by on March 1, 2012 Leave a Comment

Rebuilding of the infrastructure

An area of interest for future growth is, obviously, the rebuilding of the infrastructure. More and more demands are compelling federal, state, and local governments to build new roads, improve water and sewer systems, replace obsolete bridges, and so on. While such construction activity has not been included in lists of growth industries in the past, public policy is focusing increasing attention on it, and there will be continued growth in this area not only in the U.S. but in other parts of the world, such as the Middle East, Eastern Europe, and Russia. Companies such as Caterpillar Corp. (the leading supplier of earth moving equipment), Fluor Corp., and Morris Knudsen (engineering and construction companies) could be big beneficiaries of the growth in this area. Investors should not overlook the obvious: public construction of all kinds is a way of providing work for the unemployed masses of the U.S. and other nations, particularly those with limited skills and training. This may be one of the fastest growing sectors of the economy of this and other nations for many years to come as, hopefully, spending on defense will moderate and governments can begin to direct additional funds to their respective domestic scenes.

In addition to the growth areas enumerated above, there are certainly growth companies in industries that are not necessarily growth industries. Such an example can be found in the food sector, Consumption of food itself is not really in a growth mode, except as the population continues to increase. But, in recent years, new trends have emerged in food consumption. The trend toward two people in a family working is a relatively new social more for the American people. A strong beneficiary of this trend has been the fast food and restaurant business, with McDonald’s as the prime example. The undisputed leader and innovator in the fast food business, this company has expanded and prospered, and can be expected to continue this trend into the next century. In the restaurant business, and catering to the family, General Mills has performed an outstanding job in creating chains of Red Lobster and Olive Garden restaurants. Certainly, these companies should be included as growth companies.

Other examples are companies that have taken a share of the market in the merchandising industry. The success of, say, Gap. Inc., Home Depot, The Limited, Walt-Mart Stores, Nike, Tandy, and others is directly related to the ability of these companies to give the public what it wants and needs, at a reasonable cost and with convenience. Not all of these companies will remain in a growth mode (fashion could change, stiff competition could occur, etc.), but investors can profit by observing consumer attitudes and companies that are meeting consumer demands.

A list of quality growth companies whose stock can be held by long-term investors with a high heart could go on and on. Although I should not belabor the matter, among specialty companies that fit a special need could be Boeing, Coca-Cola, International Flavors & Fragrances, Pioneer Hi Bred, Procter & Gamble, General Re, and others. The main point that I make is that growth companies do not necessarily have to be companies in the “glamor” growth industries. They can be companies that have a special niche in their own industries or that offer products or services in some special, demand-providing way.

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by on March 1, 2012 Leave a Comment

areas of investment opportunity

There is no question that ours is the age of advancing technology, and increased use of electrical equipment and electronics is a foregone conclusion. The behemoth in these industries is probably the bluest chip of them all, General Electric. A highly diversified company, GE can be described as a veritable mutual fund of technology. It has always been an efficiently managed company, is strongly financed, and is already a major factor in almost all important areas of scientific research and development as well as being a large manufacturer and provider of equipment and systems. It operates world-wide and is a company whose stock should be held in virtually all stock portfolios.

Other quality stocks of above average growth would include Amp, Intel, and Motorola, to name only a few. As an aside, Motorola commands special attention. Not only is it the leading domestic manufacturer and supplier of semiconductors, it is also a dominant factor in the fast growing cellular telephone business. Those companies which directly market cellular phones have become very competitive; some will survive and grow, others may die, but chances are strong that Motorola will remain the leading manufacturer of such equipment. This is the stuff of which long-term sales and earnings growth is made.

Contrary to some pundits, the computer is not dead. In fact, computer usage could be said to remain in a strong growth mode, and companies which make computers and service or sell them remain among the leading growth companies of America. In recent years, I.B.M. has lost market share to the competition, but it is still the leader and innovator in the mainframe business. Companies such as Hewlett Packard, Automatic Data, and others should be among those considered in any growth stock list.

One of the potentially exciting areas of investment opportunity is pollution control. Generally speaking, environmental control and improvement has become almost a mandate of the people. Not only will government continue to spend heavily in the areas of air and water purification and waste disposal, but so too will private industry, and this offers opportunity to companies engaged in this field. Again, there is a long list of such companies, but an obvious and outstanding leader in the field is Waste Management.

Telecommunications equipment and service is another dynamic area of growth, and it embraces a long list of specific equipment and service. As mentioned above, the cellular phone is one of them, but not to be overlooked are the providers of other equipment and services. While there is a long list of large and small companies in this industry, there is one very obvious quality company called AT&T. For years many considered this company dull and unimpressive. But it is now emerging as one of the quality growth companies of the world, having become unshackled from regulation, and comprising a combination of superior research capability as well as outstanding manufacturing capacity. Not many have called AT&T a great growth company, but it has become just that.

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by on March 1, 2012 Leave a Comment

selection of individual stocks

Equities
Of course, selection of individual stocks for an investment portfolio is vitally important to the ultimate success of the portfolio in reaching its goals. Many investors consider security analysis an occult enterprise, but it is not. More often than not, stock selection depends on common sense. Industries and individual companies within industries have characters of their own. Yet, in the final analysis, there are only a few different kinds of stocks, as listed below:
— Long-term growth companies
— Cyclical companies
— Interest rate sensitive companies
— Emerging growth companies
— Special situation companies
— the “mundane”

LONG-TERM GROWTH COMPANIES
Without question, the core or emphasis of any well constructed stock portfolio should include the acquisition and holding of company stocks which promise potential in long-term earnings growth. Such stocks are hardly ever inexpensive relative to the market itself, but they offer the best opportunity for increased value over any reasonable period of time.

Why? Because these companies are in the fastest growing industries in our economy. These are companies whose sales and earnings have grown and can be expected to grow at an above average rate because their products and services are experiencing increased demand from consumers.

It is not really very difficult to define which industries and which companies comprise this category. Among them are the following:
— Ethical Drug Companies
— Hospital Supply and Management Companies
— Electrical Equipment and Electronic Companies
— Information Processing Companies
— Pollution Control Companies
— Telecommunication Companies
— Others

The so-called “graying of America,” the demographic trend toward not only an expanding number of senior citizens but people living longer lives, has been a boon to businesses operating in the health care field. Major ethical drug companies are constantly engaged in major research efforts to develop new drugs to meet increasing demands for treating diseases of all kinds, not only those suffered by the elderly, but those prevalent throughout the entire population.

Companies such as Merck, Lilly, Pfizer, Bristol Myers Squibb—to. Mention a few—have been very successful over the years in such endeavors, and as a result, both sales and profits have soared. Although, from time to time, investors have worried about such things as price controls on drugs, these companies have prospered and should continue to prosper as not only the volume of their sales increases but as the cost of production of their products declines. Moreover, these companies are not subject to economic cycles, as are companies in other sectors. The use of drugs to combat disease is a necessity (far cheaper, for instance, than surgical procedures), in good times and bad.

The same premise applies to Hospital Management and Hospital Supply companies. To some extent, they are more cyclical than drug companies because of various factors. Hospitals may, from time to time, experience decreased use of beds due to hospital over-building in different geographic areas or lack of such procedures as “elective surgery” in poor economic times, and so on. And hospital suppliers may periodically suffer from declining sales to hospitals and other sources for sales. But, in the long run, there is almost no end to the growth of the hospital and medical supply business, both disposable supplies and equipment. Companies such as Abbott Labs, Baxter International, Johnson & Johnson, and others should enjoy enhanced earnings for the foreseeable future.

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by on March 1, 2012 Leave a Comment

economic cycles and market crashes

It has often been said that the stock market does not like uncertainty, and those who are perennial pessimists have, over the years, consistently pointed out that “this is a period of uncertainty.” The problem with this argument is that all eras include periods of uncertainty, the outlook is never perfectly clear, and although we should certainly worry about such things as government deficits, bank ill liquidity, excessive inflation, over borrowing by consumers, economic cycles and market crashes, we nevertheless have to assume that excesses or traumatic events today will be offset by something else tomorrow.

Given the fact that foresight is, at best, only about 60 percent correct, what then is 100 percent correct? The answer is hindsight. All people have the ability to know what has happened, and if they pay attention, they will always be correct about what has occurred. This is true of the stock market. It is easy to know what the market has done in the past, but less so to predict what it will do henceforth, at least over the short term. Therefore, why not use this 100 percent accurate ability in the management of money? This is where formula investing is valuable. Formula investing is simple. It is, quite literally, a way of arithmetically observing what has happened to the value of a portfolio and adjusting to it.

For example, assume an investor has a long-term goal of being invested, say, 75 percent in the stock market, 15 percent in bonds, and 10 percent in cash reserves. His portfolio has been established at those levels, individual securities have been selected, and the portfolio is in place. The value of the portfolio and individual holdings will fluctuate both up and down on a constant basis. But if that investor has a predetermined system of adding to stocks when their value declines below 75 percent of the total portfolio, selling stocks when the value exceeds 75 percent, and adjusting bond and cash positions accordingly, he can mitigate against the inevitable and violent swings in asset values.

For sure, this is not a way by which to maximize performance. It certainly is not a way to buy at the bottom and sell at the top, but it is a way to guarantee buying low and selling high, and it eliminates a multitude of emotional reactions as well as major timing mistakes in purchases and sales. Admittedly, this flies in the face of traditional advice many have proffered investors. Gerald Loeb is famous for advising investors to “let your profits run” and “cut your losses.” While such advice is understandable, it does not recognize that markets and prices of individual stocks can and do rise and fall periodically for less than analytical reasons.

Of course, if a given stock performs well in the market, the odds are good that it will continue to do so; if it performs poorly, chances are equally good that momentum will carry it further downward. To some extent, I agree with Mr. Loeb. However, if I have bought a stock or a group of stocks for the longer term and I am correct in my selection, I need not worry about interim fluctuations but am willing to take advantage of such fluctuations using a strategy of formula investing.

When a stock rises beyond my expectations, I am willing to sell a few shares and hope that I am doing the wrong thing because the remaining stock will continue to appreciate. On the other hand, when a stock or stocks that I like generally decline, this presents an opportunity to buy more at a lower price. Of course, both precipitous appreciation and depreciation in value are a signal to me to reappraise my selection of holdings and even the percentage of funds I am willing to allocate to the market. This is where adjustment of my foresight takes over from the discipline of hindsight.

There are a myriad of different ways of applying formula investing, and it is impossible to enumerate all of them here. The main point is that such a discipline, predetermined, is invaluable to managing a security investment portfolio successfully.

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by on March 1, 2012 Leave a Comment

stock market fluctuations

In my professional history, the worst period for the stock market through which I have ever lived, or ever hope to live, was between 1973 and 1974. In 1973, stocks dropped roughly 18 percent. In 1974, they sank another 25 percent, and there was panic in the marketplace. During that period, the stocks most affected were good quality growth companies, those highly leveraged firms whose price earnings ratios were high. Overpriced stocks, coupled with soaring interest rates, caused this decline in the market.

Due to an oil embargo, inflation was also soaring. Oil supplies were short, energy costs sky high, and the economy seemingly on the verge of collapse. Again, everybody thought the world was coming to an end, which it did not. In fact, during 1975 and 1976, the market came back strongly. Since then, we have witnessed several declines in the market, and also several strong markets.

The 1980s was a glorious decade, with few exceptions. In both 1981 and 1984, the market declined slightly. But the ‘80s saw one of the best performances in the stock market of all times. I should add that I do not think cycles are over, nor do I think fluctuations in the market have run their course.

We have witnessed violent fluctuations even during the good markets of the 1980s, with the result that most people have learned some important lessons. We have experienced fairly consistent fluctuations, some more violent than others, and have lived through booms and through recessions. We have lived through wars, both hot and cold, through the possible impeachment of a president, an assassination of another president, and turmoil in the Middle East. Each of these events can be devastating, with all variety of economic fallout. But in the final analysis, investors can draw intelligent conclusions from these experiences.

One conclusion is that although stock prices will fluctuate dramatically and melodramatically, equities will perform well for the patient investor. When I started in the business in 1948, the Dow Jones Industrial Average was roughly 177, and though I can only guess where it will close at the end of this century, the Dow has seen substantial long-term price performance, unlike most other investments. Over the same time investors have not only realized enormous capital appreciation, but have also enjoyed enormous increases in dividend income. Analysts and so-called stock market experts often overlook this when considering the history of the stock market. Indeed, statistics show that in 1990 the dividend paid was about 70 percent of the original cost of stocks in 1948. The 1948 investor has not only rocketed from 177 in the Dow Jones Industrial Average to 3,000 and higher in capital appreciation, but his dividends have returned that capital several times over.

Almost all of the unexpected events of the last century would have been difficult to foresee with either accuracy or certainty. And all of them brought about significant moves up or down in the investment markets.

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