When I saw that Frederick Kobrick had published a book, I knew I had to read it. With a title like The Big Money, how could I resist?
The Big Money: Seven Steps to Picking Great Stocks and Finding Financial Security may seem like an overblown title, but it really is not. For the past 30 years, Kobrick has been one of the top investors in the country. After 14 years at Wellington Management, he then went over to State Street Research & Management in 1985. During his 15-year tenure, his fund was one of the top five. After that, like many mega-successful investors, he started his own hedge fund.
Of course, critical to his success was finding game-changing companies. The list is impressive: Cisco
And, yes, in his book, his goal is to teach us mere mortals how to be great stock pickers. Interestingly enough, his approach is mostly non-quantitative. In fact, he uses a notebook to keep tabs on his companies.
Kobrick refers to his approach as BASM, which stands for Business model, Assumptions, Strategy, and Management. Let's look at what goes into that formula.
Business model: Kobrick defines this as how a "company can achieve profitability." The business model must also be simple and repeatable.
He talks about Cintas
Assumptions: For Kobrick, assumptions are the key things a company believes in. In the case of Cisco, for example, the company assumed that the Internet would be a massive growth opportunity. Or look at Circuit City. The company assumed that customers would always want exciting electronics products, as well as wide selection.
Strategy: Essentially, this is the game plan for the company. However, Kobrick does not provide much color on this point -- rather, his main focus is on the business model and management.
Management: No doubt, management is essential for any great company. Kobrick talks about Michael Dell, Bill Gates, Mickey Drexler at Gap
But don't you need to meet with these people? Kobrick doesn't think so. Rather, he thinks because of the Internet, as well as new regulations such as Reg FD, it is much easier for regular investors to get a sense of management without face-to-face encounters.
Now that you have a great company .
It's not uncommon for people to buy into a great company. The problem is holding on to it. Basically, the temptation is to treat a great company like any other ordinary company. That means applying traditional valuation metrics, such as P/E ratios and so on. But according to Kobrick, great companies "can appear to be overvalued even when they really are not, because they so often beat earnings estimates by virtue of the power of the greatest business models."
However, great companies can falter. But Kobrick believes this is a big investment opportunity. Take a look at Nike in 1986. The stock lost half of its value as it invested heavily in marketing. Yet over the next four and a half years, the stock would surge 18-fold.
Kobrick definitely has put a lot of effort into this book. For his big stock picks, he goes through his thought process (it looks like he kept all of his notebooks!). He then goes through the critical junctures for the companies. When was a problem temporary? Or when was it time to sell?
Kobrick also points out that he was greatly restricted as a portfolio manager. For instance, if his Cisco holding grew tremendously, he would be forced to sell so as to ensure diversification.
But of course, this is not a problem for individual investors. And if a great stock becomes a big part of your portfolio, that's fine. According to Kobrick, it takes only a couple of great stocks to help your away along the path to wealth.
Fool contributor Tom Taulli does not own shares of companies mentioned in this article. He is currently ranked 38th out of 13,114 players in Motley Fool CAPS, the Fool's new stock-rating community that's open to everyone.