Well, years ago when people tell me that one could really multiply our returns 2X, 10X or even 100X, the first thing that would popped into my mind would be TOTO in Singapore or Lottery. It sounds too good to be true. Well, it can be done though it’s not easy.
In this post, I will be sharing a summary of one of the chapters in Peter Lynch’s Book called “One Up on Wall Street”. This is one of my favourite books in which an ex-colleague of mine introduce to me without him knowing – he left this book on his working desk while he was staring at his PC. Some of the points shared in his books are also some points that Professor Bruce Greenwald has shared when I met him at Columbia University last year.
10 POWERFUL TIPS TO FIND A PERFECT COMPANY
1. Sounds Dull, or even Ridiculous
A perfect company is one that runs a simple business with a boring name. Lynch mentioned a company called ‘Pep Boys – Manny, Moe and Jack’. It runs a full-service and tyre automotive aftermarket chain. Why is having a boring name important? This is because if it sounds boring, likely that no one on Wall Street will take notice, thus a higher chance of finding a bargain.
2. Does Something Dull
The company could be making something so dead boring that the sound of it may put one to sleep. How about a company that makes screw nuts, coffins, drilling parts, cork, etc. Lynch mentioned Crown, Cork and Seal which makes cans and bottle caps.
3. How about a company that washes grease? Or a company that makes plastic forks? Or a company that makes intestinal by-products? Yucks! So what companies were mentioned specifically?
(i) Safety-Kleen – provides machines that washes greasy auto parts in gas stations
(ii) Envirodyne – previously bought Viskase that produce the casings surrounding sausages
Examples that were mentioned included Safety-Kleen out of Chicago Rawhide or Toys “R” Us out of Interstate Department Stores. The logic that Spin-offs may be worthwhile looking is because parent companies would only want to spin off companies that make them look good , not the other way around. Thus, spin-offs would generally have strong balance sheet.
5. The Institutions don’t own it, the Analysts don’t follow it
If you are able to find one company that Analysts do not follow or they don’t even heard about it, chances are that you have found a winner. Remember that if you own such companies beforehand before institutions, and if eventually institutions found it and then invest in them, the stocks will sky rocket.
6. Rumours, Rumours, Rumours – Toxic or Mafia
Can you imagine a group of executives walking into your office with Polo T-Shirts with words “Solid Waste”. Sounds like Shxx! Yes, it is. The company called Waste Management, founded in 1971, is a waste management, comprehensive waste, and environmental services company in North America.
Or how about Mafia running Casinos and Hotels? If there are some rumours surrounding some companies, chances are that most would stay away from them. That’s where your opportunities are.
7. Depressing Companies
Do you know what companies you can own where the customers will never ask for a refund? A Funeral Parlour! Lynch mentioned this company called Service Corporation International (SCI). On SCIs website, it states “We’re more than North America’s largest single provider of funeral, cremation and cemetery services. We are mothers, fathers, sisters, brothers, sons and daughters who are devoted to the communities where we live and work. We are more than 20,000 dedicated individuals who provide caring assistance to families in need, honor veterans and public servants and deliver lifesaving programs to help keep children and seniors safe.”
8. No-Growth Industry
The same example that was given was SCI where there was no growth in the industry. In such industries, especially one that is boring and upsets people, there is will not be any problems with competition. On the other hand, in a high growth industry, there tend to be higher competition egs. Carpets in 1950s, electronics in 1960s and computers in 1980s.
You are looking at a company that has a consumer monopoly and the barrier of entry is high for competitors. Warren Bufett found Washington Post in the early days. Drug companies such as SmithKline (now called Glaxo Smith Kline) with patent such as Tagamet, Coco Cola, Robitussin, etc are companies with a niche. Warren Buffett would call this Economic Moat.
10. People Have to Keep Buying It
One thing that was obvious to me was Cigarettes. It’s one product in Singapore where there are messages with gruesome pictures on it telling people that they will die out of cancer, and yet people kept buying them packs after packs year after year. By the way, the cost of 1 packet of cigarettes will allow anyone to have their 3 meals in 1 day. That’s how expensive cigarettes are in Singapore. So do you know what companies make cigarettes?
Investing is SIMPLER than you thought. Hear what these people have to say when they started knowing nothing in the following video:
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Founder & Director,
Mind Kinesis Value Investing Academy & Mind Kinesis NLP Academy (NLP Singapore