By Karin Housley
There are some very useful investment tips and strategies discussed in this book in a very light-hearted manner.
The most basic tip the book mentioned was from Peter Lynch. He is one of the most famous and most successful fund managers ever. During his tenure as manager of Fidelity’s famous Magellan Fund, some of his stock gains were worthy of The Guiness Book of World Records.
Lynch prefer stocks to just about any other investment vehicle over time. He believes that an amateur investor who devotes a small amount of time to researching companies in an industry she knows a little bit about can outperform 95% of the paid experts. If we are alert shoppers, we have a chance to get the message about retailers earlier than Wall Street. Invest in what you know.
There will always be “missed opportunities”, thankfully the market is merciful and will always give us a second chance to find a stock at sale price. It is always best to focus on the company, not on the stock. Once you’ve bought a stock, your work is far from done. A long-term strategy of buy and hold is not the same thing as buy and forget. Every 6 months, you should do a routine checkup on every stock you own. This is an especially important reminder for long term investors. Even with blue chips, big names, and Fortune 500 companies, buy and forget strategies can be unproductive and downright dangerous.
Seven Criteria of a Rule Maker
1. Repeat purchase of low priced products.
This is good common sense. Would you rather own stock in a company with a product that people had a daily need for, or a company that sold only large one-time purchases? Rule Makers are companies that have repeat purchases often. Examples of those would be drug companies, soft drink companies, oil companies and clothing companies. These companies make a profit more often because their product is purchased more often. Even in consumers’ worst financial times, they will find extra cash to purchase the needed items.
2. Gross margins
To make it into Rule Maker status, a company must have gross margins of at least 60%. A company that could achieve high gross margins would be one that doesn’t have to spend a lot making its product exaple coco-cola. etc.
Look at the income statement :
Gross margins = (Total sales – Cost of Goods Sold) / Total Sales
3. Net margins
Another important benchmark that needs to be met in order to become a Rule Maker is to have net margins that are greater than 10%. Net margins tell us how much profit a company is making after you subtract all of its expenses; you don’t want a company spending all of its profit. You can’t make a business making one penny on every dollar. Rule Makers have to have some cashola left over. Net margin = Net income / sales
4. Sales Growth
To become a Rule Maker, the sales growth must exceed 10% per year. This isn’t the easiest of feats to achieve when you are investing in brand-name companies that have been around for years, that have taken time to become the name in their field. It’s easier for start up companies to achieve faster growth because they haven’t saturated the market yet. The world is theirs. Rule Makers must keep their wheels turning in the sales growth department and never let their guards down.
Formula = (sales this quarter – sales last quarter) / sales last quarter
5. Cash to long-term debt ratio
Rule Maker companies should be cash hogs. The richer the better, and the best are filthy rich. They should have of all their debts taken care of, and be ready to use all the extra cash to grow. In order to make it to Rule Maker status in the cash to debt ratio, they must have 1.5 times as must cash as they do debt. You will find the cash and long-term debt on the balance sheet. Look for the exact words : Long-term debt. Short term debt means nothing in this equation.
Formula = Cash / Long term debt
Should be more than 1.5 to qualify as Rule Maker.
All cash means anything that can be converted to cash quickly.
6. The Foolish Flow Ratio
Rule Makers should have a Flow Ratio below 1.0.
Formula = (Current Assets – All Cash) / (Current Liabilities – Short term debt)
Why do we take cash out? If we remove the cash from the current assets, what is actually left is the merchandise they haven’t really sold. This include products that are left lying in the back warehouse. Who is going to buy last year’s clunky heels? The bottom number, Current Liabilities – Short term debt, is the costs that have to be paid in the next year. Rule Makers should hold off as long as possible on paying ucrrent liabilities to keep cash in their own pocket. They can earn more money this way. A low Flow Ratio means the company has its inventory under control and has mastered the current liabilities balancing act.
7. Familiarity and Interest
Is it a company that you know and are fond of? Are you familiar enough with it, is it a product that you’d find in your home and do you like the overall product or service?