Tuesday, October 30, 2012

Compile Your Shopping List

It is difficult in this era of instant gratification and immediate, numerous sources of information to be patient, especially concerning investments.  This is a time, however, to be disciplined and patient in making investment decisions, as the sharp rebound in stock prices has left them vulnerable to a significant decline.

The release of interim profit reports by companies provides fresh information about the financial state of  companies and the investment appeal of their stocks.  While many investors focus on revenue growth (since growth can make currently expensive stocks much cheaper in only a couple of years), I favor the balance sheet and cash flow statement.  I especially seek companies in sound financial condition, with managements that behave like investors themselves, and who manage their companies in a sustainable way for the benefit of their shareholders and for other stakeholders around the world.

Companies with little net debt and surplus cash flow from business operations (after deducting funds for capital expenditures and sizable assumed dividend payments) are most appealing to me.  When their stock prices are selling at modest valuations relative to earnings and "free" cash flow (after capital spending and sizable dividends), I'll buy them almost regardless of my view of the overall stock market.

So now is a good time to do the necessary background research to compile a list of stocks to buy.  Then decide on what is a reasonable price to pay (less than fair value of course!).  You can then follow the practice of the late, great investor John Templeton, who set limit orders to buy stocks at prices significantly below the current price.  And he waited.  If the order was filled, he was pleased.  If not, he remained patient.  So as in other areas of life, position yourself to take what opportunities are presented and be patient.

Steve Lehman

S & P 500: 1414


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