How a Professional Investor Handles His Own Money

 

While no professional investor ever wants to admit to investing in anything other than what he recommends to clients, there is one outstanding difference between investing personally and professionally. Patience. Although many investors claim they are buying for the long term, if the recommended stock doesn't move up within a few months, they want to know what's wrong and how long before it makes its move.

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I use exactly the same technique of determining trends to make my own investments that I use for my clients' investments. Unlike most investors, however, I am not disappointed when a stock takes several years to show major strength.

The principle that should govern stock investing: Determine areas where there is substantial growth capability. Invest only in the companies having a good chance to benefit from those trends.

Example: In the 19th century, British investors realized that railroads were a key investment in the U.S. They knew little about each line and there was little in the way of balance sheet information. However, if they invested in several, at least one was bound to be an outstanding winner, and possibly every one of them held the prospect of sharing in that advance

Don't buy cyclical stocks: I never buy a stock at the bottom of its cycle. If you buy stocks during down periods, you are a speculator, not an investor. You are speculating that you know the bottom of the business cycle for the company. Few people know that.

Avoid companies that can't grow. For example, General Motors was a good buy when it sold only two million cars a year and there was still a large market to penetrate. As it stands now, there is no growth ahead of it.

Don't try to spread risk. Once you have chosen your areas and stocks, don't bother trying to spread the risk with other stocks It just dilutes effort.

Outside of the stock market: My primary feeling is that non-liquid investments are not very beneficial to my portfolio. Reason: it doesn't matter that a Rembrandt painting I may own is worth $3 million if it takes a long time to find a buyer

Real estate: I hold no property except my own home. Naturally, it has appreciated, but I bought it to live in, not for investment. How to Evaluate High Technology Stocks.

Collectibles: I have a baseball memorabilia collection that has been appreciated quite a bit, but that's due to luck. I collected baseball cards and programs when I was a preadolescent sports fan. I also have an art collection, but I have no idea whether my selections are worth more or less than the price at which I bought them. I buy art for pleasure, not for investment.

Adding Foreign Stocks To Your Portfolio

Advantages of foreign stocks: Spreading the risk. Some economic pressures depress stocks in the US. boost them abroad.

Specific investment opportunities. Examples South Africa is the only place to invest in certain minerals, as France is for wines and Japan for cameras Drawbacks:

Currency fluctuations are an additional risk and complicate already tricky buy-sell decisions Investors usually pay taxes to the country where the stock is traded (the average rate on dividends is 15% ) and to the U.S. Foreign taxes can be recaptured at least in part (by filing IRS Form 1116) to claim a foreign tax credit. But the time lag in doing this delays an investor's realizing his profit for some time

No other country regulates equities as tightly as the Securities and Exchange Commission (SEC) does here. Result Deals considered fraudulent at home are common abroad. Ac counting standards are lax in many countries too Dividends often fluctuate for no apparent reason

Small investors only should consider foreign companies with growth and earnings potential in stable countries. Investors able to allocate a minimum of $250,000 to overseas stocks can hedge with blue chips in several Countries

How to invest Some companies (Britain's Burmah Oil Co. Ltd., Japan's Canon, Inc.) are traded over the counter in the US. Others (Canada's Dome Petroleum Ltd.. Japan's Sony Corp) are on the New York or American stock exchanges Larger brokers in the US. can handle transactions on most foreign exchanges.

Cost Standard commission for better-known issues, minimal extra charges for others (Customers with large portfolios should have to pay little or nothing extra for the service)

 

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Research on foreign equities is difficult because governments rarely require companies to publish the kind of data that the SEC mandates However, annual reports are readable and informative in countries such as Japan, France, and Canada.

How to Invest in Utilities

Utility stocks, more than most issues, are purchased for reliable income by conservative investors who may require current income from investment holdings. Here are some guidelines that may help avoid unpleasant surprises.

Is the utility located in a state with a favorable regulatory climate? Some states make it very difficult for utilities to pass along rising costs to consumers, and some states are more permissive. The typical state will generally grant the utility approximately two-thirds of the rate increase requested. It will require approximately one year following such requests to provide the necessary authorization.

The utility should have ample earnings from which to pay interest on any bonds outstanding Utility companies are generally heavy borrowers of capital for expansion Should a cash flow bind develop, dividend payouts may have to be suspended since bondholders hold the first call on company assets. Earnings for the company should amount to at least 2.5 times the interest payments due on corporate notes; preferably more. In considering any stock for its dividends, make certain that earnings are ample to cover projected dividend payouts.

The price of the shares should be no lower than book value if the company has plans to issue more shares. Otherwise, shareholder equity will be diluted by such distribution.

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The company shouldn't pay out too high a percentage of earnings in dividends. Approximately 65-70% is an average payout. The lower the percentage of earnings in dividend payout, the more protected the dividend will be. Check the balance sheet for excessive debt and for favorable asset-to-liability ratios.

Your broker should be able to provide the above information either by means of in-house research or through access to Standard & Poor's ratings of corporations and corporate debt.