Key Posts from the first 1500, #2

This was post #6 on this board. http://discussion.fool.com/since-this-is-a-board-on-investing-ph… It gives my answer to the question: “When you buy a stock, what is the most important thing you look at?”

Here is my answer. It’s really a tough question because there are so many factors involved.

Saul

  1. First, I look for a company that is rapidly growing its revenue. By rapidly, I’m looking for usually AT LEAST 25% per year. (That usually rules out companies with no revenue like start up biotechs or start up diesel-from-algae companies, as well as slow-growing companies. I do occasionally make an exception as I have done for a position in SZYM, which has two large factories which just came into production and another supposed to come into production this quarter, with big time partners).

  2. I look for recurring revenue. I LOVE recurring income and the razor and razorblade model.

  3. I look for a company that has a long way to grow. A company that I can hope will be at least a 3 bagger and maybe a 10 bagger. (That’s one reason I sold out of my position in Apple. Most people who were long Apple were hoping for a rise from $450 to $550 or $600, when I was writing. That’s equivalent to buying a stock at $4.50 because you hope it might get to $5.50 or $6.00. I wouldn’t buy a stock at $4.50 unless I though it could get to $20.)

  4. That means a company that has a long runway, that ideally can grow almost forever. What I mean is a company where the addressable market is so big that their share of it allows them to keep growing for the foreseeable future. That’s no guarantee that they will, but it’s better than a company that already has 40% of it’s total available market, for instance, and can only double once.

  5. I want a company with rapidly growing earnings. I usually won’t touch a “story” company that is losing money, but that "will break even two years from now”, no matter HOW enticing the story is.

  6. I pay no attention to GAAP earnings and only look at non-GAAP or adjusted earnings. I know this bothers some people like Fletch, but it’s what I do. I feel that GAAP earnings ridiculously distort the picture. (Consider company X that has a big tax benefit this quarter and reports huge GAAP earnings, and then next year they pay normal taxes and looking at GAAP, it appears as if their earnings have tanked, just for a trivial example. Or company Y that has outstanding warrants. If their stock price goes up, GAAP rules makes their apparent GAAP earnings go down due to repricing of warrants. Just nonsense. I especially remove stock-based compensation as an expense).

  7. I look for companies that are easy to follow, ( which is why a lot of my companies are recommended by the MF). It means that I generally avoid foreign companies. (Arcam, the Swedish 3D printing company, was an exception.)

  8. I won’t touch ANY Chinese company. Not even Baidu. This is due my experience in 2010 or so with 13 little companies (some recommended by MF global Gains), of which fully 11 turned out to be fraudulent in one way or another. You simply can’t tell what’s going on in a Chinese company. Consider that Yahoo is a major company and owned 40% of Alibaba, and the Chinese CEO blithely gave himself the fastest growing subsidiary as a present without telling Yahoo. If it can happen to a big company like Yahoo, what chance do I have? I probably wouldn’t invest in companies in other emerging markets either.

  9. I want a company that does something special, a “Rule Breaker” , not a company that just makes a commodity product well.

  10. I avoid mining and drilling and natural resources stocks , which tend to go in cycles from boom to bust.

  11. I look for insider ownership.

  12. I want management to be interested in making a profit. (That’s why I sold out of amazon even though I love the company. I saw an interview where Bezos touched on a dozen or so goals he had for the company over the next ten years. Making a profit just wasn’t on his radar screen, never even mentioned. (I realize that this has made me miss out on the increase in amazon’s price, but I just wouldn’t be comfortable with it).

  13. I buy no bonds of any type.

  14. I’m usually nearly 100% in stocks, and only rarely and briefly as much as 10% in cash. I have a couple of small accounts in which I can buy on margin, but my amount of margin in rarely as much as 4% or 5% of my total investment.

15 I don’t invest in options.

16 I don’t invest in futures. (I tried them when I was younger, and saw a bunch of money disappear overnight). In the stock market if the market goes up, everyone makes money. Futures are a zero-sum game though. For every contract, someone is long and someone is short. Someone makes a profit and someone else loses the exact same amount. (That’s zero-sum). And you are competing against experts, professionals, who live and breathe the commodities markets.

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Saul,

I think this is a great idea, and I hope you pursue it.

I was thinking, however, that it might be easier to just have a list of important posts somewhere? the easiest way might be to post all of the review posts you make as replies to one single thread. Then you could just say, “Check out this thread for the basic strategies I use.”

Anyway, it is just an idea. I think any method you choose to review the important information will help prospective investors to learn your methods.

I continue to be surprised and delighted by your devotion and leadership. I am not sure why you do it, but I appreciate it.

Thanks again,

Tdonb

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