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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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Growth at a Reasonable Price (GARP) investing combines the two successful strategies of value and growth investingGrowth at a Reasonable Price (GARP) investing combines the two successful strategies of value and growth investing into a very sensible stock picking approach. GARP investors buy only stocks with growth at a reasonable price, operating in a more traditional mode than value investors, who look for stocks that are relatively cheap in relation to the companys earnings and book value, and growth investors, who buy stocks that tend to grow substantially fast and have high earnings potential. After the dot-com crash, GARP became the popular acronym on Wall Street. The aftermath of the Internet sell-off presented some good buying opportunities, but the bottom for companies like Cisco and Yahoo!, classic growth stocks, hit further down the road. Traditionally, GARP investors seek growth companies with solid growth prospects and share prices that are somewhat lower than their intrinsic value, stopping short of looking at the companys business in detail. However, by November 2000, Cisco had lost more than 50 percent of its value, and Yahoo! had dropped from $120 to $15. Even though there was nothing fundamentally wrong with these companies, market conditions at that time could not help a GARP investor. The Magic T discussed in Chapter 13 is designed to identify market tops and bottoms, which can help GARP and other investors with market timing. The worlds most famous growth investor, Peter Lynch, defined growth at a reasonable price without ever even calling it GARP in his strategic practice to pay no more than one times the growth rate of earnings per share over the past three to five years as well as the projected earnings over the next three to five years. Similar to value investing, the analysis of insider trading of individual growth stocks can help investors discover which stocks to buy. When insiders purchase the shares of growth stocks at higher and higher prices, good news usually follows. Good or better than expected news is the fuel that keeps growth stocks growing. Insider trading will be discussed in greater detail in Chapter 5. The third broad investing style and probably the most popular with younger investors is momentum investing. The fundamental tenet of momentum investing is that investments, whether they are stocks or industries that have already outperformed the market in the past, are likely to continue their winning ways. This belief builds on the notion that most investors are like cattle and will tend to herd with the most recent winners. Momentum investors chase the hot stocks and funds, and they do not mind swinging from the fences. For them, 15 percent or 20 percent returns in a year is not worth talking about. They want doubles and triples within a few months. Most momentum investors will tell you that they focus on companies with accelerating earnings, better than expected earnings, analyst upgrades, and stocks that are increasing faster than the market. Many momentum investors have strong disciplines, and I know some money managers who use this strategy very profitably. It is fine, in my opinion, to let them manage your money if you are so inclinedjust not in a bear market. It is the bear market that clobbers momentum investors and puts them into hibernation. In 2000, for example, investors discovered that markets can and do become simultaneous and illiquid, which killed the notion that momentum players can get out at any time. When bad news hits a momentum stock or industry, the door shuts just as everyone is trying to escape. In early 2004, I was increasingly concerned with the lack of insider buying and the fact that just about everyone I spoke to was charting stocks and talking about momentum. I recall one of my firms young money managers telling me that his approach was simple. As a proponent of William ONeil, who many consider the father of the momentum style, he bought every stock that broke out of a base on high volume and added to his position when it pulled back to support levels on light volume. I muttered to myself that it seemed like dj vu all over again. Hadnt anyone learned from the bursting of the bubble in 2000? The problem with momentum investing is that it works best during the early to middle stages of a stock increase or overall market advances. At some point in time, there will be a final breakout to new highs that most likely will be the top for the cycle and could be the top for many years. How does a momentum investor know whether the last breakout to new high ground is not the top? One thing I know for sure, though: You can always count on the return of momentum investors. Most have short memories and the next bull market will bring them back in force again. Greed is human nature and, in my opinion, momentum investing personifies greed. No discussion of momentum investing would be complete without discussing CANSLIM. This is a philosophy developed by William ONeil, co-founder of Investors Business Daily, focusing on earnings and overall strength of momentum companies. The acronym spells out the criterion for this stock selection process. Current quarterly earnings must be up at least 18 percent. Annual earnings per share should show growth over the past five years. New highs in price are achieved as a result of new significant industry conditions. Shares outstanding should be at a small and reasonable number. Leading the industry or, better yet, the market. Institutional sponsorship from firms with above average recent performance. Market indexes and the markets overall current direction have been determined. These are the fundamental characteristics of historically successful stocks. The CANSLIM strategy is strict; all the above criteria must be met to warrant an investment. It includes practices from all the major investment strategies but does not support investing into high-risk companies. Investment style is simple; it is a top-down strategy. I want to be in the stock market when the odds are in my favor and out when the odds are against me. For picking stocks, I buy both growth and value stocks, but only if there is insider buying to support the picture. I want to be a partnernot an adversary with the men and women whose companies I invest in. As we examine some of the key reasons investors lose money, here is the second mistake: following investment market letter writers and so-called experts who appear in the media, especially in television. Most market letter writers and other experts are wrong more than they are right, especially at key market turning points. Following them is a prescription for disaster. The third mistake: investing at the wrong time. Believe it or not, starting an investment plan in certain months will almost always guarantee failure. The good news is that in other months, investors are almost guaranteed success, given the right plan. Clearly, if you can correct these mistakes, you will be well on your way to being a consistent stock market winner. |
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