT POSSIBLE FOR EVERY NONPROFESSIONAL INVESTOR TO EASILY UNDERSTAND IT.
SECOND: I ASKED EACH COMPANY, OR READ IN ITS DOCUMENTS AND REPORTS, WHAT ITS INDUSTRY OUTLOOK WAS, WHAT THE GENERAL SECRETS OF SUCCESS WOULD BE IN ITS INDUSTRY, AND WHAT SPECIFICALLY THE COMPANY WOULD FIND MOST CHALLENGING AS IT LOOKED AHEAD.
THIIRD: I OBSERVED, TRACKED, AND LOOKED FOR
(A) EXECUTION;
(B) GROWTH RATES AND MARKET SHARE AS THE KEY METRIC;
(C) GROSS MARGINS AND BOTTOM-LINE PROFITS, JUST TO MAKE SURE THAT THE HIGH GROWTH AND MARKET-SHARE GAINS WERE NOT BEING ACHIEVED WITH LOW PRICES THAT WOULD UNDERMINE PROFITABILITY. ALSO,
(D) I WANTED TO BE SURE THAT THE COMPANY DID WHAT IT SAID AND SAID WHAT IT DID.
FOURTH: SOME SMALL COMPANIES, INCLUDING THOSE I BOUGHT IN INITIAL PUBLIC OFFERINGS, DID NOT LIVE UP TO EXPECTATIONS. I COULD SEE QUICKLY THAT MARGINS OR MARKET SHARE OR INCONSISTENCIES BETWEEN STATED GOALS AND OPERATIONS WERE NOT GOOD. SO I WOULD TAKE A SMALL LOSS AND GET OUT QUICKLY. THE LOSSES WERE SMALL BECAUSE THAT WAS JUST A DISCIPLINE－WHEN I HAD MY DOUBTS ABOUT A COMPANY WITH LITTLE OPERATING EXPERIENCE, I WOULD GET OUT. BUT IF I WAS UNSURE, AND THERE WAS STILL SOME HOPE OR PROMISE, I WOULD MONITOR IT EVEN AFTER I SOLD. SOMETIMES I WOULD BUY BACK THE STOCK EVEN IF IT WAS AT A HIGHER PRICE. I DID THIS EARLY IN THE PUBLIC LIFE OF DELL, AND THAT WORKED.
WHEN COMPANIES WERE TRACKING WELL, I BOUGHT MORE SHARES ALONG THE WAY. I EVEN DID THAT AFTER CISCO HAD DOUBLED FROM THE PRICE I BOUGHT IT AT WHEN IT WENT PUBLIC, BECAUSE THE COMPANY HAD PROVED ITSELF. OBVIOUSLY, IT WAS STILL A HUGE STOCK GOING FORWARD. (I DID ANOTHER 18X MY INVESTORS’ MONEY AFTER IT DOUBLED OVER THE FOLLOWING FOUR OR FIVE YEARS, AND THEN MADE EVEN MORE.)
BILL GATES WAS EXCITING BECAUSE THE PUBLIC VALIDATED HIS VISION OF WHERE PROGRAMMING-LANGUAGE DEVELOPMENT AND PC OPERATING SYSTEMS WERE HEADED. OF COURSE, HE WAS HELPING THIS HAPPEN. HE NATURALLY HAD EXCITING VISIONS OF WHAT WOULD COME NEXT AND SPECIFIC PLANS FOR WHAT HE WOULD DO AT EACH STAGE TO EXPLOIT NEW OPPORTUNITIES.
IN THE CASE OF EACH COMPANY, EVERY ONE OF THE MANAGERS WHO PROVED TO BE WINNERS COULD ARTICULATE A CLEAR VISION, AND IT DID NOT SOUND LIKE A FANTASY OR A MARKETING SPEECH, EACH ONE COULD DEFINE THINGS IN DISCUSSION OR IN ANNUAL REPORTS AND PROSPECTUSES, AND EXPLAIN HOW THE ORGANIZATION WOULD GET THERE.
17/05/2011
