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

Thanks, Dien. Some thought-provoking stuff you've shared! I'm particularly intrigued by this takeover strategy, as it would seem on the surface to be more of a niche technique and not something that millions of others are doing or attempting.

Of course one can't go wrong imitating just about ANYTHING that Buffett has done, as he is a certifiable financial genius :). Of course the million dollar question is how do you develop a reliable methodology for spotting those undervalued companies.

And last, but certainly not least, I'm interested in your OWN technique which has been very profitable for you! I'm frankly impressed that you even HAVE a very profitable technique with the state of the market these days. Then again, I've heard that the best investors make money regardless of how the market is doing.

If you'd rather keep your strategy proprietary, I certainly respect that right. But if you're willing to share, I'd be fascinated to get an insight :)

All the best,

-Jesse

> 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

Hi Jesse!

> Thanks, Dien. Some thought-provoking stuff
> you've shared! I'm particularly intrigued by
> this takeover strategy, as it would seem on
> the surface to be more of a niche technique
> and not something that millions of others
> are doing or attempting.

Yes.... I know some others also use this kind of approach, but they do it by doing "insider trading" and getting inside company information -- which is illegal. That's the Gordon Gekko approach, if you've seen the movie "Wall Street"! It's also what put insider-trader Ivan Boesky behind bars in the 1980s.

I don't think Rene Rivkin does it that way, because he's so public about his approach.

I think what Rivkin does is he takes public knowledge and interprets it (using his experience) to make informed guesses regarding possible takeovers, which he believes are about to occur in the upcoming weeks or months....

As long as you're using public knowledge, it's legal.

> Of course one can't go wrong imitating just
> about ANYTHING that Buffett has done, as he
> is a certifiable financial genius :). Of
> course the million dollar question is how do
> you develop a reliable methodology for
> spotting those undervalued companies.

> And last, but certainly not least, I'm
> interested in your OWN technique which has
> been very profitable for you! I'm frankly
> impressed that you even HAVE a very
> profitable technique with the state of the
> market these days. Then again, I've heard
> that the best investors make money
> regardless of how the market is doing.

> If you'd rather keep your strategy
> proprietary, I certainly respect that right.
> But if you're willing to share, I'd be
> fascinated to get an insight :)

Jesse, I use a Buffett-esque technique. That's why I'm such a Buffett-fan!

The answer is, you can make money in the present market (I have been). I'll write more about that next. :)

- Dien

Hi Jesse,

Is anyone finding these valuable?

What kind of returns are possible?

The first stock I bought was in 1997, I bought stock in an Australian company called CSL. I bought CSL for around $8 per share.

Today (a little bit over 4 years later), they're selling at $49.45 per share.

The next stock I bought was another Australian company, Cochlear, for about $6 per share.

Today (a bit over 3 years later), they're selling at $39.26 per share.

The next stock I bought was another Aussie stock, Nautronix, at $1.20 per share. I sold it 6 months later, also at $1.20 per share. (I broke even.) I just included that to show that even I make the occasional mistake. But I always use a good margin of error, so mistakes are unusual. :)

What can anyone else make? For the above results, on CSL so far I've made about 57% per year compounded annually. On Cochlear, so far I've made about 87% per year, compounded annually.

Last year, in July, I bought my first US-listed stock, Resmed (RMD), at around $25 per share. Today, they're selling at $55.69 per share, a little over one year later. That's over a 120% return on my investment. (That beat even MY expectations!)

Can anyone do this? Frankly, I think I've been lucky.

BUT, I do believe that you can make a return of 30% or more per year on your investments, if you're willing to take the time to do the research work. It does take work, but the nice thing is you only do the work once. Once you buy, you hold, which means you do some research, you buy, then you sit back, DO NOTHING, and watch your money grow. :)

I'd love to know if anyone is interested in this topic or not.... To tell you the truth, day-trading is far more exciting. But this long-term investment approach is far more profitable. :)

- Dien Rice

...Find it VERY valuable, and appreciate you sharing!

Your success stories are certainly inspiring. However, what I'd be most interested in is the *thought process* and reasoning which led you to choose those particular stocks.

I am starting to see just how steep my learning curve will be to become the "Ultimate Investor," as Robert Kiyosaki calls it. But that's OK -- just makes the project that much more rewarding!

I'm definitely thinking I'd benefit from a mentor in the investing arena. Perhaps someone would be interested in guiding me along in this capacity in exchange for my business building advice?

Thanks again, Dien. Look forward to more great insights.

Best,

Jesse

> Hi Jesse,

> Is anyone finding these valuable?

> What kind of returns are possible?

> The first stock I bought was in 1997, I
> bought stock in an Australian company called
> CSL. I bought CSL for around $8 per share.

> Today (a little bit over 4 years later),
> they're selling at $49.45 per share.

> The next stock I bought was another
> Australian company, Cochlear, for about $6
> per share.

> Today (a bit over 3 years later), they're
> selling at $39.26 per share.

> The next stock I bought was another Aussie
> stock, Nautronix, at $1.20 per share. I sold
> it 6 months later, also at $1.20 per share.
> (I broke even.) I just included that to show
> that even I make the occasional mistake. But
> I always use a good margin of error, so
> mistakes are unusual. :)

> What can anyone else make? For the above
> results, on CSL so far I've made about 57%
> per year compounded annually. On Cochlear,
> so far I've made about 87% per year,
> compounded annually.

> Last year, in July, I bought my first
> US-listed stock, Resmed (RMD), at around $25
> per share. Today, they're selling at $55.69
> per share, a little over one year later.
> That's over a 120% return on my investment.
> (That beat even MY expectations!)

> Can anyone do this? Frankly, I think I've
> been lucky.

> BUT, I do believe that you can make a return
> of 30% or more per year on your investments,
> if you're willing to take the time to do the
> research work. It does take work, but the
> nice thing is you only do the work once.
> Once you buy, you hold, which means you do
> some research, you buy, then you sit back,
> DO NOTHING, and watch your money grow. :)

> I'd love to know if anyone is interested in
> this topic or not.... To tell you the truth,
> day-trading is far more exciting. But this
> long-term investment approach is far more
> profitable. :)

> - Dien Rice

I'm familiar with the Buffet method -- sorta. They have calculators on quicken.com that will do an analysis of the stock with the Buffet method.

I confess that formulas make my lil' eyeballs cross.

I like the takeover announcement idea, and will start looking at the news to see if I can spot something (and mention it here so we can all 'practice' and learn.)

I did learn to take financial advisors' advice with a grain of salt, but I need to set 'sell' limits on stuff. My first purchase (recommended in a magazine) was Schwab. And when it dropped to 40% of my purchase price, I said 'enough is enough' and sold it. I think it's a decent company, but I don't want that money tied up in a value-losing stock now.

Hi Mel!

> I'm familiar with the Buffet method --
> sorta. They have calculators on quicken.com
> that will do an analysis of the stock with
> the Buffet method.

> I confess that formulas make my lil'
> eyeballs cross.

Wow, I went over to have a look. This is the approach I use....

(That is, I went to www.quicken.com , entered a symbol , then clicked on "Evaluator" on the left hand side of the page, then clicked on "5. Intrinsic Value".)

This looks like a great tool! I'm going to go through their formula to see how it matches (or differs) with what I use.... At my initial inspection, it looks very similar....

Here's how you can use this right off the bat. After you've gotten to the "Intrinsic Value" section, check out all the stocks you are considering buying. What you're looking for are stocks whose "intrinsic value" is significantly greater than their "current price." (I like the "intrinsic value" to be at least twice the current price, which gives you a nice margin of error in case your calculations are wrong.)

By the way, these stocks are not easy to find! But.... once you've found one, you could have a great growing stock!

You may find many stocks have NO "intrinsic value" -- these are the companies which aren't making any profits! I avoid those companies like the plague! (That's why I didn't get caught in the "internet bubble" -- because almost all those companies had little or no intrinsic value.)

For example, if you put in "LU" (Lucent Technologies) you'll find it has no "intrinsic value". That's because Lucent has been making losses rather than profits lately. YHOO (Yahoo!) also has no "intrinsic value" since they've been making losses lately too.

BUT... Type in "PPD" (Pre-Paid Legal). You'll find its "intrinsic value" is currently more than FOUR TIMES its current price! I consider PPD to be ridiculously undervalued. I bought shares in it a few months ago at $16.20 . It's currently $20.91 , so I've already made a 29% profit. But I believe it's still worth more.

Thanks Mel, that's an interesting web page.... I'm going to evaluate it further (especially their formula) just to see exactly how it compares with what I do. But as an initial way to go, it looks pretty good. :)

By the way, I think after you've found a stock with a high intrinsic value compared to current price, you should go further. You should get a copy of their annual report which is often available from their web site -- look under "Investor Relations" or "About the Company" -- some heading like that. Usually you can download it as a PDF file.

I believe you should understand the company before you invest in it. So read through the annual report, to try to understand what the company does.

Especially, try to understand why the company is growing (if it is). Is this growth sustainable for the next five or ten years? If it is, that's good.

Does the company have a monopoly, or a strong brand name, which enables it to earn above average profits? If so, that's another good sign.

Sometimes there may be legal problems. (PPD is having some legal problems, which makes it a more complicated stock to look at, but I don't believe that these problems affect PPD's underlying business.)

Thanks Mel! Great site! :)

> I like the takeover announcement idea, and
> will start looking at the news to see if I
> can spot something (and mention it here so
> we can all 'practice' and learn.)

That'd be great! I'll see what else I can find out too.... :)

> I did learn to take financial advisors'
> advice with a grain of salt, but I need to
> set 'sell' limits on stuff. My first
> purchase (recommended in a magazine) was
> Schwab. And when it dropped to 40% of my
> purchase price, I said 'enough is enough'
> and sold it. I think it's a decent company,
> but I don't want that money tied up in a
> value-losing stock now.

I haven't looked at Schwab, so I don't know much about their business (how they're going, etc.). I've found that if you look at intrinsic value, it's hard to go wrong. The main thing which can go wrong are legal cases -- they can make a stock's price drop like a bullet, and unfortunately they're not always predictable. (PPD is so cheap right now because of a legal case, so you have to take this into consideration before purchasing. My opinion is that the legal case will not affect PPD's underlying business, but you have to look into the issue and take it into consideration.)

- Dien

Hi Mel and Jesse, and everyone interested in stocks....

When you get me talking about stocks, I can get pretty excited. I really enjoy the stock market!

I'm going to say something a bit controversial, though....

I started looking into the stock market in 1996, and tried to read whatever I could. Fortunately, early on I came across a textbook....

Unfortunately, I don't remember the name of this finance textbook. But what I remember is what it said....

This textbook mentioned a university research study which had been published in the 1980s. It compared the results from a variety of stock trading methods....

I think they evaluated them for a year or possibly two. From what I remember, they picked stocks using several methods, including Technical Analysis, Elliot Wave theory, Benjamin Graham's approach, etc. etc.

Out of these, they found that ALL these techniques were NO BETTER than throwing darts at a board. (That is, they did no better than choosing stocks at random.) Every single technique! EXCEPT for one....

That single exception was the approach used by Benjamin Graham. That's the approach I've mostly been talking about, where you find "undervalued" stocks....

Warren Buffett was Benjamin Graham's student, both at university and he also worked for Benjamin Graham after he graduated. He's modified Benjamin Graham's method, in that Warren Buffett narrows down his search to "growth" stocks (which are growing in their earnings) which have strong monopolies or brand names....

However, to me this was enlightening. Technical analysis, for example, is a very widespread method. On the basis of what I've read, I don't believe it works. (That's the controversial part.)

In fact, I think because they make mistakes, these traders often drive the price of stocks down too low, or up too high. When they're down too low, an "intrinsic value" investor will buy. When they're up too high, an "intrinsic value" investor will sell (and make a profit).

An "intrinsic value" investor makes money from the "mistakes" that many others make in the stock market.

The bottom line is.... Looking at "intrinsic value" works!

So why are all these other methods still around? Here's why I believe they are....

An "intrinsic value" investor buys and sells infrequently, because they will hold on to their stocks for several years (typically). That's bad news for the stock brokers, since they make their money through commissions on every trade....

On the other hand, approaches like Technical Analysis encourage frequent trading! So, I believe that....

Stock brokers are probably encouraging these other methods!

That's because, by doing so, they increase their own profits.

That's why I believe you should take your stock broker's advice with a grain of salt. I don't believe they are impartial. It's better to master "intrinsic value" investing and make your own decisions (or find an impartial financial advisor who has mastered it, though I'm not sure if there are many of these around).

- Dien Rice

Dien,

You might find this new Buffet-breaking-news site interesting for a number of reasons:

1. Follows Buffet's picks
2. Describes the "Intelligent Investor" book by Graham.
3. Illustrates how easy it is to build a site that rides on the coat-tails of real success.

Simon

P.S. If you want to taste success - ride on it's coat-tails, don't "copy" it.


Buffet: Example Of Instant Based-On-News Site