Tags: Buffett | stocks | company | earnings

Viewing Stocks Properly: A Huge Key to Investment Success

By    |   Monday, 16 Sep 2013 07:44 AM

I remember being a young man in my early 20s watching Joe Kernen on CNBC
and seeing letters and numbers scroll across the bottom of the screen. I remember thinking to myself, there must be a lot of money to be made for the person who can figure out what makes those stock prices rise over time.

So I remember praying throughout the years that God would show me how to properly invest and steward my money. Now, we think that prayers are answered all at once ... and sometimes they are. But this one has been a prayer that has been answered and pieced together over time through the years as I was ready for it.

Here's another controversial thought. We assume that God will always send us to Christians when we need to learn something. And again, many times that does happen. But sometimes God just sends you across someone's path that is simply good at what they do. After all, whether the individual recognizes it or not, it was God that gave them the intellect and the ability to think and see things a certain way to gain success.

And if you pick up on that way of thinking, you can gain a similar type of success.

Well, my investing strategy is really a piece of a few investors' thinking — people like Warren Buffett, Sir John Templeton and John J. Murphy.

From Buffett and Templeton, I learned fundamentals, which are how to assess a company's stock price relative to its assets and its earnings, etc. Buffett describes himself as an atheist and Templeton, while he was a very religious man, didn't hold a lot of common biblical views. And I honestly don't know Murphy's views on religion. But he's the one I learned a lot about technical analysis.

Finally, I was mentored in technical analysis by a great Christian man, A.J. Monte. (Technical analysis allows you to assess what's going on with a stock due to what the price action is doing on the chart, through its trend direction and various technical indicators).

So God will use quite a number of people who have bits and pieces of what you need to know in order to complete what He has for you. And so it was with me. My investing philosophy came from a combination of what these guys knew and brought to the table. While I knew Monte personally, I just read the books or writings of the others to glean from them how they thought so it could wear off on me and help me form my investing philosophy too.

Over the years, I've been able to piece together what really matters the most. I learned the fundamental metrics that really matter the most and how to think like a contrarian by buying great assets when investor sentiment is horrible. I've learned how to quantify negative sentiment on the charts and also which technical indicators are "worth their salt."

All combined, it's given me a great fundamental-technical-sentiment-based approach where I use the strengths of all of these forms of analysis.

But the biggest thing I want to home in on today is the proper "thinking" that is required to be a successful investor. I think that's one of the biggest things that has helped me to hold onto stocks through dips and onto great gains while others withered through fear as the same stock dipped.

I gained what I believe to be the proper viewpoint from Buffett. He doesn't think of publicly traded companies as "buying stock." Instead he thinks of "buying companies" whether he's buying some shares of the company or whether he's buying 100 percent of the company.

Why does that matter so much? If you know the quality of what you've bought, your faith in the company isn't shakable when the bumps and dips come (because the dips will come. Hardly any stock goes straight up.)

You see, Buffett is widely considered to be the greatest investor of all time. And you'd think with a title like that, which many people have given him, that everything he picked would have been profitable and would have started going up almost immediately after he bought it. But when you research his purchases, you find that this isn't true at all.

Oh, he's definitely one of America's greatest investors. But it's not because he called the bottom on a stock and it immediately started going up for him. No, quite the contrary happened. He rarely ever called the bottom on the stock, yet he did capture value.

But there were instances where the stock still declined 50 percent or more before rebounding. How in the world could he mentally withstand seeing that many dollars disappear from his account as the stock declined that severely?

It goes back to viewing the "stock" as a "company." In other words, know the quality of the business and don't just think of the stock certificate or only the stock's price that bobs up and down on the chart. Think of what you've bought into, in other words, what you really own.

For instance, most of the stocks I own in the Ultimate Wealth Report are multi-billion dollar companies. They make billions of dollars per year in earnings and they generally have billions of dollars of cash on their books.

I buy when the stock is cheap relative to the company's earnings and net assets. This allows me to buy huge companies with great earnings and lots of cash on their books "on the cheap."

Do I toss and turn at night by owning these stocks? No! In one market downdraft one time, I had two of the stocks decline 50 percent or more on me (just like Buffett had some too). Did I panic and lock-in losses and cry the blues? No. Did I lose sleep when that happened or lose confidence in the stock? No.

It was still the same multi-billion dollar company it was before. It still was producing billions of dollars in earnings and still had billions of dollars on its books and it was still cheap relative to its earnings and net assets. It simply just got cheaper in the interim.

But what kept me on board and riding the stocks back up to nice profits was my focus on the quality of what I'd bought rather than how I might have felt otherwise had I allowed an emotional decision to be made about how I "felt" at the moment about the stock's decline at the time.

I learned from the wise viewpoint of Buffett on stocks. Here are some of his thoughts:
Stock market prices may bounce wildly and irrationally, but if decisions regarding internal rates of return of the business are reasonably correct — and a small portion of the business is bought at a fraction of its private owner value — a good return for the fund should be assured over the time span against which pension fund results should be measured.

My simple interpretation of this: Regardless of what stock prices temporarily do, if you focus on the quality of the company and what it's expected to do (earnings wise) and you buy it at a cheap valuation, then as you give it time, you should do very well.

One last final thought from Buffett that has influenced me a lot:
Success, in large part, is a matter of attitude, whereby the results of the business become the standard against which measurements are made rather than quarterly stock prices.

My simple interpretation: It's the way that you think about a stock that's going to determine if you're successful or not. If you look at what the company itself is doing as a business (and not as a stock) and you're watching the expectations of what the company says it believes it can earn, etc. and that's growing nicely overall, then the stock price will eventually line up. And if you're patient, you'll reap the rewards by having a nice gain on your stock over time.

So if you truly want to be successful in investing, learn to think this way, and you'll have good success.

God bless!

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust.
Click Here to read more of his articles. He is also the editor of Ultimate Wealth Report. Discover more by Clicking Here Now.

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SeanHyman
I remember being a young man in my early 20s watching Joe Kernen on CNBC and seeing letters and numbers scroll across the bottom of the screen. I remember thinking to myself, there must be a lot of money to be made for the person who can figure out what makes those stock prices rise over time.
Buffett,stocks,company,earnings
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2013-44-16
Monday, 16 Sep 2013 07:44 AM
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