Saturday, August 9, 2008

The Investment Zoo Chapter 10: A Sound, "Do-It-Yourself" Approach

In this chapter, the author lays out a "do-it-yourself" strategy. He starts by reminding us that choosing high quality, international, non-cyclical companies makes sense since you can achieve high returns with low risk and low commissions since you will just buy and hold for the most part.

He warns readers twice not to make investing overly difficult. Focus on just a few of the most important points with the companies you are considering to invest in. Information and details change frequently but grow out of date quickly, so the important points to focus on are the quality of management today and in the future, whether the industry is fast growing and non-cyclical and whether the company is the best in the industry.

He advocates buying the best quality stocks during panic situations and temporary setbacks. An example he cites is if Philip Morris' shares fall due to the threat of lawsuits, it's likely a temporary setback and can be a good investment since demand for tobacco is inelastic. In the same way, if there is concern in the markets regarding US pharmaceutical regulation it's a good time to load up on the best quality international health-care stocks. Jarislowsky rationalizes that if the market averages 14x earnings and provides 5%-6% after inflation returns, then buying the market at less than 14x earnings will improve your investment gains and vice-versa. He cites guidelines of bear markets averaging 8-12 times earnings and bull markets averaging 20-25 times earnings.

Jarislowsky acknowledges that selling is inherently harder than buying and only recommends selling if 1) the company no longer fits your buy criteria and 2) the stock price has gone up much too high. He advises to use high markets to get rid of mistakes in your portfolio and to be prepared with a list of quality companies to buy in the a bear market.

He states that many panics are rarely justified and market prices are taken down very quickly during panics. Some panics take longer to work themselves out than others such as unsophisticated mutual fund owners heading for the exits. In those situations its best to be patient and wait for the selling to stop before buying in. One of Jarislowsky's great quotes is found in this chapter. He counsels that patience is well rewarded and says "If you want to buy cheap from scared people: Why jump on a moving freight train and rob it if you can just wait until it stops?"

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