In Search of the Perfect Investment

The key to stockpicking is to find a company that fundamentally changes the way an industry works or introduces a totally new industry.

A totally new industry is Google in search.

Fundamentally changing an industry is what Netflx did to movie delivery — first with DVDs by mail and (and more importantly) with movies online.

You ride the growth. When the explosive growth ebbs, you get out and move on, searching for another one.

There are always companies on a roll with revolutionary new ways of delivering old products or new industries altogether.

Eventually these companies mature. Their stock price flattens. And they may most likely head downhill. Walmart and Microsoft are two such companies. Innovators in their time. Now hanging on for their dear life, under new boring management.

Stockpickers and money managers are forced to buy or recommend a bundle of stocks. To become fully “invested” from day one.

It doesn’t work that way. No one can find a bundle of hot companies, instantly. You have to actively search every days. Search your daily life. I missed LuluLemon, though my family raved about the company’s clothes and our local LululLemon store (the one around the corner) was clearly booming. I thought the stock overpriced. Ditto for Panera Bread, which I knew was booming but I thought was overpriced.

The clear lesson from 2010 was that hot stocks run. And run big.

But at some point they run out of steam. At point, it’s time to get out. There are no rules on this. Just keep your stop tights. Make sure you lock in gains — especially if the stock goes parabolic. These two didn’t go parabolic. But they’s always ebbed a little, suggesting that the big growth is gone. Time to sell?

Right this moment, I don’t have a game-changing stock. Later this week, I’m going to Las Vegas to visit the annual Consumer Electronics Show (CES) in search of the latest hot technology company. I’ll report as soon as I find something. Meantime, the closest I can find to game-changing is what Apple is doing with tablets (think  iPad) to the laptop/network/printed book industry.

Now for one of the great ironies: I distribute my dictionary — Newton’s Telecom Dictionary — through a large wholesaler called National Book Distributors (NBN). Last week they emailed me: Borders had stopped paying them. And they, in turn, had stopped sending Borders books. Meantime, my local Barnes & Noble store at the corner of Broadway/Columbus and 65th Streets closed on the weekend, to be replaced shortly by a cheap clothing store called Century 21. While the print book  business is dying. I’m completing my implementation of my dictionary on the iPhone/iPad. If things work out (cross your fingers) I should make more money with the Apple electronic version at a lower price than the print book (which I will continue to sell through Amazon — the last remaining real book distributor.

Not bad for Amazon. This growth has been propelled by sales of the Kindle — their largest selling “book.” I hope to have my dictionary up on the Kindle shortly. Sadly, Kindle doesn’t have a search engine.  We have to write one. Yuch.

Barron’s goes stupid. Every few months, I waste $5 and buy the latest issue of Barron’s. Their latest issue

has their ten favorite stocks for 2011. They are:

+ ExxonMobil (XOM). Best managed oil company, says Barron’s, though it likes Chevron (CVX) more. Me too.
+ United Continental (UAL) — an airline. Now you can feel doubly miserable. When you fly and when you own the stock.
+ JPMorganChase (UPM). Jamie Dimon’s disaster.
+ Barrick Gold (ABX). This one makes sense. Gold is still going up.
+ Wal-Mart (WMT). Which century is Barron’s living in? My wife won’t go near the place, even for toilet paper and paper towels.
+ Cisco (CSCO). Everyone and their uncle is eating Cisco’s lunch.
+ Pfizer (PFE). Aren’t this company’s drug patents all running out?
+ General Motors (GM).  Time to buy a Volt? A what?
+ Entergy (ETR). Something is wrong with this one. The stock is on the skids.
+ PepsiCo ((PEP). Long live sugar. It’s got more sugar than Coke. I like sugar, but Pepsi is too sweet.

The best part of Barron’s Ten Stocks for 2011 was the reader comments posted on on Barron’s web site. These are great:

Roderick Gerwe wrote:

You state that the large cap stocks will “best” the other stocks. Not good grammar. This is the comparative, not superlative case. The correct grammar is that the large cap stocks will, “better” the small caps. Article also says GM could “best” Ford. Correct grammar is that GM can “better” Ford. Use of “best” or the superlative case should be used only when considering three or more items.

11:54 am ET December 31, 2010

Frank Ruffing wrote:

Grammer is dead

* 02:40 pm ET January 2, 2011

Stephen Wilson replied:

Spelling too, Frank?

* 04:52 pm ET December 31, 2010

Robert Walker wrote:

Unfortunately it appears so.

Bob W

* 07:54 am ET January 1, 2011

Paul O’Leary wrote:

How “do” GM make this list? Their balance sheet looks great and if integrity was in style their management would wear a letter symbolizing failure on their armani suits the rest of their lives. Tremendous headwinds are brewing for GM in the form of rising commodity prices, wage inflation in China, inflation curbs in China and austerity measures across the entire globe.
GM will continue to be a “more lipstick” company.

* 09:08 pm ET January 1, 2011

Edd Mcdermott replied:

How Do indeed!! For two consecutive weeks Barron’s has announced GM applied for listing on the Big Board. Has the NYSE lowered its criteria?? Peddling GM stock isn’t illegal, but it’s downright immoral. Aside to Mr. Gerwe: A spanking new Target Super Store opened and much to my dismay the sign over the express lane reads: Ten Items or “Less”. Yikes!!!

* 12:31 pm ET January 1, 2011

Gary Langbaum wrote:

Since part of the rationale for your recommendation of large cap stocks is based on Bill Miller’s liking them, maybe you should rethink your positions based on his record over the past 10 years. After becoming a “star” by outperforming the S & P 500 for 15 years in a row, a strange comparison since that was not the type of investing he was doing, he has now underperformed it for 4 of 5 years and 9 of 10 and now ranks in the 99th percentile of all managers with his style. This is not a reason for doing anything but avoiding his approach.

* 03:09 pm ET January 1, 2011

J Al wrote:

not sure why this author gets to write for Barrons. The reason stocks did well is due to interest rates. If during 07-09 they were paying 10%, and suddenly get a hold of 5%(at the highest) rates they will print money. Remember how many cars were sold in when rates were very low, all car companies were finance companies.

* 09:45 am ET January 2, 2011

Jim Beck wrote:

I hear ya Andy ,GM underpriced duh! C’mon man…

Harry Newton who beat Allen on Saturday morning, drew even with Skip on Saturday afternoon and beat Elike on Sunday morning. If I can learn tennis, maybe I can learn investing?