Post of the Day
October 21, 1999

Board Name:
Mechanical Investing

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Subject:  Re: Long-term strategies
Author:  LAPropDoc


Everyone seems to be a little irritated recently, so don't take this as a personal attack but I believe you're mistaken about my tone, though I could be wrong.

Charles, if you're here...

PEG was invented by Moe Chernick (aka MoeBruin) in the summer of 1998. If you've followed my advice and checked out the Foolish Workshop FAQ, section 9 will give you many links to checking PEG out. It has only been actually used with money since then.

Moe's Real Money Portfolio runs a PEG in quarterly, which he purchased with $50069, which has increased 86% to $93343. Others may also be using it, but I know of no one whose made millions.

We have back tested it from 1987 with historical data, and a imaginary portfolio invested in 1987 as per my example, would now be worth $990,000.

We are currently awaiting the data to test it back thru the bear markets of the 70's, so take those returns with the proviso that its only for the recent bull run.

As for dependable: With the wide variety of screens which have cropped up in the last few months, PEG is tame by comparison. It has been picked apart for flaws, and found very sound, working well thru all holding periods. Give me more dependability like that.

(I started to use RS Overlap as an example but realized that one would really set off a can of worms)

Hope there is no confusion for you. Now for Dan's concerns.

I find it annoying how you have such a negative view on emotional "thought driven" stock picking. Pouring over reams and reams of paper work? Give me a break. Sometimes you have to do a little homework to get an education.

I, and many others here, don't have a negative view on emotional investing, it just I feel it has no place in mechanical investing.

That's not to say I don't hold several Rule Maker/Breaker stocks and several other emotional purchases. Its just I don't expect them to generate the returns I need to retire like I want.

Lets look at some quotes from the Rule Maker strategy

Ahh, so now it's time to look at some of the general guidelines that we use to select Rule Maker candidates. Please note that these guidelines are loosely drawn. They're not hard and fast rules.

The Rule Maker criteria rest on the premise that understanding a company's business -- both its location and its direction -- is essential to successful investing.

Finally, Rule Maker analysis is both qualitative and quantitative in nature.

So, without further ado, here are the Rule Maker Essentials:
1. Dominant brand
2. Repeat-purchase business
3. Convenience
4. Expanding possibilities
5. Your familiarity and interest

While rule 6 thru 10 are based on the number, half of the critique is emotional and based on your best guess. Let's look at the first one "Dominant brand"

When a product achieves that instant recognition, that consumer habit, it is Foolishly said to have "mindshare." It has burrowed a small home into your cerebellum. And when this happens en masse -- when you, your neighbors, your colleagues, and your enemies all say, "Haaa-choooo! Ugh. Eeew! Do you have a Kleenex, Joe?" -- you have an increasingly defensible business. Having one product with mindshare, or better yet several, is the first sign of a true Rule Maker business.

Its true that mind share can make you money. But the reverse is just as true. Until I bought it, I had no clue Minimed existed. That didn't stop it from making me a gain of 14% (until last Monday when the market tanked).

What has converted me to mechanical investing is its cut and dry, buy it because its on the screen approach. Takes the emotion, and the possibility I made the wrong decision out of the loop.

Look at the method for picking PEG stocks. Nowhere in that, do I have to decide if the new Kleenex "Baby soft" Tissues will be a winner.

What does take homework is learning to understand the How and Why of mechanical investing. And with the black and white ruler of back testing to prove if its right. But after you do, it can be done in 30 minutes a year.

(Go to the current picks on the philly site, buy what you don't have, sell what should be. Double check for safety. Then get back to playing with the grand kids.)

Give you another example.

If I'm waiting in a hospital for a heart transplant and when I meet my surgeon, he or she is a fifteen year old Hawkeye Pierce. Am I going to feel confident in him opening me up? No. But if you show me figures showing he has the best success rate in the country? I might feel better. Emotions have no place in deciding whether I live or die.

Or in my financial well being.

Tell you what, you bounce in and out of stocks you know nothing about every month, I'll go long CSCO

As for going long on Cisco, the Rule Maker portfolio bought CSCO at $2000 last year, its now worth $1549. Had they put that $2000 in a PEG screen, it would be worth over $3700 now.

One time example, yeah, and used just because it favors my point.

If you look at my past posts, you will see I have always said that an investor should have a core group of LTBH stock. I just think emotion doesn't have a place where money fits in.

So long as we all can agree to disagree, I can get back to sticking pins in my Greenspan voodoo doll.