To Those Looking To Invest In Stocks (Part 1)

Hi Jesse, Mel, and everyone interested in stocks!

First, sorry this took me a bit longer to post than I anticipated. I had a bout of indigestion, and so it took me a bit longer to get to writing this than I had planned! But let's get started....

I believe that often there's a trade-off between security and speed. I think that more secure investments usually take longer than the less secure, but possibly faster, investments. If this is true, it means that you have to decide which of these criteria you want to use to invest. (Or what combination of the two.)

I'll give a couple of ways to invest here, though one is probably very difficult to implement. The other way is the method I use myself.

Rene Rivkin's Approach

One Australian investor to look at is a guy named Rene Rivkin. You can look at his web site at http://www.rivkin.com.au/ .... He currently sells a subscription to a weekly newsletter, where he gives his views every week on what to buy and what to sell.

His background is that he is one of the founders of an Australian stockbroking company, Rivkin Croll Smith, which he later sold. Apart from that, he makes all his money from his own investing and from his newsletter. His fleet of cars -- he personally owns something like 80 cars -- shows that he seems to be successful.

From articles and interviews I've seen with him, what I can gather is that Rene Rivkin's technique is this....

He tries to find out as early as possible what companies are likely to be takeover targets. He then buys shares in the companies which are likely to be taken over.

If his informed guess is right, the companies will at some point make a public announcement regarding this.

When that happens, usually the share price of the company to be taken over will rise dramatically, and that's when he sells his shares for a profit.

Of course, sometimes he can be wrong, but I have the impression that he's a very cautious investor.

Can an ordinary person use this technique?

I think Rene Rivkin is in a unique position to use this style of investing. He spends a lot of his time soaking up information, probably much of it from various contacts which he has in the finance industry (especially since he's the founder of a stock broking firm). So, he may often hear about upcoming developments before the general public does.

His stock market experience also probably helps him to interpret the information, when he's looking for possible takeover targets. I think it could be difficult for an ordinary person to try to apply this technique effectively.

However, Rivkin does have a way for people to "share" in this technique from his newsletter. I DON'T subscribe to his newsletter, BUT (not having seen it) I think his newsletter would probably pay for itself if you had a few thousand bucks to invest following his advice. I think his technique is plausible for someone in his position and with his experience.

(The reason I haven't subscribed is that I prefer to use my own style of investing, which has been very profitable for me.)

One limitation is that his newsletter is only for investing in companies listed on the Australian stock exchange. There could be something similar for companies on US exchanges, but I'm not sure.

I personally believe the best approach is still the one used by Warren Buffett. But more about that later. First, let me briefly talk about stock brokers.

Stock Brokers

Many people listen to their stock broker when deciding what to invest in. However, the truth is, many stock brokers are essentially salespeople. They make a commission on everything you buy and sell. It is in their interest for you to buy and sell a LOT -- the more you trade, the more money they make.

Think about it -- if they really knew what stocks would go up, would they still be working as stock brokers? In many cases, the probable answer is NO.

The problem with stock brokers is that their self-interest and your self-interest are not the same. They make money if you trade a lot -- whether you make money doing it or not. So, I'd take any advice from stock brokers with a grain of salt.

Following The Crowd

When it comes to stocks, what most people tend to do is "follow the crowd." In many activities, this is a way to play it safe. However, in the stock market, this approach can be a disaster.

The problem with this is that it means many people have a tendency to buy too high (AFTER everyone ELSE has bought), and sell too low (AFTER everyone ELSE has sold). When you "follow the crowd" there's a tendency for you to "buy high, sell low" -- which is why a lot of people lose money.

A better approach is the one followed by Warren Buffett -- the world's most successful investor. Here's the theory behind his approach....

Warren Buffett's Approach

Every business has an intrinsic value. Since buying stocks is buying part of a business, that means that every stock also has an intrinsic value too. This approach says that, over a long enough period of time, the price of a stock will gravitate towards its intrinsic value.

This means that "overvalued" stocks (whose price is higher than their intrinsic worth) will tend to go down in price, towards their intrinsic value.

At the same time, "undervalued" stocks (whose price is LOWER than their intrinsic worth) will tend to go up in price, towards their intrinsic value.

So, if you buy undervalued stocks and wait, as long as your calculations are right, you'll ALMOST ALWAYS make money.

Which companies are good ones to look at? Some essential criteria which Warren Buffett uses to select companies to invest in are these....

• They must have a monopoly or a strong brand name (so they dominate their market)
• They must have a good record of profit growth which will likely continue for several years to come (they must have a degree of predictability here)
• They must be undervalued (as explained above)

I'll explain more about these criteria later....

Dien Rice