Common Stocks and Uncommon Profits

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It often takes 7-11 years from the time a project is first conceived to start generating favorable corporate earnings.


15 points for identifying good companies:


  1. Does the company have products or services with sufficient market potential to make a sizable increase in sales over the next several years possible?
  2. Does the management have the determination to continue to develop products or processes that will further increase sales after current product lines have largely been exhausted?
  3. How effective are the company’s research and development efforts in relation to its size?
  4. Does the company have an above-average sales organization?
  5. Does the company have a worthwhile profit margin?
  6. What is the company doing to maintain or improve current profit margins?
  7. Does the company have outstanding labor and personnel relations?
  8. Does the company have outstanding executive relations?
  9. Does the company have depth to its management?
  10. How good are the company’s cost analysis and accounting controls?
  11. Are there other aspects to the business somewhat peculiar to the industry involved that would give the investor clues as to how outstanding the company may be in relation to its competitors?
  12. Does the company have a short-term or long-term outlook with regard to profits?
  13. Will the growth of the company require sufficient equity financing so that the larger number of shares then outstanding will largely cancel the existing stockholder’s benefit from this anticipated growth?
  14. Does the management talk freely to investors about its affairs when things are going well and when they are going poorly?
  15. Does the company have a management of unquestionable integrity?


If there is a serious question of the lack of trust an investor can have in a company’s management, an investor should never consider investing in that company.


Sales are only of value if they lead to increased profits.


A company that makes above-average profits while paying above-average wages is likely to have good labor relations.


The investor wanting maximum results should favor companies with a truly long-range outlook toward profits.

 

Any dilution to a company’s shares should be of lesser value than the long-term value gained from financing that follows from that dilution.


An investor should only invest what they can afford to lose.


The current phase of the business cycle is but one of at least five powerful forces that influence stock prices. The other major influences are the trend of interest rates, the overall government attitude toward investment and private enterprise, the long-term trend of inflation, and new inventions and techniques.


More money has probably been lost by investors holding an asset they really did not want in hopes of eventually selling at break even.


After growing spectacularly for many years, companies will usually slow to a growth rate roughly matching industry as a whole (GDP).


Capital gains tax should seldom if ever prevent you from selling your holdings, especially if the growth picture has changed.


An investor should never sell an outstanding company just because its shares have appreciated tremendously. 


Buying a company with insufficient knowledge is more dangerous than lack of diversification.


Investors should never follow the crowd.