w w w . t i c o n l i n e . c o m

TAKE YOUR TIME

Here's a little secret of investing: (whisper) the market doesn't move all that fast, you have as much time as you need to make a decision - stop rushing!

I think one of the failings of the stock market and online trading in particular is that it has become too easy to buy and sell stocks. If it were as easy to trade houses, people would probably be doing that as well. Instead, everybody knows the hassle involved with inspecting a new house, talking to agents and lawyers and handling the moving arrangements. Faced with such a large activation energy, many people simply sit in their homes as the value of their property increases - which is how investors should be treating their stocks.

I believe it is also a useful habit to think about a business. It doesn't matter how long it takes or if you're right or wrong about the business. It is useful to think about a business simply to establish if you 1) understand the business and 2) can come up with useful questions to ask the CFO or CEO.

During this research time, the flow of money through a business should be your primary focus. How does the money get made, flow through the system, employed, wasted or invested. What factors can affect this flow? How would this business be made better?

One of my favorite questions to think about is:

If there were a business that was exactly identical and sitting next door, how could they gain the upper hand?

The no-brainer answer would be increase profit margins or return on shareholder equity, but investors should be able to go further than that. If you visualize yourself as the CEO what kind of actions, if taken by your competitor, would disturb you? Are these moves likely to occur? If there were few existing competitors, how much effort (or activation energy) would be required for a newcomer to set up shop beside you? What are the barriers to entry and how low (or high) are they?

How is the demand and supply of the product? Is the product a commodity and can a competitor undercut the price because it has more economic goodwill? Is the demand so great that price wars are not something to worry about just yet? If supply is low, will it stay low? What factors would have to happen to increase supply? Is that likely to happen?

After these thought sessions (I usually require a few), you will construct an idea of how the business works. During subsequent thought sessions you may find yourself revising your assumptions. The next step is to test your thoughts against the annual report and/or SEC 10-K filings. If the reports don't make any sense to you it is probably a good indication that you really didn't understand the business. In that case, you should drop any ideas of investing in it. In rare cases you may find that all your thoughts are right on target (perhaps you have what Peter Lynch calls an 'edge' - you work in the industry or deal with the product directly). In most cases your investigative endeavors will lie somewhere in between the aforementioned two extremes.

Once you fill in any gaps in your knowledge by reading the annuals you can compose a list of questions that have remained outstanding or those that were not explained to your satisfaction. This is when the call to the business comes in. With relatively small, low-cost businesses there are very few layers of bureaucracy and you may find yourself speaking with the CFO or CEO. I've copied Peter Lynch's habit of asking about competitors as a closing question - not just who they are, but why the CFO/CEO admires them.

The bottom line is that you should do some independent thought about the business using preliminary data found on the internet (or any other lead), follow up on those ideas with the annual report and then place a call to the company. If you have a problem with impulse buying, be sure to place some barriers between you and your money to give you enough time for thinking and reading.

Best Regards,
JimC

Aside: I have been placed on assignment for the next few months at the National Cancer Institude in Bethesda, MD near Washington D.C. The experience will be priceless. I don't expect updates to this site to decrease in frequency, but you never know how these things will end up.