The World’s Greatest Stock Trader
Jan 25th, 2005 | By James Boric | Category: Investing Strategies, Penny stocks*** James Boric reports live from Bloomington, IN…
*** For those of you who are looking for investing ideas, boy, are you in luck today. I have a ton of ‘em for you. And the ideas came to me after I re-read one of the best primers on investing ever printed. It’s a 53-page handout put together by Tweedy, Browne Co. LLC called What Has Worked in Investing.
The booklet takes you through five of the most lucrative, time-tested investment strategies ever used. In fact, everyone from Warren Buffett to Ben Graham to John Templeton has used adaptations of these investment strategies to build their own portfolios. And if you are serious about growing your own wealth, this is a MUST-read. In fact, you should read it tonight.
But for those of you who don’t have the time, I will summarize the main points you need to know. And as an extra bonus, I will show you stocks in today’s market that fit these time-tested investment strategies.
(Who else provides this kind of service for FREE?!)
By the way…
If you aren’t familiar with Tweedy, Browne, they are a large money manager based in New York – with billions of dollars in assets. Not bad considering the company was founded in 1920 and was worth about $88,000! But despite the huge growth over the years, one thing hasn’t changed at Tweedy since the 1920s. Before they ever invest a dime in a company, they insist that the stock meet at least one of the five proven investment strategies that work. Here they are…
*** Investment Strategy #1: A company must sell for a deep discount to its book value. In other words, if you added up all of a company’s assets and subtracted its liabilities (debts), what would be left over? In theory, that is the “fair value” of the company. And one of the greatest value investors of all time, Ben Graham, used this strategy to find companies worth owning. The idea behind the strategy is simple…In theory, undervalued companies will rise when Wall Street discovers what bargains they really are. So the investors who have the guts to own stocks when no one else does (when they are undervalued and undiscovered) will be rewarded.Makes sense to me. So I decided to see if there are any undervalued companies on the market now. Turns out, there are 12 that Ben Graham would at least look at today – and all of them are small caps. Here are the top five most undervalued stocks in terms of asset value…
1. Copper Mountain Networks (CMTN:NASDAQ) is trading for 90 cents a share – 143% less than its asset value
2. Celeritek (CLTK:NASDAQ) is trading for 86 cents a share – 131% less than its asset value
3. CoSine Communications (COSN:NASDAQ) is trading for $2.52 a share – 123% less than its asset value
4. Metro One Telecommunications (INFO:NASDAQ) is trading for $1.37 a share – 118% less than its asset value
*** Investment Strategy #2: A stock must trade cheaply compared to its earnings. It has been proven that growing companies with low price-to-earnings ratios (meaning under the historic average of about 17) yield investors higher returns than stocks trading for higher price-to-earning ratios. But…
Value without growth isn’t value at all. So you want to look for companies growing quarter over quarter and year over year that are also trading cheaply relative to earnings.I decided to scan for companies that grew sales and earnings by at least 25% Q over Q and Y over Y – and were still trading for less than 17 times earnings.
Of the 6,000 stocks on the market, only 34 fit the bill. And 19 of them were small caps. Here are the top five…
1. Petroleum & Resource Co. (PEO:NYSE)
2. VAALCO Energy (EGY:AMEX)
3. Deltic Timber Corp. (DEL:NYSE)
4. TransGlobe Energy Corp. (TGA:AMEX)
5. Nordic American Tanker Shipping (NAT:NYSE)
*** Investment Strategy #3: Look for insider buying. When an officer or other high-ranking official buys stock (at open market prices) in their own company, you can bet they are doing so for a good reason. Either they have some valuable insight about an upcoming acquisition, marketing program, cost-cutting effort or change in the industry – or they feel the stock is cheap relative to its true value. Tweedy, Browne looks to invest in the companies when insiders are buying.
A quick scan of the market reveals five small-cap companies worth taking a look at right now. Company insiders seem to love them!:
1. Inhibitex, Inc. (INHX:NASDAQ) – insiders have scooped up 19.1 million shares in the last 6 months
2. Ocean Shore Holding Co. (OSHC:NASDAQ) – insiders have purchased 4.9 million shares in the last 6 months
3. Concord Camera Corp. (LENSE:NASDAQ) – insiders have bought 1.47 million shares in the last 6 months
4. Incyte Corp. (INCY:NASDAQ) – insiders have scooped up 1.42 million shares in the last 6 months
5. Alloy, Inc. (ALOY:NASDAQ) – insiders have purchased 1.3 million shares in the last 6 months
*** Investment Strategy #4: Buy stocks that have experienced a sharp decline in price. When a company has been growing for years and suddenly experiences a decline in earnings, Wall Street usually panics and sells the stock – causing its price to plunge. Tweedy, Browne realizes that most well-run companies usually revert back to their old selves before too long. That means investing when a stock is beaten up can be a fruitful investment strategy.
To be honest, it’s hard to scan for these. You have to follow a company to know if Wall Street unjustly punished it. So I won’t even try to do it blindly. Let’s move on to investment strategy #5…
*** Investment Strategy #5: Invest in stocks with small market caps. Small companies tend to have higher growth rates and higher rates of return versus their larger, more established counterparts. That means they have more room to expand.
All of the stocks I have mention above have a market cap of $1 billion or less. So they could all potentially fit Tweedy, Browne’s investment criteria. Of course…You shouldn’t blindly invest in any of the companies I mentioned in today’s Sleuth. That would be ridiculous. But if you are looking to whittle the field down from 6,000 stocks to about 15, I would use Tweedy, Browne’s five investment criteria as a start. After all, it helped them grow from $88,000 to about $10 billion. They must have done something right!
Of course, the question you have to ask is…
Do you have the patience to wait for these investments to rise? This is not a quick moneymaking strategy. Rather, it’s a buy-and-hold strategy. If you aren’t willing to hold for at least 3-5 years, forget about it.
But if you are looking to find some incredible opportunities in this market by investing in stocks no one else is, I strongly urge you to read What Has Worked in Investing. You can download a copy for free from Tweedy, Browne’s Web site: http://www.tweedy.com
Of course, if you aren’t looking to hold stocks for several years, you too can make money. But you have to assume more risk. And one of my colleagues, Steve Sarnoff, happens to be the best options traders I know. As the editor of Options Hotline, Steve has helped investors make as much as $1 million trading options. It’s amazing. To read more about Steve and his options service, Click here:
http://www.agora-inc.com/reports/OHL/WOHLF126
***Finally, if you are a speculator at heart, Irwin has just what you need. Irwin, take it away…
The World’s Greatest Stock Trader
Born and raised on a New England dirt farm, this young man went on to become the greatest stock trader ever – and one of the most despised men of his time.
He lived through two of America’s most horrible stock crashes – making millions in a single day as others jumped from windows to escape financial ruin. At times, he controlled the entire American economy from his posh New York office. He was blamed for the great crash of 1929. He survived death threats and kidnapping plots – on several occasions. And in 1940, he ended his own life – killing himself with a .32-caliber pistol in a New York City hotel.
His name was Jesse Livermore. And every investor or trader should know his story….
In 1891, at the age of 14, Livermore arrived in Boston on the back of a horse-drawn wagon. He had nothing to his name except a $5 bill that his mother had slipped him – against the will of his father, who argued that the boy should stay put and work the plow.
But his father never understood his son’s knack for numbers…a God-given gift that would be the source of his fortune. As luck would have it, the wagon stopped in front of the Paine Webber office. Livermore marched in and asked for a job. It just so happened that one of the chalkboard boys (who posted the results of the ticker on giant blackboards) didn’t show up for work that day. Livermore got a job immediately.
Suddenly immersed in the wild action of trading stocks, Livermore gradually began to realize that the market had a life of its own. And he was bent on trying to figure it out.
Night after night, after grueling days at work, he went back to his dingy boarding-house room. He furiously entered notes and trends in a diary…trying to decipher the market’s patterns. During those lonely years, he formed two realizations — realizations that would make him one of world’s richest men.
The first realization was that he had to become a student of the market. He had to commit himself to an ongoing education…not only of the market dynamics, but also of the personality flaws that caused people to make fatal trading errors. The other realization was that he needed a system – a set of self-imposed rules that would govern his life as a trader.
His belief in a system arose from his detailed observations that the stock market had an inherent logic…and that it was only through logic that a trader could beat it – and make a real killing.
Two years into his self-education, Livermore felt confident enough to test his trading theories. The problem was he didn’t have a stake – a wad of cash that he could use to start trading. Like other poor men at the time who sought their riches in the stock market, Livermore headed straight for the notorious bucket shops of Boston.
Operated by gangsters, bucket shops attracted stock speculators like moths to a flame. That was because guys who were broke and desperate could open accounts and trade for a slim margin – usually 10 cents on the dollar. So with 50 cents, you could invest $5. And if you lost, the bucket shop kept the proceeds. With house odds of 95-to-1, most men met financial ruin.
What the oddsmakers didn’t count on, though, was Livermore’s system. His intellectual exercise thrived under the battlefield conditions of the bucket shops by adhering to three basic rules…
First, Livermore proved that to make big bucks, you must trade in the direction of least resistance – only trading WITH the primary trends. The trend can move up or down, but you have to know for certain which way the market is moving. If the trend starts to move against you, then get out. Given that the market could reverse itself quickly, Livermore was a big proponent of stop losses – with 10% as his maximum target loss.
That leads to Livermore’s second rule….
When you’re unsure of how the market is moving, stay on the sidelines. One of Livermore’s biggest breakthroughs as a trader was detaching himself emotionally from the business so that he could sit it out on the sidelines. The most important thing about trading is NOT TO LOSE MONEY. And sometimes the best way to do that is to abstain from trading if the market is moving against you.
Finally, Livermore only traded the market leaders. For Livermore, the leaders were proxies for the Dow Jones average. When the market leaders faltered, it was an indication that the market itself was heading downward. The signal occurred when the leaders stopped hitting new highs and plateaued.
Armed with his system Livermore knew he could beat the house. And that’s exactly what he did. Time after time, Livermore bet on stocks and won. In fact he won so often he was banned from the bucket shops in Boston. Shut out, he decided to put his skills to the ultimate test. He went to Wall Street.
In New York, he quickly made a fortune…but lost it when he strayed from his system. He was forced to return to the bucket shops to rebuild his stake. Since he was banned in Boston, he went to St. Louis and then New Haven. Finally, he was ready to return to Wall Street to make another killing.
In the summer of 1929, Livermore’s extensive analysis of the market pointed to a disastrous downturn. He just didn’t know exactly when it would happen. He started shorting the market, his positions growing increasingly larger as Wall Street collapsed around him. The results were amazing…
While millions of people waited in soup-kitchen lines, he made a staggering $100 million during the Great Crash of `29.
The millions of investors who had lost everything complained about Livermore. People started questioning how he made so much money while they wound up destitute. Even The New York Times blamed him directly for the tragic crash. Death threats came directly to his phone line – and he took them head on, talking his way out of them.
After his $100 million windfall, Livermore lost his passion for trading – and with it his fortune. No one could understand why – not even he. It wasn’t until his legacy had been chronicled that experts understood he had been suffering from clinical depression. But at the time there was only way out for him…a .32-caliber slug to the brain.
It was the same, magnificent brain that had developed one of the most successful trading systems ever.
Like most great concepts, Livermore’s incredible system was simplicity itself. It involved market timing (knowing when to get in and out), quickly cutting losses, anticipating trends and optimizing the market’s momentum (up or down).
Livermore was the first trader to actually demonstrate that both a commitment to market understanding and a bona fide trading system were the keys to making millions in the stock market. And although Livermore is dead, his ideas live on to form the cornerstone of modern stock trading principles.
Even though the times have changed, Livermore’s system is a beacon of common sense in turbulent times. And common sense, rather than dollars and cents, can often be the critical difference between making and losing a fortune in trading stocks.
Happy investing,
Irwin Greenstein
January 25, 2005
The Penny Sleuth, presented by Agora Financial, features articles on penny stocks, options, small-cap stocks, pink sheet stocks and OTCBB coverage.
Sign-up for the FREE Penny Sleuth e-letter to get small-cap stock analysis and options strategies sent straight to your email inbox every trading day.
We Value Your Privacy
