Newsletter July 29, 2006
InvestorsFriend Inc. Newsletter, July 29, 2006
Getting Rich in Stocks
It would be nice to promise you that you can get rich very quickly by following the stock picks on investorsfriend.com. But this Site is far too honest to make that kind of unrealistic promise.
Investors can absolutely expect to grow their wealth through stock ownership. But the reality is that it takes time to build up a significant portfolio through saving and investing.
So, the bad news is that it takes significant time to build wealth through stocks. But the good news is that over a period of enough years it is quite easy to grow a significant portfolio. And the fact is that these years are going to pass by whether you invest or not. If you have to get older, you may as well arrive their in a wealthier state!
Make Time Your Friend
When you buy high quality companies (high return on equity combined with a history of reasonably strong growth in earnings per share year after year) time becomes your friend. Over a period of years such companies tend to grow in value. Their earnings growth becomes a buoyancy force that tends to push the stock price up. Often there may be volatility along the way but usually time and patience will be rewarded.
The opposite approach is to make time your enemy. This occurs when you find yourself holding an over-valued company. Often such companies have low or no earnings but have lots of promises about future earnings. Often such stocks can increase temporarily if they are touted by stock promoters. The trick here is often to try to sell near the top and get out before the market realizes the stock is over-valued and its price plummets.
In between these two scenarios are many stocks where it is not really clear if time is on your side or not.
It seems to me that the life of an investor will be much less stressful and probably more rewarding if the investor mostly holds stocks of a quality such that time will be his or her friend.
I also have personal evidence of this as presented below.
The Investorsfriend web site has featured stock picks since mid 1999. In reviewing the stocks with the largest total gains since then, it should not be surprising that the biggest gainers (that have more than quadrupled in price i.e. up 300% or more) are stocks that we picked as Strong Buys or Buys in 2002 or earlier. I expect that some of our higher rated stocks picked in 2003 or later will also ultimately quadruple in value, as time will be our great friend on many of these more recent picks as well.
The top five gainers that are still in our database are summarized below:
|Company||Date Picked||Initial rating||Total Price gain to date|
|Stantec||Sept. 3, ’99||Strong Buy||657%|
|Pason Systems||Aug. 31, ’01||Buy||567%|
|Melcor Developments||Dec. 20, ’02||Strong Buy||400%|
|Canadian Western Bank||Aug. 5, ’99||Strong Buy||358%|
|Home Capital Group||Apr. 26, ’02||Buy||328%|
At the time they were initially picked all of these stocks exhibited graphs with reasonably steady growth in annual earnings and revenue per share. Also these were available at that time at bargain or at reasonable prices. In effect all of these stocks were the type where it was reasonably clear that time would be our friend.
With results like those above, I certainly look forward to seeing many of our more recent and current higher quality Strong Buys and Buys behave similarly with the passage of several more years.
Note that our total average performance was not as high as the above figures which are for our best five stock picks ever assuming they had been bought at that time and held since then.
Subscribe to our Stock Picks
As the Performance figures on this Site suggest, our Stock Picks have been helping myself and other investors to become rich through stock investing. It does take time but I can attest that over a period of years the returns can really start to add up. In each of the last three years I have made more money in stock investing than many people made working full-time for the year. Some of our subscribers made substantially more than that.
I am not going to make grandiose promises but if you subscribe now to our stock picks, I am confident that you will be satisfied with our work and that it will assist you in growing your wealth for the benefit of yourself and your family.
Is Now a Good time to Invest in Stocks?
There can never be any guarantees that any particular time is a good time to invest in stocks.
Some would suggest that now is not a good time to invest given that markets have declined noticeably since peaking in early May and since the U.S. may be heading into an economic slow-down.
However, consider that Warren Buffett (the world’s most respected investor) has said that we should be fearful when others are greedy and greedy when other are fearful. Given that many are fearful right now, this would suggest that right now might in fact not be a bad time to invest.
Also even if onc decides that right now is not a good time to invest in the markets in general, there will still be individual stocks to be found that are good investments at any time.
I have updated our article that examines the attractiveness to investors of the various industry segments on the TSX.
Find Growth Per Share to Become Rich in Stocks.
Companies that grow earnings per share at high rates (in our current low-inflation environment “high” might equate to 10% or greater) will greatly increase in value over a period of years. Consider that at a 10% annual growth rate, earnings per share would double in 7.25 years, quadruple in 14.5 years, be up 8 times in 21.75 years and 16 times in 29.0 years. More dramatically, consider that at a 15% annual growth rate, earnings per share would double in 4.95 years, quadruple in 9.9 years, be up 8 times in 14.85 years, 16 times in 19.8 years, 32 times in 24.75 years and be up a staggering 64 times in 29.7 years. The result is that if you can find a company that will grow its earnings per share at 15% annually then (assuming the P/E ratio does not change) you would only need to invest $16,000 today in a tax-free account to have that grow to about $1 million in 30 years.
This suggests that we should seek to find companies that we can reasonably expect to grow earnings at over 10 or even 15% for many years into the future.
One way to do this is to look for companies that have in the past been growing earnings per share at rapid rates. My view is that it usually makes sense to go with a proven winner. Many companies can promise and predict high rates of earnings per share growth, but far fewer companies can point to a proven track record of having already accomplished that.
Another consideration is to assess whether management has a goal of achieving high growth rates (per share) into the indefinite future. Many companies and managers are content at their current size, they may simply have no burning desire to grow.
I think it’s fair to say few worthwhile accomplishments are ever made by corporations or by individuals unless a goal is set to achieve that accomplishment. Many companies may try and fail to grow to a huge size, but I suspect very few that do not bother to try ever end up accomplishing much.
Previous editions of this newsletter can be accessed here.