Post of the Day
August 22, 2000

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Berkshire Hathaway

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Subject:  Rules for Successful Investing
Author:  cosmicos

I've had just about all I can take from the fuddy duddies who insist on using outdated techniques of security analysis. Times have changed and everyone needs to adjust their investing methodology accordingly. For the benefit of all those lost souls who remain attached to quaint notions such as business fundamentals and asset allocation, I have compiled a list of 15 investing principles for success in the New Economy. Remember, it's never too late to get rich quick.

1. Never hold cash.
Since the stock market routinely turns modest investments into vast fortunes of wealth, you should invest exclusively in stocks. While it's true that stock prices will fluctuate from day to day, they are virtually risk-free for those people with a long-term horizon of six months to a year. Consider reducing your exposure to stocks only if you need the money within a month or two. Generally, the only thing riskier than owning stocks is not owning them at all.

2. De-emphasize diversification.
Only nervous nellies bother to diversify. It's best to concentrate your money in the trendiest and most talked about industry sectors. The potential reward is worth the minimal risk involved.

3. Invest first, research later.
Don't worry if you have trouble reading a balance sheet or income statement. If you hear something intriguing on CNBC or an internet message board, you better act fast. Don't waste valuable time researching a company's fundamentals until after you own it, if at all.

4. Disregard all traditional measures of valuation.
In this golden era of investing, you can buy stocks with the reasonable expectation that there will always be someone else that will purchase your shares at a price higher than what you paid. It's no longer a question of what price to pay, but simply a matter of how soon you can scrounge up the money to do it.

5. Invest with momentum.
There are few better strategies than buying a stock whose price is going up very rapidly. Since stock prices only go up for a good reason, we don't necessarily need to know the specific reason. The important thing is to get on the bandwagon before being left behind.

6. Buy stocks on margin.
You can greatly enhance your return by buying stocks on margin. If you have exceeded the margin limit at your brokerage account, consider other sources of cash such as a home equity loan, 401(k), and credit card cash advances. Once those are exhausted, you can always find a loan shark.

7. Automatically buy stocks when the market dips.
When stock prices go down, it's almost always due to the irrational behavior of bearish traders rather than a correction of overvaluation. Without question, any decline in stock prices should be considered a major buying opportunity.

8. Avoid "old economy " stocks.
Ignore companies in traditional industries, especially those stodgy ones that are selling at a discount to their growth rate or book value. After all, time is money and you can ill afford to wait a couple of years for your money to double. A far better bet are high-flying technology stocks. Within this group, focus on those companies whose stocks are selling for a minimum of three times their projected growth rate. If a company has a ".com" attached to its name, all the better.

9. Keep earnings in their proper perspective.
No earnings? No problem. Profitability is the most overrated phenomenon in the business world today. There's a pervasive myth that companies eventually need to be profitable to remain in business, much less be successful. On the contrary, a company can simply issue more debt or raise money through secondary stock offerings to stay in business. Indeed, these strategies can keep a company going indefinitely. Though it may seem counterintuitive, companies with consistent earnings and no debt are actually at a competitive disadvantage to money-losing, highly leveraged enterprises. Any company with positive earnings obviously isn't spending enough money on additional growth initiatives.

10. Shun companies that don't split their stock.
Although this rule seems perfectly obvious, there remain a small number of investors who think stock splits don't matter. It's difficult to overstate the benefit of owning double the number of shares at half the price. For those investors who use a series of screens to narrow the field of potential investments, stock splits are a particularly useful indicator. A sure sign that a company is succeeding is when it undergoes a two-for-one stock split. Better yet are three-for-one and four-for-one stock splits. It's like money in the bank. Those companies that don't split their stock are behind the times and likely heading toward extinction.

11. Embrace creative accounting.
Just as you expect a company to be on the cutting edge of technology, so too should a company be on the cutting edge of accounting. Among the things to look for are pooling of interest during mergers, acquisition costs being written off as in-process R&D, and the condensing of future income from long-term contracts into a single quarter. A generous granting of stock options also helps since this form of compensation is not counted as an expense. Don't worry about the dilutive effect of stock options. As long as stock prices keep rising (which they're guaranteed to do), you'll be fine.

12. Learn who to pay attention to.
Ignore cautionary statements made by the likes of Warren Buffet and other financial charlatans. Buffet and his cohorts are nothing more than gloomy party poopers who are out of touch with the new reality. The motto of the successful investor is "Don't worry, be happy".

13. Develop sources for hot tips.
Nothing betrays you as an amateur faster than relying on your own independent research. The truly savvy investor will form a network of information sources with which to make all investment decisions. People "in the know" regularly watch CNBC for valuable tidbits from investment strategists. Mutual fund managers touting stocks they already own are reliable sources of unbiased opinions as are stock analysts who work for investment banks seeking to land lucrative underwriting deals. As you gain more experience, you'll come to recognize the value of discussions taking place in internet chat rooms as well as traditional venues such as cocktail parties. Experienced investors are always on the lookout for rumors of stock splits and analyst upgrades.

14. Trade stocks frequently.
If you want to stay ahead of the curve, you have to keep moving fast. Buying and subsequently holding a stock for a long period of time is symptomatic of misplaced loyalty. You should get in and get out. See stocks for what they really are -- mere pieces of paper.

15. Maintain realistic expectations.
Although the NASDAQ stock index recorded an 85% percent gain in 1999, it's unlikely that we'll see that type of return every year. In the future, expect annual returns to be in the more normal range of 30 to 40%. Of course, if our country undergoes a recession, it's quite possible that the total return could drop as low as 15% for an entire year. While such a low rate of return can be hard to endure, you just have to keep the faith.


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