Dear Reader,
A couple weeks ago I told you some FAU students have started watching. Well, apparently there’s been a few more.
So in today’s video, for investors just starting out as well as long-time readers, I address one of the most important investing rules.
As I mentioned before there are four questions to ask yourself whenever you buy any stock:
- Do I understand the business?
- Am I comfortable with the management?
- What is the business worth?
- What do I have to pay for it?
If you can start to ask yourself those questions before you buy any stock – just asking those questions – your investment operations will improve dramatically.
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Now, the last time I talked about this I tackled the first one:
Do I understand the business?
Again, the rule there is, don’t touch anything you don’t understand. Just don’t touch it!
There are plenty of good things that you do understand – great businesses out there that you can spend all your time focusing on – and do really well as an investor!
You can just say, I’m going to ignore the ones I don’t understand.
By “understand” what I mean is, you have to be able to understand what inputs the company has, what it sells, where its suppliers come from, who has the pricing power in the relationship between your company and its suppliers or consumers.
And you have to understand how competitors can attack the company’s position.
But today I want to talk about the second question:
Am I comfortable with management?
First, remember – there’s only one god we worship at Behind the Markets when it comes to business and investing, and that’s return on investment – ROI.
So what you want to do with the “am I comfortable with management” question is you want to bet on management teams that are driven by and make all their decisions by return on investment.
They understand what they get back in relation to what they invest.
Now, in the news recently we’ve seen DirecTV and Dish Network trying to merge, and AT&T trying to get out of that disastrous deal…
Talk about bad management!
We’re also seeing where CVS Caremark’s bad management took a great retail chain and then decided to buy Aetna and a pharmacy benefit management company right when Medicare was putting pressure on these companies.
And of course, CVS bought Oak Street Health which we made a lot of money on – we recommended it in Takeover Targets before that announcement came out.
It was taken over 10 or 12 days after we recommended it. So that was a great, fast winner for us.
But my point is, the management of those companies was not focused on Return on Investment.
Anything you do when it comes to the stock market…
Any business you buy a piece of – because that is what we’re doing when we buy stocks – we are buying a fractional amount of a business…
When you buy a piece of a business you have to ask yourself if you’re comfortable with management.
That’s why I was so happy to recommend PayPal (SYM: PYPL).
See, PayPal’s prior management was chasing a bunch of different things.
But then a year ago a new CEO comes in and what does he do?
He first cuts costs.
He wants to focus on return on investment – profits in relation to the amount of investment it takes him to earn those profits.
So he focuses first on cutting costs, the “investment” part of the business, and now he gets to march out and look to get “return” again – profitable growth.
Now, not all growth is created equal.
ROI is so important because it focuses on return – revenue and profit, and investment – costs.
It focuses on both sides of the income statement and the balance sheet and the relationship between them.
And that’s what I really focus on here – both as an investor and as a businessman.
Think about it, as a businessperson say you have an opportunity to invest in two things…
For every $1,000 you invest in thing 1 you get $200 back, a 20% return.
For every $1,000 you invest in the other option you get a 30% return, or $300 back.
You’re going to take the second one all else being equal.
And we want management that focuses on investing in the highest ROI activities.
That’s why we avoided CVS even as the stock collapsed, because they’re just all over the place.
We avoided AT&T because again, management was just taking all that shareholder money and making silly acquisitions.
And we like PayPal, because management comes in there and just immediately gets to work on ROI…
On the investment side they reduce headcount and lower costs and then shift focus to the return side – making money.
We like companies that do that.
If you haven’t checked out the company yet that is my No. 1 Takeover Target for October, go here now for the ticker>>>
“The Buck Stops Here,”
P.S. If you still haven’t read our free “Our #1 Takeover Target for October” report…
…please take a few seconds to view it right now before the report link expires.
I eventually plan to take this free report down, so do yourself a favor and check it now…
