TACTIC 1 : Just Pick The Winners! Easy
Wait until you know who won and then just take your pick among the winners.
Apple and Monster Beverages are two companies that fit the bill as “winners” in their industries. As Warren Buffett explains, the best way to identify a winner in any given industry is to ask its competitors who they would most like to shoot down with a “silver bullet.”
The company that other companies are afraid of is typically the true winner in its industry.
When looking for a silver bullet company, you can look for the following financial indicators:
- High profit margins (gross and operating primarily)
- High return on assets; and
- Increasing market shares
TACTIC 2: Ignore Dividends!
People tend to forget that dividends are taxed!
Investors lose a significant portion of their money every time something is distributed (say, through dividends). This results in a significantly lower long-term compounding effect, similar to the impediment of high costs in many actively managed funds.
In practice, both stock appreciation and dividends contribute to wealth creation in the market. The point is that it is frequently more beneficial for a company’s total return if it reinvests its earnings rather than paying a dividend. E.g. paying dividends is a cost to a company!
Berkshire Hathway knows this, and does not pay dividends to its shareholders.
When that is the case, exceptional management of superior companies should know, and you should not dismiss an investment simply because there is no dividend.
So look for investment without considering too much of its dividends.
They are just extras.
TACTICS 3: Wait for Discounts!
Mr. Smith advocates a strategy of attempting to acquire market darlings when they are “less popular”.
And if you look at almost any excellent company, you will notice a number of times when their valuation fell dramatically.
There are some common themes among situations in which a darling is given an unfair discount:
Fail to meet quarterly, 6 monthly, and / or yearly target
General panic
Both the above can change the “sentiment” about the company, from “they are taking over the world” to “would they even survive in 5 years?”
Take Microsoft, for example; the stock fell roughly 25% during covid year, despite the fact that the virus is unlikely to have a major negative impact on their operations.
Or Facebook, who misses its quarterly target and the stock fell.
As long as the company fundamentals are healthy and good, these companies will continue to grow. And you know what, you are having their piece of the pie at a discount.
So be patient and wait till the next storm to grab them. Every company cannot meet their quarterly target consistently. When they lapsed, it’s time to strike.
SUMMARY:
- Leaders in their fields frequently make for excellent potential investments because they have shown strength and resilience even in the face of difficult obstacles.
- Dividends can be beneficial, but they are not always required in order to make a profit.
- There will be times when even the strongest companies can be purchased at reasonable prices for those who are patient and prepared.
James Lim
SFA Founder
Member of Australian Investors Association (AIA)
The University of Queensland Speaker
