Friday May 28, 2010
22.91%. That's the total return of all of the stocks recommended by Richard Schmidt since 1997.
As a former CEO and turn-around expert, Schmidt burst onto the investment scene in 1991, when he sold his business interests to become a full-time investment advisor and money manager.
His track record has landed him on the pages of Forbes, Fortune, BusinessWeek, Investor's Business Daily, the New York Times, the Wall Street Transcript, the Washington Post, and USA Today. And his television appearances include CNBC's Money Talk, CNN's Inside Business, and the Nightly Business Report with Paul Kangas.
How Richard Schmidt Finds His Stellar Stocks:
Success Key #1: Identify the Handful of Sectors that Are Growing Fastest.
If you want to outperform the market you have to invest in the right sectors.
Here's a study that drives home how important this is. The consulting firm Greenwich Associates tracked stock prices over 33 years. They found that an investor who bought the market averages at every bottom . and sold at every top . would have seen his $1,000 investment grow to $85,000.
But an investor who stayed invested during both bull and bear markets . but only in the top-performing industry sector . would have made $4.2 billion.
You read that right, it's $4.2 BILLION.
So how do you stay in the right sectors? All you have to do is look for those sectors that are currently showing the greatest rise in price and volume.
That's all there is to it! There are no complicated formulas . no obscure indicators . no "hidden secrets." All you do is look at the 192 different industry groups and rank them according to growth in price and volume.
Then, once you've identified the handful of sectors that are growing the fastest, you examine the underlying industry fundamentals. Those fundamentals will tell you whether the growth is for real or whether it's a fluke.
Success Tip #2: Go Beyond Number Crunching.
Most analysts look at stock investing as a world unto itself. They see stocks as "picks" or "touts."
Well, stocks are not just picks or touts - they're living, breathing businesses.
And that's the problem with conventional analysis. Most analysts, fund managers, and investment gurus are ill-equipped to analyze businesses . because they have NO real-world experience!
The typical investment advisor has never run a business . never managed a business for someone else . never had to develop a profitable product . never had to sell that product . never had to meet a production schedule . and never had to make a payroll.
So how in the world can you expect him to recognize well-run business for you to invest in?
The bottom line is statistics and numbers are important but the numbers in and of themselves are not enough to predict whether a stock will rise.
Success Tip #3: Know when to Hold and Know When to Fold
Many advisors will tell you that you shouldn't sell your stocks. "Don't let reversals discourage you," they say. "Hold onto your stocks for the long-term." "Choose good companies that you'll want to own for the next 10 or 20 years."
This would be very good advice in a perfect world. In a perfect world, we'd all pick some great stocks, hold them, and never give the matter a second thought.
Unfortunately, we don't live in a perfect world. We live in a dog-eat-dog world. A world that doesn't sit still. A world where today's leaders become tomorrow's laggards.
Example: From the 1950s to the 1980s, IBM was the model of what a good business should be. Then more nimble competitors arrived and IBM shares lost 77% of their value! And this happened at a time when the rest of the market was quadrupling!
Department stores were another great success story for much of America's history. But then Wal-Mart came alone and ate them for lunch. Even the mighty Sears Roebuck got clobbered. Its stock price has been languishing for years.
There are dozens of examples of once-great companies that took a nose-dive. But I think you see my point. Companies change. The world changes. New trends occur. And disruptive technologies sometimes make entire industries obsolete.
You have to be able to stay on top of these changes . and know when it's time to sell.
Success Key #4: Buy at a Discount
Imagine you had a little discount card that allowed you to buy stocks for up to 10% off. If you did, you'd actually be "locking in" a profit on those stocks the moment you bought them!
Of course, no such discount card exists. But believe it or not, there IS a way to buy stocks at a huge discount off their market value . 10% . 20% . even 30% or more!
The secret: Buy on dips.
Now, you're thinking: "Everybody knows that!" Yes, everybody does know that. But there's a big difference between knowing it and being able to do it successfully. Many investors buy a stock after it's gone down, only to see the price continue to go down!
Studies show that stocks near their 52-week lows usually continue to sink, while stocks near their 52-week highs usually continue to rise. So how do you successfully buy on dips? By using the following guidelines:
Success Key #5: Get Background Information on Every Stock You Buy
One theory of investing says that it's hard to get a leg up on other investors because the price of any given stock already reflects all known information about the stock.
Thus, good management is already "included" in the price; earnings are already "in" the price; company news reports are "in" the price.
Well . if that's true. and the share price already reflects all known information about the stock . then why not obtain information that is NOT known? In other words, why don't you do a little detective work?
Talk with some of the employees. Contact the sales department to see if they're hiring, Talk with the shipping department to see if they're busy. You'll be astonished at the amount of "unavailable" information you get . simply by asking for it!
This is the type of information you'll never find in a company profile, annual report, or Standard & Poors research report. And it's information that can give you a tremendous edge.
The Truth About P/E Ratios and Book Values
2 Overlooked Factors That Practically Guarantee Success
There are two numbers in an annual report that can tell you more about a company's prospects than almost anything else. Those two numbers are the company's expenditures for marketing and R&D
Show me a company that's spending more money on marketing and R&D, and I'll show you a company that's growing faster than it's competitors.
A perfect example of this is E*Trade, a company that has made us a small fortune. E*Trade is one of the most amazing companies I've ever seen. In 1998, the company spent $400 million on marketing, which enabled it to grow at the astonishing rate of 1,000 new customers a day.
A thousand new customers a day! In over 35 years in business, I'd never seen this type of growth. I was so excited I could hardly contain myself. I couldn't believe that everyone wasn't jumping on this stock!
Well, of course there were no earnings. The company was plowing $400 million into marketing in order to grow the business. And it was plowing 13% of its revenues into R&D so that it could service all that growth. (In contrast, rival Ameritrade spends less than 1% on R&D!)
No here's the irony: If E*Trade had spent that money on real estate or vehicles or other things that would have contributed nothing to its growth, the stock would have looked better "on paper."
That's because accounting rules allow you to list real estate and vehicles and other capital equipment as "assets."
But advertising and R&D cannot be listed as an asset. It has to be listed as an expense. So instead of showing a profit, E*Trade showed a loss.
Make no mistake about it, E*Trade is a great company. Right now, it's growing even faster than it was when I first recommended it! What's more, it plans to start offering its million-plus customers everything from banking services to mortgages to life insurance. This will add tremendously to E*Trade's bottom line.
Many people ask me if I still rate E*Trade as a "buy." The answer is yes-but only if you buy during dips or corrections.
For years, you've been told to look for stocks with low P/E ratios and low price-to-book-value ratios.
There's just one problem: An analysis of the performance histories of thousands of stocks proves that this advice is dead wrong!
Let's start with P/E ratios. An analysis of the stock market going back to 1953 found absolutely NO correlation between a stock's P/E ratio and its future price. Some stocks with low P/Es went up . but many others went down. And some stocks with high P/Es were among the most successful stocks in history!
The reason P/Es are such a lousy indicator is that they measure today's price in relation to yesterday's earnings.
Buying a stock based on P/E is like driving a car while looking in a rear view mirror. You can see where you've been, but you have no idea where you are going.!
Here's a better way to use P/E ratios: Compare the stock's P/E to its earnings growth.
Take Dell Computer, for example. Many investors think it's over-priced because it has a P/E of 72, which is 2.1 times the P/E of the S&P 500.
But while the companies in the S&P have an average earnings growth of 17% a year, Dell's earnings growth is a staggering 84%. In other words, its P/E is twice as hight as the S&P, but its earnings growth is five times as high! That makes the stock a bargain!
Now let's look at book value. Book value is a measurement of what a company would sell for if it had to quickly liquidate all its tangible assets. Tangible assets include real estate owned, equipment and machinery, vehicles, and product inventory.
During the old industrial era, book value was a great way to measure a company's worth. But as our economy moved more toward a service economy (and then an information economy) book value became more and more irrelevant.
Take Intel, for example. Sure, Intel owns factories and equipment. But the company's value comes not from its factories but from its intellectual property. It's the intellectual property that enables Intel to create the better, faster computer chips everybody buys.
Bottom line: Use book value as a measure only when you're analyzing companies that are in the real estate businesses . or bankrupt companies in liquidation. For all other companies, book value is 100% irrelevant!
How to Find "The Next Great Thing" Every Time
If you missed out on the boom in Internet stocks, don't worry. There are always more mega-profits just around the corner - if you know where to look.
There is a cycle that every product and industry goes through - without exception.
It begins with the introduction phase, where time and money are spent building awareness in the marketplace. Then it goes through the growth phase, where sales take off . and finally the maturity phase, where demand for the product levels off.
Pretty basic stuff. But here's the remarkable thing: Even though the growth phase accounts for the least amount of time, it accounts for the lion's share of the profits - as much as 85% of the total!
In some industries, the bulk of the profits come in just a few years! Take the fax machine, for example. Did you know that fax machines have been around since the 1940s? It's true! Yet for four decades there was no market for them. Fax machines didn't enter their growth phase until the 1980s. And by the 1990s, they had already reached the maturity phase, with lower demand and lower profit margins.
So the trick to making money is getting in during the growth phase and getting out during the maturity phase. Fortunately, this is pretty easy to do. All you have to do is look at industry sales figures. If you see accelerating growth from year to year and from quarter to quarter, you know it's time to get in on the action. And if you see that growth is leveling off, you know it's time to get out.
Current growth figures show that the Internet is at the earliest stages of the growth phase. That means the greatest profits are still to come!