Editors’ Note: Welcome to the new Wall Street Daily Weekend Edition.
In addition to our regular roundup of top content featured at Wall Street Daily during the week that was, we’re now including extended commentary from Editorial Director David Dittman.
And highlighting this new digest is the video-based Saturday Spotlight, which will “shine” on one member of our talented and hard-working team of market analysts each week.
Enjoy! And please let us know what you think of the new format by contacting us here.
The first stock I ever bought was IBM (IBM), way back in the spring of 1983, under the guidance of my sixth-grade math teacher and with the help of my grandparents.
I am, of course, forever grateful to those folks for making it happen.
Looking back – particularly in light of the depth of knowledge on display in this week’s Saturday Spotlight – I wish I had Louis Basenese sitting next to me 32 years ago.
I think you’ll find his three-minute talk concerning the most important question to ask about a technology company compelling, useful, and, ultimately, profitable.
In Praise of “The Old School”
Mr. Leonard MacKain, who was also the Principal of William E. Fanning Elementary School, included a unit on the stock market in his fourth-quarter curriculum. I happened to live down the street from Mr. MacKain, so I was able to hitch a ride with him to school nearly every day that year.
It was in this class and during those rides that I first learned of Benjamin Graham, the “professor” of good value and high quality.
Based on Mr. MacKain’s instructions to my fellow students and me, the one stock I chose to follow was one that had already long been known as “Big Blue.”
My grandfather, a chemist who specialized in food technology, was fascinated by binary code and the prospect of a future driven by computing. He shared a bunch of his reading material with me, even though it was a little outside the wheelhouse of a then-12-year-old kid hooked on UCLA hoops, tortured by the California Angels, and infatuated with the Dallas Cowboys.
Some things stuck with me, though: good value, high quality, computing. I was reminded of those happy and valuable memories as I read Louis’ late-August Portfolio Update for Digital Fortunes subscribers.
Amid one of the most volatile weeks in recent market history, Louis reminded his readers of “the adage that we’re supposed to buy stocks when there’s ‘blood in the streets’ in order to snap up some great bargains.”
But he also cautioned against indiscriminate buying. “Rather,” he noted, “we need to proceed with real caution in terms of putting new money to work.”
Louis’ action step was the following:
More specifically, instead of focusing on beaten-down highfliers, which tend to get whipsawed the most, it makes much more sense to go after clear bargains that have yet to fully rebound.
They’re less risky and more likely to benefit over the long run, as investors respond to heightened volatility by seeking out high-quality investments.
In the introduction to the 2005 Harper Collins revised edition of The Intelligent Investor, Jason Zweig, a columnist for The Wall Street Journal, described author Benjamin Graham as “the greatest practical investment thinker of all time.”
Mr. Zweig summarized Mr. Graham’s core investing principles as follows:
- A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.
- The market is a pendulum that forever swings between unsustainable optimism (which makes stocks too expensive) and unjustified pessimism (which makes them too cheap). The intelligent investor is a realist who sells to optimists and buys from pessimists.
- The future value of every investment is a function of its present price. The higher the price you pay, the lower your return will be.
- No matter how careful you are, the one risk no investor can ever eliminate is the risk of being wrong. Only by insisting on what Graham called the “margin of safety” – never overpaying, no matter how exciting an investment seems to be – can you minimize your odds of error.
- The secret to your financial success is inside yourself. If you become a critical thinker who takes no Wall Street “fact” on faith, and you invest with patient confidence, you can take steady advantage of even the worst bear markets. By developing your discipline and courage, you can refuse to let other people’s mood swings govern your financial destiny. In the end, how your investments behave is much less important than how you behave.
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At the end of the day, the most important element of a sound investment decision is a high-quality underlying business.
The Moral of this Story
Eventually, I paid about $122 per share for IBM in mid-June 1983, using a very generous graduation gift from my grandparents. That was about 16.6 times IBM’s 1982 reported earnings per share of $7.39. That was about 13.6 times reported 1983 earnings of $9.04 per share.
Those 10 shares would be 54 shares today, due to splits and dividend reinvestment. And that $1,220 initial investment would be worth about $7,776 if I hadn’t cashed out in mid-1985 to buy a surfboard and a wetsuit. (“Long term” was not yet part of my thinking.)
IBM has evolved quite a bit over the past 35 years, to say nothing of its trajectory off its initial public offering almost 100 years ago, in 1916, when it was known as Computing Tabulating Recording Corp.
In the mid-1920s it became International Business Machines. More than $1 billion invested in research and development during the Great Depression eventually led IBM from time cards to punch cards.
IBM was a critical catalyst of the Information Age – perhaps indeed (dare I say it?) the source of the seed that grew into the Apple (AAPL) tree. And it remains to this day a “Blue Chip.”
But IBM is no longer a cutting-edge, high-growth story. The performance of its stock since 1983 bears this out: Had I held those shares for the duration I’d be realizing a compound annual rate of return of about 6%.
That’s pretty pale compared to the S&P 500 Index’s annualized return of more than 11%. And it’s downright deathly in light of the return numbers Lou’s put together for Digital Fortunes subscribers.
And when you check out today’s Saturday Spotlight video, keep in mind that Lou recommended the company that perfected touch-control security technology, AuthenTec, well before Apple acquired it to help develop its fingerprint identification system.
Good investing requires a systematic approach, discipline, and patience, things hall of famers like Ben Graham understand.
A little knowledge on top of all that will get you to great returns.
“May you live in interesting times” goes the English expression of an apocryphal Chinese proverb.
Its origins may be dubious, but we’re certainly experiencing something of this “Chinese Curse.”
The good news is, Wall Street Daily has you covered.
Following one of the most highly anticipated Federal Open Market Committee meetings ever, Chairperson Janet Yellen and her fellow central bankers chose to hold the benchmark federal funds rate at the “zero bound,” 0% to 0.25%.
Alan Gula takes a look at how this latest decision in a long line of questionable monetary policy moves impacts investors, retirees in particular.
Alan also aims his analytical laser at the wacky race for the Republican nomination, with an eye on voters and the economic unease they continue to project onto various candidates.
Speaking of folks leaving the workforce, this week at Wall Street Daily we’ve been looking at retirement in a series of articles, including Tim Maverick’s take on what to do if you’re well past middle age but have no savings. Shelley Goldberg also breaks down what to do with your IRA rollover if you’re changing jobs.
“Interesting,” sure. “Volatile,” definitely.
No. 5 on the list but not last in our hearts is Jonathan Rodriguez’s look at fear, uncertainty, and a great way to cash in using options.
Thanks for taking time out of your Saturday for Wall Street Daily’s Weekend Edition. We hope you enjoy it.