Newsletter November 8, 2005

InvestorsFriend Inc. Newsletter November 8, 2005

Performance of our stock picks

The performance of the stock picks on this Site are well documented and continue to be outstanding. The model portfolio as well as the editors personal portfolio are both up about 25% year to date and have more than doubled in just the past three years.

If you are interested in investing in individual stocks then now is a good time to subscribe to our stock rating service since we are updating many of the picks for the Q3 earnings releases this month.

How to Use This Newsletter and Site

This Site is directed at all individuals who want to learn more about investing including understanding the necessary math and the necessary business principles to identify good business that are available at reasonable or bargain prices in the stock market.

New subscribers to this free newsletter should consider exploring the articles section of this site, which contains a wealth of unique and valuable educational information. New subscribers can also browse the past newsletters as well as current newsletters as they are issued in the future.

Readers of this free newsletter who already have investments or who have new money to invest may wish to subscribe to our paid stock rating service. Our method of rating stocks has proven to be unusually accurate in picking winners and losers in the stock market in the past. While there can be no guarantees, we do expect to continue to have a good track record in the future.

A Strategy to Get Rich

Let’s face it, if you are interested in investing, you are probably interested in getting rich.

Actually,  I know that some of the subscribers to this free newsletter are already quite wealthy. As a group I am pretty sure you are doing better than average. But I think I’m safe to say that most of you are not yet fully satisfied with your level of wealth.

If you are interested in becoming wealthy, it’s a good idea to start by thinking of who it is that is rich in our country and how they got that way.

Some of the rich people are people who take home huge annual pay cheques. These include, for example, many very senior executives of large corporations, senior lawyers in big firms, specialist doctors, holders of inherited wealth, many NHL hockey players.

If you are among these groups then congratulations. But most investors are not going to be able to join the ranks of the “mega-salaried”.

Luckily there is another group of rich people in almost every City and large town that we can hope to join. My understanding is that a significant percentage of truly wealthy people are business owners. The people who own successful businesses like car dealer ships, recreational vehicle dealers, the Canadian Tire Store, or a couple of Tim Hortons or a mid-sized Hotel, a busy night club, and many other substantial businesses are generally pretty wealthy or at least on their way there.

Some people are in a position to directly join the ranks of successful business owners. But a lot of people are not in that position. They may not have the start-up money to open a substantial business. And they don’t want to take the risk of quitting their full time job. Or they are just not prepared for the sacrifices of running a business or are not confident that they could do it.

This is where investing in the stock market can come to the rescue.

Buying shares in a business makes you a (albeit usually tiny) part owner of the business.

If you buy shares in the right businesses then you can enjoy the wealth creating benefits of being a business owner. But you have to identify the right businesses and the shares have to be priced at an attractive level.

At any given time many stocks are over-priced. But there are always some stocks that are trading at bargain prices. This Web Site and newsletter contains educational articles that can help you identify the bargain priced shares. And if you would rather not attempt to do the analysis yourself, we also offer a stock rating service that has a very good track record of identifying winners and losers in the stock market.

Stock Market Versus the Casino

Many people (mostly non-investors) view the stock market as being similar to a casino. They may think that for very winner in the stock market there must be a loser. But that is not true. The following are some main characteristics of a casino compared to the stock market.

In a casino, the game is such that the “house” is almost guaranteed to win. For every $100,000 gambled, the house may take say $10,000 for expenses and profits. And the government may take another say $10,000. The remaining $80,000 would then re recycled among the players (from losers to winners). Not only is there a dollar lost for every dollar won, but there is significant leakage from gamblers to the house and to government. And if the $80,000 is recycled among the gamblers after one round of play, the leakage continues with each round so that after several days or rounds of gambling it seems likely that almost the entire $100,000 will eventually be taken by the house and by government. There may be a few skilled gambles that are capable of consistently winning at some of the games which involve skill. But if there are, they have to be very skilled indeed because they are playing a game that is stacked against gamblers.  If all the money was recycled solely among the gamblers, in games involving some skill,  then I would definitely expect to see some consistent winners and some consistent losers. But when the house and government each “rake” off some amount with each round (even if it is a small percentage) then it is a certainty that the pool of losers will be bigger than the pool of winners and it soon becomes questionable whether there can be any consistent winners in such a system.

In the stock market, investors also win and lose against each other. And the “house” and governments also take a portion, although it is a much smaller portion. But a big difference in the stock market is that money is being made from the customers of the businesses. In the stock market there is no net leakage of money from investors. In fact there is a net in-flow of money from customers. In fact in the stock market it is a well accepted fact that the average investor will make at least some small positive return, over a period of years. The reality is that skilled investors will make large returns and poorly skilled and/or poorly advised investors will lose money. But at least in the stock market, the game is not stacked against investors, in fact it is somewhat stacked in their favor.

Missed Opportunities

Most investors are bothered by missed opportunities. Whether it was not getting into real estate a few years ago or not buying (and holding) Microsoft 15 years ago, there are always missed opportunities.

Luckily in investing there are always new opportunities. No investor can possibly invest in all the good opportunities and so there is no need to feel bad about the missed ones. Investment success comes from making substantial returns on your winners and avoiding having many real losers. Some people avoid losers by using stop-loss trades. Others may avoid losers by choosing their investments very carefully and insuring that they are getting a bargain price. Buying an investment at a bargain price provides a margin of safety against suffering a material and permanent loss.

There is really no point worrying about missed opportunities.

Avoid the victim Mentality

Many Canadians are quick to blame others for their problems, especially their lack of financial success. This is the “victim mentality”. Symptoms include constant moaning that we are over taxed, that big oil companies are gouging us, that  the little guy can’t get ahead etc.

I suspect that most truly successful people don’t waste much energy on these thoughts.

The reality is that Canada and North America are full of opportunity. The economy is in great shape and the unemployment rate is at a low point not seen in decades.

Success in investing will not likely come to those who view themselves as “victims” of an unfair world. Rather it will come to those who seize one or more of the opportunities that are available.

Next Issue

A review of the attractiveness of various major market segments.