The Winning Edge On Wall Street

A Blueprint Of The “Real” Stock Market Dedicated To
The Individual Investor

 

Contents:
ONE:  The Winning Edge On Wall Street
TWO:  What To Look For In Emerging Growth Stocks
THREE:  The Importance Of Timing
FOUR:  Fortunately For Investors, The “Stars” Will Identify Themselves
FIVE:  Don’t Buy New Issues, But If You Must
SIX:  How To Pick A $5 Stock
SEVEN:  The Six Myths Of Mutual-Fund Investing
EIGHT:  Conclusion

 

ONE
The Winning Edge On Wall Street
Several studies point out the superior profit possibilities of
stocks of smaller companies. In a paper entitled “Superior Profit
Possibilities of Smaller Stocks,” Dr. Rolf W. Banz of Northwestern
University supported the notion that stocks of smaller companies
can outperform the market. Dr. Banz called their superior performance
the “size effect.”

 

Dr. Banz discovered that over a 50-year period the stocks of the
smallest 20% of the NYSE firms have, on average, outperformed
stocks of the largest 20% of the NYSE firms by a significant margin.
In fact, the small stocks performed almost four times better
than the market. These smaller companies are riskier investments,
but Banz found that even after adjusting for the difference in risk,
small stocks outperformed larger stocks. On an annual basis, the
50 smallest stocks had a risk-adjusted return that was almost 24%
higher than that of the 50 largest stocks.

 

Furthermore, while Banz used NYSE companies for this study,
he concluded that there is evidence that similar, if not better, results
could have been obtained by investing in small AMEX or in overthe-
counter stocks.

 

Banz is not the only academician to publish such findings. Dr.
Marc Reinganum of the University of Southern California has also
done empirical studies on the rate of return from investing in smaller
firms. Using a database containing up to 1200 companies, Reinganum
ranked all firms on the basis of their aggregate stock market
values (number of shares times stock price). He then combined the
ranked securities into ten equally weighted portfolios. Reinganum
found that the portfolio containing the smallest firms realized an
average rate of return more than 20% higher than the portfolio
containing the largest firms. His conclusion is in agreement with
the Banz’s findings and with the “hunches” of many investors.

 

These academic studies underline the superior profit potential
of small companies but come up a bit short in terms of explaining
why. Banz thought that takeovers aided smaller companies, but
the “size effect” was not fully explained. According to Banz, the
size effect demonstrates the inverse relationship between size and
effectiveness. Larger companies, with more staff, better finances,
and an established track record, should perform better than the
small upstarts. But they don’t.

 

We feel one reason larger companies do not perform better is
the inverse relationship between size and innovation. Larger companies
tend to be bureaucratic; red tape prevails; timing becomes
stretched out. Instead of looking for something new and different,
there are only slight changes in existing products. One consultant
aptly termed this phenomenon the “MBA syndrome,” in which,
under the guise of strategic planning, management becomes cautious
and is not willing to gamble on anything short of a sure thing.
Management finds it safer to relegate the problem to another study
than to take action.

 

The size of a company also affects the motivation that comes
from the “hands-on” effect. Decisions that have to be filtered down
through many layers of planners and executives to where the actual
product is produced tend to temper motivation on the part of producers.

 

Perhaps more important is the effect this filtering process has
on the motivation of top management. Removed from day-to-day
business operations, many top executives develop a bias against
action and toward maintaining the status quo. The professional
managers in many of America’s largest corporations often become
caretakers, and the mediocre performance of American industry
over the past 30 years is one result.

 

The smaller companies, while having risks of their own, do not
work within the same bureaucratic structure. Often there is more
direct contact between top management and the people working
throughout the entire organization. More important, perhaps, is the
more direct contact between top management and customers.

 

Smaller companies have much less bureaucratic red tape, and
the ability of one person to see his or her idea put into action has an
important motivating effect. Instead of coming up with a 400-page
business plan, there is a tendency to try out more new ideas to see
which ones fl y. Bureaucratic analyses are replaced by a tendency
to “let the market prove it.” If an idea/product does not work, it is
discarded and another is implemented. This attitude has an important
effect on motivation, which quickly translates into the high
profitability and rising stock prices of the smaller companies.

 

We’ve reviewed some important evidence that small companies
outperform large companies by a significant margin. We’ve also
offered some commonsense reasons why the smaller companies
afford superior capital-gains potential to investors. The remaining
duty is to identify these smaller companies and determine which
ones to buy and, then, when to buy them. How well an investor
does his homework will determine whether he will come out with
“the winning edge on Wall Street.”

 

TWO
What To Look For In Emerging Growth Stocks
Thousands of securities are traded on the exchanges and over
the counter. Just how do investors ascertain which of these securities
have above-average potential? After successfully identifying
companies with strong prospects for over 50 years, we have determined
seven key points to consider in separating the wheat from
the chaff.

 

1. Liquidity – A strong level of liquidity is perhaps the most
important requirement. A company with moderate long-term debt,
plus cash assets, has several advantages in a climate of relatively
expensive credit.

 

First, the company has a margin of safety if it does not have
high interest expenses. Due to the above-average risks associated
with small companies, financial surprises can and do occur. Sales
may slow or even decline. With a low level of debt, a company is
better equipped to hold its own.

 

Second, if a company sees a genuine market opportunity, it can
obtain bank financing for expansion. A company that has already
used its lender of last resort has played all its cards.

Third, any company, no matter how mediocre, can still attract
attention if it is well-financed, and shareholders can obtain a nice
sum if a takeover materializes.

 

Remember, more small companies develop problems by growing
too fast than by growing too slowly. Rapid growth not only outstrips
management’s abilities but all too often involves assumption
of excessive debt for financing expansion. Thus, investors should
look only for companies that are misers when it comes to debt. The
“optimal” debt/equity ratio theories are best left in the classroom.

 

2. Earnings Explosion Potential – By earnings explosion potential we
mean the probability of this company reporting major
increases in earnings, not of 10% or 12%, but 50% or more. There
are two situations in which this potential is likely to develop.

 

First, an otherwise attractive company that is temporarily reporting
an earnings decline may have the potential for an earnings explosion.
For example, if a well-financed company had earned $0.50
per share, $0.75 per share, and $1.00 per share in three consecutive
years, then dipped to $0.50 due to an acquisition, an investor might
project that this company could rebound to $1.00 or $1.25 per share
after digesting the acquisition. When small, growing companies
experience a temporary earnings setback, the stage may be set for
a dynamic rebound in both the earnings and the stock price. Wise
investors will be on the alert for these opportunities.

 

The second situation in which one is likely to find major earnings
gain potential is the company with a vast market potential.

Often these stocks have the highest P/E ratios (stock price divided
by 12-month earnings per share), and market timing is, therefore,
particularly important. Over the next few years electronics, data
processing, health care, telecommunications, and certain business
services stand to have above-average growth. We expect many
companies in these industries to report sales and earnings at least
doubling in five years, and then again in another five years. Earnings
in a high-growth company will sometimes receive a setback
(which is more often than not the only time an investor should buy
the stock), but the sales curve will consistently edge higher.

 

3. Capitalization – There are two reasons investors who are
interested in growth should consider companies with no more than
20 million shares outstanding. First, the stocks of companies with
hundreds of millions of shares outstanding are harder to move than
those of companies with fewer shares outstanding. More investors
have to share the same opinion to have an effect on the price.

 

Second, the takeover potential is greater in companies with
fewer shares outstanding. There have been some well-publicized,
major takeovers, but the greater number of takeovers still occur
in companies with fewer shares outstanding. When it comes to
capitalization, small is indeed beautiful.

 

4. Management’s Equity Interest – Investors should look for a
company in which top management’s interests are closely related
to investors’. In companies where top management does not own
stock, or owns only moderate amounts, management may employ
accounting methods or make tactical decisions to ensure that their
bonuses, salaries, and other benefits are given priority over other
expenditures, such as important research and development ventures.
When top management does not own stock, labor costs also
get out of hand. One reason some companies have excessive labor
costs and benefits is that management will receive more or less
the same benefits for which they supposedly bargained “hard” at
the negotiating table. Management and the union are often really
in the same bed. An owner-manager, however, tends to keep costs
a little more in line.

 

The bottom line is that when top management makes a bad
decision, shareholders want them to feel it in a substantial decrease
in their own net worth.

 

5. Unique Operating Niche – Many times it is assumed that a
company has a sure lock on future profits because of a patent that
will keep its product unique. Indeed, in some industries, such as
drugs, this is the major reason so many companies are profitable.
But other features of a company can make it unique and give an
edge over competitors. Low-cost production is the forte of Emerson
Electric Co. Despite the cyclical nature of its markets, the company,
a manufacturer of electrical equipment and electronics, has maintained
impressive results on the strength of its focus on keeping costs
down. New product innovations can be the niche. Rubbermaid, the
maker of household products, is extremely successful in introducing
new products. Kennametal has used its tungsten carbide know-how
to make a fortune for its owner-managers and shareholders.

 

It is also important that investors determine whether other
companies can steal the thunder of currently successful companies.
Crock pots were a good idea, but nothing unique to Rival
Manufacturing Co. when bigger companies entered the field and
out-marketed Rival.

 

6. An Improving or High Return on Equity – Return on equity
has often been offered as a measure of management’s abilities.
Return on equity measures how well any particular company is
able to turn investors’ dollars into earnings. Obviously, shareholders
in a company with a low return on equity would be better off
liquidating the company or paying 90% of earnings out in dividends
since investors may be able to earn a higher return from another
investment.

 

A high return on equity takes on additional importance when
the economy is in a relatively illiquid state. An above-average return
of equity, accompanied by no debt or a modest level of debt,
indicates that a corporation’s growth should be easier to sustain.

 

A high return on equity usually means that the company has an
above-average financial operating ratio and can often fund projects
internally. A high return on equity is also a must for the growing
company to attract additional equity capital. Again, in a period of
relatively high interest rates, a company selling its stock must offer
a high return on shareholders’ investments. Dividends are only
half the story – the more important half is return on equity. Wall
Street justifiably pays a premium for a higher return on equity, for
it reflects on the company’s future growth capabilities.

 

7. Management’s Ability and Integrity – Most guides to security
selection list management’s abilities and integrity as important
factors to consider. But how can an investor really evaluate these
criteria? By looking at diplomas on the wall? Of limited help. By
quizzing executives on their management strategies? Maybe. By
talking to competitors? Perhaps. By talking to suppliers? Again,
perhaps.

 

This is the most important factor, but also the most difficult on
which to get a handle. More analysts have been misled by looking
over the corporate grounds and receiving an exclusive interview
than have gained valuable insight.

 

But if an investor can detect an attitude present among the
employees, from the top down, which reflects a sense of urgency
and above-average drive, the investor ought to investigate further.
Ask the CEO only one question – what opportunity means to him/
her. Then listen. The world stands aside for the person who knows
where he/she is going, and the investor who latches on early to
a corporation run by this type of person will excel in the market
nearly every time.

These seven factors are certainly not the only pertinent ones.
However, they are definitely useful in determining which are the
most promising of the smaller stocks.

 

In the profiles of successful emerging growth companies, these
same factors emerge time and time again.

 

THREE
The Importance Of Timing
Timing is of the essence on Wall Street, yet remains an elusive
achievement to most. During the ’70s, market timing could
certainly not be ignored. The net gains in the stock market until
the market pushed higher in 1982 had been zero for years. The
distance between peaks and troughs, however, added up to several
thousand points. But, even in the stock market environment of
the past couple of years, where a buy and hold policy might have
had the best opportunity to shine, the majority of the professional
investment managers failed to keep pace with the overall market
gains.

 

The reason so few people can make money in the market is that
human nature dictates that everybody loves a winner and hates a
loser. However, to invest successfully in stocks, the reverse is often
the key. When everybody knows that stocks are a good buy, when
the New Highs list is expanding, when neighbors are talking about
making a killing on this or that, or when the level of anxiety about
stocks is low, that is the time to think about leaving the party. At
the opposite end of the scale, when stocks have dropped so far that
one even hates to look at the stock market quote page, the objective
investor will sense that a buying opportunity is at hand.

 

The Dow Theory Stands The Test Of Time
The first step in developing good timing is to be in step with
the primary trend — it is far easier to profit by investing with the
trend than against it. The Dow Theory is by far the most time-tested
tool for interpreting the direction of the primary trend. The Dow
Theory often helps to keep investors out of “bull traps” in a down
market. By the same token, when stocks are headed higher, the Dow
Theory often aids investors in getting in on time.

 

The concepts of the Dow Theory are relatively easy to list, but
experience is necessary for their most profitable application.

 

The Averages Discount Everything (except acts of God) — This
apparently simple statement is actually quite profound. The securities
market represents the greed, fears, and aspirations of millions
of investors. Economic pundits can project one way or another and
run their econometric models, but only the Averages reliably project
coming events. Traditionally, the Averages are six months ahead of
economists in predicting economic conditions.

 

Dow’s Trends — The Averages have three simultaneously
occurring trends. The primary trend is the most important of the
movements for longer-term investors and usually lasts two years
or more. The secondary trend runs counter to the primary trend,
lasting three weeks to as many months, and corrects one-third to
two-thirds of the previous primary trend. The third trend, the minor
movement, consists of daily fluctuations.

 

Both The Industrial And Transportation Averages Must Confirm
— This is one of the most important Dow Theory tenets. The
movement of one Average must be confirmed by the other before
inferences should be drawn. In an up market, inability of one Average
to verify the other in higher prices may mean a change in direction
is at hand. By the same token, in a down market, the inability
of one Average to verify the other in lower prices may mean that
prices are about to turn to the upside.

 

Volume — Volume tends to be tricky to interpret, but generally
a market which is overextended becomes dull on rallies and
develops activity on the downside. Likewise, when the market is
oversold, volume becomes dull on declines and expands on rallies.
The common expression is, “Volume goes with the trend.”

 

Lines — A line is a sideways movement that lasts three weeks
or longer, during which time the price will fluctuate in a range of
approximately 5%. A line indicates either accumulation or distribution.
Breakouts have substantial forecasting implications.

 

Bull Markets — Bull markets are long upward trends usually
lasting two years or longer. There are usually three stages to a bull
market. The first stage is represented by reviving confidence in the
economy and declining interest rates, and the second stage experiences
a known improvement in corporate earnings. In the third
stage, speculation is rampant.

 

Bear Markets — Bear markets are long downward moves,
interrupted by important rallies, usually lasting approximately 16
months.

 

Bear markets begin before negative economic issues are being
reported in the media. However, the first stage is quickly set by the
abandonment of the hopes upon which stocks were purchased at
inflated prices. The second stage reflects selling due to decreased
earnings reports. The third stage is outright distress selling.

 

Determining The Trend — Determining the turning points in
primary markets is very important. Trends are assumed to continue
until a reversal has definitely been signaled. In a bull market a reversal
occurs in three stages. First, a secondary reaction is identified (a
correction that has run counter to the preceding primary upswing,
has lasted at least three weeks, and has corrected at least one-third of
the primary upswing). The market then rallies to recover one-third
to two-thirds of the secondary downswing, and then drops again
to penetrate the established secondary low. Again, the movement
of one Average must be confirmed by the other.

 

Keep in mind that there are usually three phases in a primary
market. The first secondary reaction may be severe, but it is too
early for a bear market to start. The same is true for the second reaction.
However, if the bull market has lasted for two years or more,
and the second reaction in the market goes below the low point of the first
reaction, a change from bull market to bear market is confirmed.
A change from a bear market to a bull market is just the opposite.

A rally in the bear market first corrects one-third to two-thirds
of the preceding bear market primary downswing. (At this point, it
may be a bear market rally, or the first leg in a new bull market.) The
market then tests the previous bear market lows and falls short
of setting new lows. Following the failure to set new bear market
lows, the market rallies to new highs, confirming
the change in trend from bear to bull. (For a more complete explanation
of the Dow Theory, send $6.00 for a copy of our 32-page
booklet, The Dow Theory.)

 

Stock Prices Precede Economics
It might be helpful at this stage to review the typical economic
climate that accompanies important stock market turning points
since the turning points usually occur far in advance of the movements
of the economic tide.

 

A bull market generally turns to a bear market when confidence
in the economy is high — when analysts are in the process of marking
up earnings estimates and the financial news, in general, is quite
good. In the market, however, solid stocks have been bid up to a
relatively high level, and now money starts to flow into more speculative
stocks. The new issues market is probably active, with many
corporations that do not even have a sales record floating stock. Just
as there is speculation in stocks, there is speculation in business.

 

The most viable investments have been made, and now businesses
are financing more questionable investments. Accompanying this
speculative climate is an increasingly high level of interest rates,
making it costly to speculate on margin and making the cost of
capital in business too high. More costly capital, combined with
the drying up of values, is typical of bull market tops.

The bottoms of bear markets are accompanied by an economic
climate that is as desolate as the previous bull market top was exuberant.
The financial news is bleak and the board rooms are empty.

 

Stocks cannot be given away. In all probability, there has been at
least one panic. Here again, interest rates provide an important clue
to the market’s future behavior. Just as the previous level of high
interest rates put a lid on prudent business expansion, declining
interest rates now make business expansion affordable. There is
little question why major stock market advances cannot get under
way as long as the bond markets are in the doldrums. During the
second stage of a bear market, stocks tend to fall sharply as lower
earnings reports are released. In the final stage, however, stocks
become more resistant despite the fact that these negative reports
are still being released. When stocks start showing buoyancy and a
bond market rally is under way in earnest, the bull market is probably
right around the corner.

 

Intermediate-Term Timing
The market swings from excessive optimism to excessive
pessimism. Strapping a polygraph to investors to test their current
levels of greed or fear might be a foolproof way to tie up some stock
market profits, but it is certainly impractical. Intermediate-term
timing can be clarified by any number of technical indicators which
measure emotional selling. These tools tend to correlate strongly
with secondary reactions as they develop in bull markets.

 

One simple indicator of a buying opportunity is a climax selloff
following a 15% drop in the market, which certainly represents
investors’ discomfort. Usually the news media will have an eye
on the public’s emotions as well and will be fanning the flames of
anxiety even more.

 

Another method would be to buy stocks when the number of
stocks declining exceeds the number of stocks advancing 14 to one.
At these market points, stocks are being dumped on a wholesale
basis, and in general, investors’ anxiety is high. But, if the market
is classified as being a primary bull market under the Dow Theory,
the laws of probability suggest that purchases will work out in
almost all cases. These periods of excessive declines tend to occur
every five to six months.

 

Still another technique is to measure the number of stocks selling
above or below their 200-day moving averages. This indicator,
like any other, cannot forecast what stocks are likely to do. But like
the Dow Theory, it can inform the investor as to where he or she is
at any point in time. Most investors do not even know where they
are, much less where they are going.

 

Using the 200-day moving average indicator, an investor knows
that if 80% of the stocks are trading above their 200-day moving
averages, they are not cheap. If 80% of the stocks are trading below
their 200-day moving averages, they are not dear. The 40% level
is useful in identifying intermediate buying areas in bull markets.
If investors can overcome their anxiety and keep their eyes on the
chart, they might just profit.

 

Divergence A Useful Tool
A final method for making intermediate-term timing decisions
is to look for divergence, which under the Dow Theory indicates
a possible important turn in the trend. When one Average makes a
new high (or low) unconfirmed by the other Average, importance
of the new high (or low) must be discounted. More often than not,
this divergence indicates a change in direction.

 

Throughout the history of the stock market, divergence has
been important in picking turning points, especially when a selling
climax occurred in the weeks, or one or two months, preceding.
The major bull market that began in 1974 was preceded by a
selling climax that resulted in the Industrials selling off to 584.46 on
October 4 and the Transports to 125.93 on October 3. Two months
later there was a test, but while the Industrials were declining to a
new low of 577.60 on December 6, the Transports never declined
below 138. A classic case of divergence set the stage for one of the
major bull markets of all time.

 

The next major buying area in the 1974 bull market, incidentally,
was in October 1975. On October 1, the Industrials had
penetrated their previous secondary low by dropping to 784.16.
The Transports, however, held above their low. The bull market
was again off and running.

 

Other interesting examples of divergence occurred in late
summer 1979 when the Industrials continued to set a series of new
highs, 887.63 on August 31, 893.91 on September 21, and 897.61
on October 5. The Transports, however, set a series of declining
tops, 266.41 on August 31, 265.24 on September 21, and 264.80
on October 5. Trouble was brewing. On October 9 the Industrials
lost 26.45 points — a big decline at that time.

But just as divergence signaled a top in August, September, and
October, it also signaled the next bottom. A major selling climax
took the Industrials to 805.46 and the Transports to 226.43. A rally
followed, and then another selling wave occurred. But while the
Industrials sank to a new secondary low of 796.67 on November
7, the Transports dropped to only 228.96. The market was ready
to advance.

 

The next buying opportunity occurred in spring of 1980. The
market topped out at 903.84 on February 13, and the typical selling
climax drove stocks down. On March 27, the Industrials stood
at 759.98. Stocks again sold off in April, but while the Industrials
slid to a new low of 759.13 on April 21, the Transports held at
235.20.

 

One instance when divergence foreshadowed a market sell-off
occurred in 1987. For most of the year, both the Industrials and
Transports moved higher in posting a series of all-time highs. However,
after both Averages went to all-time highs in mid-August, the
Transports failed to keep pace with the Industrials. Indeed, while
the Industrials set another new high in late August, the Transports
failed to do so. This divergence was a precursor to the huge market
drop that took place in October. These examples should make clear
the value of divergence in making market timing decisions.

 

Additional Indicators That Feature Divergence
Advance/Decline Line – Divergence is also indicated by the
failure of the New York Stock Exchange Advance/Decline line to
follow the Dow Jones Industrial Average either up or down. The
Advance/Decline line in mid-1980 confirmed new DJIA highs,
then started to decline while the market continued to advance. The
new subsequent DJIA highs in November 1980, January 1981,
and April 1981 were not confirmed. Interestingly, the Dow Jones
Industrials’ own Advance/Decline failed to make new highs as well,
although the DJIA was making new highs. A detailed study of the
components confirmed the suspicion that fewer and fewer stocks
were behind the advance. The Advance/Decline line appears to work
better at tops than at bottoms, where it often lags the Dow.

 

New Highs/New Lows – The failure of the number of stocks on
the New Highs list to expand when the DJIA is hitting a new high
signals trouble ahead, while the failure of the number of stocks on
the New Lows list to expand when the DJIA is hitting a new low
indicates that the market is turning upward.

 

Dow Jones Utilities – A significant market rally cannot proceed
under conditions of tight money. While there are a number of
confusing methods to measure the money supply, the Dow Jones
Utility Average remains a simple gauge of liquidity, as utilities are
capital intensive and are more sensitive to interest rates. Capital
expansion, and hence future earnings growth, cannot occur if credit
conditions are becoming unfavorable. New weakness in the Utilities
while the market is still advancing suggests that stocks will
soon be turning down in anticipation of future earnings erosion. A
move by the Utilities to the upside, however, suggests better credit
conditions ahead.

 

FOUR
Fortunately For Investors, The “Stars” Will Identify Themselves
The colloquialism “the cream rises to the top” applies to
nature, human behavior, and stock prices. Those who are aware
of this truth and exploit it, profit. Those who don’t will remain
bridesmaids forever.

 

One of the most important elements in the management structures
of highly successful companies is that they create a climate
that allows the key people to identify themselves. They allow their
executives to take responsibility and make things happen. It is
ironic that the larger the organization, the further away from this
effective system the selection process moves. A larger company
“over-analyzes” executive selection; the smaller company lets the
top performers show themselves. The larger company tends to be
risk averse, and the smaller one is more willing to let the chips fall
where they may.

 

Fortunately for investors, just as key executives will identify
themselves quickly in smaller companies, stocks that are emerging
stars will also identify themselves.

 

Buy Name Stocks
It is important that investors look for stocks that already are
making a name for themselves. For one, just the fact that the
company is becoming better known may be some indication of an
aggressive management team. But, investors should also be aware
that stocks that have been capable of attracting bullish enthusiasm
in the past will do so again. Today’s wallfl ower may or may not.
An investor who wants to do extensive homework can spend the
time, energy, and money to ferret out the future “name” stocks, but
why not let the other market participants do it for him or her? For
maximum stock market results, it is important for the investor to
know which stocks are capable of attracting attention.

 

Any investor who has been in the stock market through at least
three bull markets knows that many of the current leaders were leaders
in the previous bull markets. There are exceptions, as certain
types of stocks, such as the inflation plays, are one-time events only.
However, certain types of growth stocks will come back time and
time again. Stocks which have attracted bullish enthusiasm in the
past do so in the future.

 

Use Charts For Clues
Some of the most successful stock market investors have effectively
identified stars on the basis of price and volume data
committed to memory. They remember price quotes and volume
numbers from The Wall Street Journal or Barron’s, which allow
them to track stocks. Most readers do not have the time nor patience
to keep memory drawers full of this data, but fortunately charts are
available for that purpose.

 

While we do not want to entertain the argument of just how
precise certain chart patterns can be in forecasting future stock
movements, we do think utilizing charts to monitor the demand
(or lack of demand) for any stock is not only efficient, but it makes
good sense. Stocks do not randomly make the List of New Highs or
List of New Lows. Some stocks move more or less with the market,
others against, and others ahead of the market. Since most investors
are “long” buyers of stocks, it is obviously important to be with the
stocks that are going to be ahead of the market.

Experience shows that some stocks make money for investors,
others do not. Some stocks are in net demand, others are not. Some
defy the laws of gravity, others do not. Study the charts of today’s
performers and you’ll see plenty of relative strength clues in the
previous price patterns.

 

Investors can utilize charts of different time frames for identifying
relative strength. We have gleaned some winners from examining
both ten years of monthly ranges and also 18 months of daily
price patterns. What is important in these charts is that the stock
is showing improved relative strength over the given time period.
When the market is advancing, these stocks are the pacemakers.
When the market is emerging from a secondary reaction, these
stocks are among the first to advance.

 

The Buying Opportunity
For years we have kept “watch lists” of both listed and unlisted
securities based on chart patterns. A favorable chart pattern tells
us that there is demand for these stocks, but it does not tell us to
purchase them at that moment in time. On the contrary, by the
time a stock is attracting widespread investor attention, it can no
longer be bought wholesale. Chances are, that particular stock is
currently too active.

 

But, what the investor can do is put this stock on his or her watch
list and wait for the inevitable correction. If there is any law in the
stock market, it is that every stock will have buying corrections,
and the greater the advance, the greater the correction. The more
active the stock is at the time of purchase, the greater the chance
of an imminent correction.

 

The correction, although expected, is apt to be occurring at a
time when investors are discouraged about a particular company’s
prospects, especially if the company is reporting lower earnings
per share. Perhaps investors are discouraged about the company’s
industry prospects. The energy stocks, for example, tend to go from
boom to bust time and time again. Or the correction may be due to
a general market sell-off when investors’ anxiety is high. Whatever
the reason the climate is depressing, the investor who has studied
chart patterns welcomes it as a buying opportunity.

 

A Case Example
Aspect Telecommunications was organized in 1985 to develop
advanced call transaction processing systems. These systems provide
“intelligent” call control and management systems that improve
customer service and reduce operating costs for firms handling high
volumes of telephone sales and inquiries. The company’s first product
came to market in 1987. The firm lost money in its early years,
as most developing companies do, finally breaking into the black
in 1989. The company went public in 1990 at $15.50 per share.
Aspect Telecommunications is a case of a new issue that did
well — at first. Indeed, after going public, the stock raced to nearly
$24. Unfortunately, as is often the case with “hot” new issues —
you’ll read more about the pitfalls of new issues in the next chapter
— the stock declined sharply after the initial euphoria had subsided.
In fact, the stock fell to a low of $6 at the end of 1990.

 

The stock didn’t behave much better in 1991. Indeed, after
rallying to nearly $11 per share early in the year, Aspect Telecommunications
stock fell to under $6, thus eclipsing the low of the prior year. Poor earnings —

the firm posted a loss in 1991 overall — hurt the stock’s performance.

It was toward the end of 1991, however, that savvy investors
would soon smell opportunity in these shares. In the fourth quarter
of 1991, Aspect Telecommunications posted an impressive rebound
in profits, and the turnaround continued in 1992, with the company
showing huge per-share earnings gains in each of the four quarters.
Such a strong turnaround in profits, coupled with exploding sales,
is an indication of a firm that is hitting its stride.

 

Perhaps even more significant was the technical action of the
stock. After rallying in the early part of 1992, the stock once again
declined sharply to just under the $7 level. What was significant,
however, was that the stock price held above the lows established
in both 1990 and 1991, thus signaling that perhaps the worst was
over for these shares and a period of rapid advances was ahead.
Such was the case. The stock took off for the remainder of
1992 and showed huge gains in 1993 into 1994. During that span,
the stock rose from under $7 to $46 — a 569% advance in roughly
two years!

There are some obvious examples of technical analysis in the
Aspect Telecommunications case study that can be applied to countless
other emerging growth stocks — relative strength, the ability
to hold previous lows, and penetration of a trendline. All that is
required to take advantage of these inevitable corrections is a feeling
for where the general market is, as defined by the Dow Theory,
and some experience in interpreting chart price patterns.

 

FIVE
Don’t Buy New Issues, But If You Must . . .
Obviously all growth stocks were at one time new issues, and
the new issues market is frothy at times because of the public’s
appetite for that “pot of gold.” But a new issue is more often than
not brought out at the best possible price for the issuer and the investment
banker and the worst possible price for the investor. There
are scores of better buys in companies that are already seasoned.
In fact, the volume in new issues is a reliable indication that the
market is topping out, and investors ought to be selling, not buying,
new issues. But as some investors prefer to dabble in the more
speculative sectors of the market, searching for the next Xerox, we
offer some pointers that should help limit losses.

 

Myths About New Issues
Myth #1: New issues are a “sure thing.”
Nothing in the market is a sure thing, least of all new issues.
The quick profit in new issues depends on getting the stock at the
offering price and selling it on the speculative upsurge which may
accompany the offering. Small investors rarely get sought-after
shares at the offering price and are frequently found buying the
stock at the top from someone who got shares in the initial offer.

Myth # 2: New issues are underpriced.
It is in the best interest of the issuing company to see that
the stock is sold to the public at the highest possible price. This
pricing policy insures ample proceeds to the company and large
commissions to the underwriter. However, reputable underwriters
try to price new offerings fairly in order to sell the stock as easily
as possible. Still, in comparison to the general market, new issues
are richly priced.

 

The Slow But Steady Approach
It is not impossible for a small investor to make money in new
issues. However, the small trader is more likely to be successful by
trying to select a long-term winner than by trying to pick tomorrow’s
“hot” stock.

 

#1: Select only the very best.
Read the prospectus carefully and pay special attention to:
• The company’s operating status – If the company has
not begun operations or derives the bulk of revenues and
earnings from sources other than its primary business, it
is an outright gamble.

 

• Reported earnings – Only earnings from operations, excluding
extraordinary items, should be considered. Even
when the potential is great, a lack of earnings indicates a
problem. In fact, it may be the company’s inability to raise
funds through other means that has driven management
to seek outside investors via a public stock offering. If a
company must go public to avoid bankruptcy, the stock
should be passed by.

 

•  Growth rate – Truly enormous growth rates can be turned
in by companies preparing to go public. But no company
can maintain an astronomical growth rate indefinitely.
When growth slows, the stock’s price will also decline.

 

•  Financial integrity – Forget about the great new idea or
the new product that will make everything else obsolete.
If the company’s finances are not sound, nothing else can
make up for it.

 

a. The firm’s long-term debt should not exceed shareholders’
equity.

b. The current ratio (current assets divided by current
liabilities) should be at least 2.0.

c. The quick ratio can be found by summing cash,
securities held, and accounts receivable and dividing
the total by current liabilities. Coverage of 1.0 is acceptable.

• Remuneration of corporate officers.

 

• The price which present shareholders paid for their
shares.

 

• The number of shares which will be retained by present
shareholders.

 

• Use of proceeds – The use of offering proceeds to pay
salaries, develop a new product, or repay debt frequently
means the company cannot obtain financing through other
channels. If banks and venture capitalists shun the firm,
so should small investors.

 

#2: Buy below the offering price.
Once a promising new stock has been located, there is a temptation
to buy it immediately. However, those who bought “runaway” new
issues only to see them fall steadily back toward their original price
know the pain of overpaying for new issues.

 

•  The stock that gets away is the exception – When the stock
has been carefully chosen for its long-term potential and
financial integrity, an investor may buy on a price setback
with confidence that quality will eventually win out.

 

•  Be patient – Most new issues decline in price when the
market falls. One example is Apple Computer. The stock
went public and soared on investors’ interest in the computer
field. However, patient investors finally got their
chance with these shares at prices below the offering
price. Another example is Genentech. This biotechnology
concern went public and promptly took off, riding the
wave of enthusiasm for this new growth market. However,
investors patient enough to wait out the speculative fervor
were able to purchase the shares at a lower price. These
issues are just two of the many stocks which dropped in
price once the speculative fervor had subsided. Be sure
the stock in question is sound and then wait.

 

#3: Follow the company’s progress.
There is an old investment adage that urges investors to investigate
before investing. Part of investigating a new issue is to keep an eye
on activity once public trading has begun.

 

•  Less established concerns may run into difficulties – The
small computer outfit that plans to set bigger competitors
on their ears usually finds the going quite rough. Keeping
an eye out for such potential problems can prevent a
costly mistake.

 

•  Secondary offerings can be a sign of trouble – A secondary
offering of a recent issue may be a sign of distribution of
the stock by insiders.

 

#4: Buy when the stock is unpopular.
We follow this advice in the selection of all stocks, but it applies
especially to new issues because of their inherent volatility. The
upside move typically carries the stock far above any reasonable
measure of its value, and similarly, the correction brings the stock
to ridiculously low levels. That is the time to pick up the solid, but
scorned, recent issue.

 

Risks Are High
One cannot overemphasize the risks involved in new issues.
No one who cannot afford to lose funds should even consider these
stocks. The strategy which we propose should limit the risks and
prevent some costly mistakes. One can best protect one’s investment
by:

1. Seeking out quality in new issues.
2. Strictly limiting the amount of one’s total investment
in new issues.
3. Staying with new issues underwritten by reputable firms.
4. Keeping abreast of developments within the company.

 

Our approach is certainly not the road to “easy money,” but
we feel it is the safest, and perhaps the easiest, approach for the
amateur investor to follow. Careful selection and patience should
enable investors to come away from the new issues market with
some excellent capital-gains candidates.

 

SIX
How To Pick A $5 Stock

The Appeal of a $5 Stock
In addition to the appeal of a “bargain,” there are other good
reasons for purchasing carefully chosen $5 stocks:

 

1. The profit potential of small capitalizations – Many of the
best choices in the $5 category have a small number of shares
outstanding. Professor Rolf W. Banz’s paper, “The Superior Profit
Possibilities of Smaller Stocks,” shows small stocks outpacing
larger stocks by a four-to-one margin over a 54-year period.

 

2. Smaller stakes – Low prices limit downside risk. While a
loss is always distressing, no one can lose more than $5 on a $5
stock.

 

3. Lack of institutional interest – The absence of institutional
interest provides the opportunity for substantial capital gains as the
company grows and captures institutional attention.

 

How to Limit Risk
High risk is usually associated with stocks priced at $5 and under.
The underlying companies may be more vulnerable to business
failure, liquidity crises, and recessions than their larger brethren.
However, it is also true that where there is risk, there are superior
opportunities for capital gains.

 

In stalking these gains there are steps investors can take to
limit risk:

1. Diversify – Diversification may be considered in two parts:

(1) One should have a sound portfolio of good quality stocks, bonds,
or other assets; (2) One should be well diversified in $5 stocks. A
general guide is to keep a balance between cyclical and noncyclical
industries.

 

2. Buy for the value, not the price – Even at $5 or less, a stock
can be overpriced. Buy the stock based on the company’s assets and
its expected future earnings stream, considering ongoing business
and probable future additions.

 

3. Limit exposure – Put a fixed limit on the amount available
for investment in $5 stocks — 15% of the total portfolio may be
used as a guideline. Another method is to use only dividends and
interest received from more stable investments.

 

4. Protect profits – When a stock rises to 150% or more of
the original cost, half the position can be sold, with the remainder
retained to participate in any further advances.

 

5. Monitor progress – Keep abreast of changes in the company’s
direction or finances.

 

Selecting The Best $5 Stocks
In the $5 range there are three groups of stocks which are especially
appealing: emerging growth companies, turnaround plays,
and takeover candidates.

 

Identifying Emerging Growth Stocks:
1. The importance of financial integrity – The single most
important factor in evaluating a growth company for long-term
investment is its ability to operate profitably and generate capital
internally. Long-term debt should be less than 40% of total capital,
and the current ratio (current assets divided by current liabilities)
should exceed 2.0.

 

2. The expected future earnings stream – In evaluating future
earnings potential, one should be looking for annual gains on the
order of 20% to 50%. Most of the following will be true of companies
with good earnings prospects:

 

•  over the last five years, earnings per share have grown at
least 10%-15% annually;

•  the company is active in a relatively new technology or
product area;

•  over the last five years, profit margins have been rising or
steady;

•  the company has a history of successfully introducing new
products;

•  the company targets a particular segment of its chosen
market.

 

3. Management – It is difficult for a small investor to evaluate
the quality of management, but some facts can usually be obtained.
Investors should look for companies where:

 

•  management is not near retirement age;

•  management has gained experience at other companies in
the same or similar industries;

•  the company founder is still on hand;

•  management owns stock in the company.

 

4. Time Frame – The emerging growth stock is a long-term
investment. It takes time for such companies to grow and develop,
and investors should exercise patience.

 

Stalking the Turnaround Play:
The opportunity for a turnaround exists wherever results have
been poor and the management complacent or incompetent. While
there are probably dozens of companies which fit that description,
genuine turnarounds have more distinctive traits that mark them
as ripe for change – 1) a change in management; 2) redeployment
of assets; 3) insider buying. Finding potential turnarounds requires
some sleuthing. A majority of the following are often true of potential
turnarounds:

 

•  within the past 1-2 years, there has been a major change in
top management – a new chairman or chief executive officer,
for example;

•  unprofitable or marginally profitable operations have been
discontinued;
•  corporate officers or directors have been buying the company’s
stock.

 

Identifying a Takeover Candidate:
Perhaps few profit opportunities have received as much attention
as corporate takeovers. Because of the uncertainties involved,
it is important to choose a stock which is attractive apart from its
takeover prospects. Companies ripe for takeovers often have some
of the following traits:

 

•  a small capitalization;

•  a market price less than book value;

•  a “weak” management team;

•  ownership of undervalued assets or important patents.

 

The following may be true of a potential takeover:

•  the company has fewer than 20 million shares outstanding;

•  management is dominated by persons near retirement age;

•  management’s record on innovations and improving returns
has been poor;

•  the company owns assets whose market values are potentially
higher than those shown on the balance sheet;

•  outside investors have been steadily buying the stock.

 

SEVEN
The Six Myths Of Mutual-Fund Investing
It’s no secret that mutual funds have become the investment
of choice for millions of individual investors, often at the expense
of ownership of individual stocks. A telling statistic reflecting
investors’ insatiable appetite for funds is that there are now more
mutual funds than stocks listed on the New York and American
Stock Exchanges.

 

But mutual funds, despite their popularity, are not the “perfect”
investments that they are often portrayed to be in the financial media
and mutual fund advertising. To be sure, mutual funds provide
a number of advantages for investors, such as diversification and
convenience. But investors who invest solely in mutual funds while
ignoring individual stocks, especially small-capitalization stocks,
may be relegating their portfolio to mediocre performance at best.
This chapter takes a look at some common myths of mutual fund
investing and examines each of these drawbacks relative to common
stocks.

Myth #1: Mutual funds are safe investments.
Contrary to what many investors believe, mutual funds, including
money-market funds, are not federally insured investments.

Even funds sold by banks are not federally insured. And if you use
the word “safe” to mean that mutual funds are immune to sharp
downturns, you’re wrong as well. Remember that funds are only
as safe as the securities in which they invest.

 

Are mutual funds safer than stocks? Certainly, diversification
does matter when limiting risk, and diversification is easier to
achieve with mutual funds than stocks. Still, investors who choose
no-load mutual funds over a portfolio of growth stocks may be
surprised to see just how “safe” these funds aren’t during declining
stock markets.

 

Myth #2 : I can expect above-average performance from my mutual fund.
You can expect above-average performance, but you probably
won’t get it from your fund. In any given year, it’s not unusual
for two-thirds of all mutual funds to underperform the market as
measured by the S&P 500.

 

Several factors account for the lackluster performance of most
funds. First, many academics argue that the market is so efficient
— in other words, that stock prices reflect all that is known about
a stock and discount information so quickly as to make finding
mispriced stocks very difficult — that it is extremely difficult to
outperform the market on a consistent basis. Many practitioners in
the investment field hold that markets are not as efficient as academics
believe. Still, you probably won’t find too many fund managers
who won’t acknowledge the difficulty in beating the market.

 

But even if you believe that it’s possible to beat the market
regularly, how many mutual fund managers are out there who have
the skill to do so? Very few. And the few mutual fund managers
who truly add value pales in comparison to the ever-increasing
number of mutual funds. Are all of these funds being managed by
fund managers who add value? Of course not. Furthermore, performance
may be even weaker over the next decade if the equity
market turns more difficult. After all, it wasn’t too hard to show
double-digit gains during the last decade when stocks in general
were rising at such a rapid rate. However, in an environment where
market returns are more in line with historical averages of roughly
10% per year for stocks, the disparities between the few effective
fund managers and the huge number of mediocre ones will be even
more evident.

 

Also affecting mutual fund performance is that, in some instances,
a mutual fund may have little incentive to go for above average
performance. For example, a fund that accumulates, say, $2 billion
in assets may have much more of an incentive to maintain the status
quo by carrying high cash amounts or focusing on conservative
investments. That’s because, at $2 billion in assets, fees to the
mutual fund family could be anywhere from $20 million to $40 million
every year, even if the mutual fund doesn’t make a dime for its
shareholders. Thus, preservation of capital rather than asset
appreciation may be the primary objective of the fund manager.

 

A portfolio of good growth stocks may not always outperform
all mutual funds over time. However, investors who ignore stocks
for mutual funds may be overlooking some attractive long-term
capital-gains performers while relegating their investment dollars
to subpar performance.

 

Myth #3: Investing in no-load mutual funds is “no-cost” investing.
Much of the popularity of no-load funds is the fact that they
can be bought without a sales fee. However, to say that investing
in no-load funds is “no-cost” investing is simply not true. In many
cases, the costs of investing in no-load funds are greater than the
costs of investing in individual stocks. The problem is that most
investors don’t realize it since mutual funds deduct expenses from
your holdings, which means you never actually write a check to
pay the fees.

 

The sales fee, or “load” fee, is only the tip of the fee iceberg in
terms of the costs of investing in mutual funds. Funds have a variety
of fees at their disposable to pluck money from your pockets:

 

•  Annual management and administrative fees — These are the
fees that all no-load funds charge to manage and administer the
assets. Rates differ from fund group and across types of funds.
However, it is not uncommon for equity funds, especially those
investing in foreign securities, to have annual management fees of
well over 1% and more than 2% in some instances. Administrative
fees may include such things as account setup fees, annual account
maintenance fees, telephone redemption fees, wire redemption fees,
IRA annual maintenance fees, account closeout fees, and check
redemption processing fees.

 

•  12b-1 fees — A number of no-load mutual funds charge 12b-1
fees to help defray marketing expenses. These fees have become
more regulated in recent years, although 12b-1 fees can still consume
a healthy chunk of your assets.

 

•  Back-end loads — Since mutual funds realize that investors
don’t like up-front load fees, they have become adept at building
less-conspicuous fees into the system. One such fee is a “back-end”
or redemption fee. Most back-end load fees kick in if a fund holder
sells shares within five years. The fees decline the longer the fund

shares are held and usually disappear if the fund holder holds the
shares for longer than five or six years.

When you add all of these fees together, it’s quite possible that
a mutual fund may be charging you 2%-3% per year in fees. That
translates to annual fees of $200-$300 on holdings of $10,000.

That’s $200-$300 that will never earn a dime in the future. How
much money do these fees cost over a 20-year period? Assuming
your fund fees average $250 per year for 20 years, and assuming
you could have earned an average of 8% annually, the fees would
cost you about $12,355

.

By using a discount broker and holding down trading activity,
the annual costs of managing a portfolio of individual stocks
is much lower than the costs investors pay even when investing in
no-load mutual funds. Investors should keep in mind that the cost
advantage of stocks versus funds means that a typical mutual fund
must outperform a portfolio of stocks by at least 1%-2% every year
in order to generate the same “after-fee” returns. That gives stocks
a big edge in terms of long-term potential performance.

 

Myth #4: Picking no-load mutual funds is easier than picking stocks.
One of the major selling points of mutual funds is that it’s a lot
easier to pick a winning fund than a winning stock. All you need
to do is look at track records and stick with the top funds. Sounds
easy, right?

 

The reality is that picking mutual funds has become a lot like
picking stocks. First, the sheer number of funds presents problems.
Sorting through the thousands of mutual funds to find winners is no
different than sifting through thousands of stocks to find winners. In
fact, it may be more difficult. At least with stocks, you can examine
balance sheets and income statements, assess growth prospects of
the industry, analyze new products, etc. With funds, the only pieces
of information to go by are the fund manager — presuming you can
even tell who the fund manager is — and the fund’s track record.
That’s it. That’s why so much emphasis in picking funds is placed
on historical performance.

 

Muddying the waters are the aggressive promotional campaigns
being waged by mutual fund companies. These ads all focus on
performance. However, a fund that may be advertising its impressive
10-year performance may be a fund that has turned in horrible
results in the immediate three-year period. Furthermore, the fund’s
excellent 10-year track record may have been compiled by a fund
manager who is no longer in charge of the fund.

 

Picking top-performing stocks, like no-load mutual funds, is
certainly no picnic. However, investors who do their homework have
much more information at their disposal to evaluate a stock versus
the limited quantitative tools available to analyze mutual funds.

 

Myth #5: Investing in mutual funds has no special tax consequences.
Perhaps the biggest downside to investing in mutual funds is
that, in many cases, buying a mutual fund means buying a tax liability.

Investors in funds, especially funds with high portfolio turnover,
are likely to incur a tax liability at some point in the year. This occurs
when the fund manager sells issues that have appreciated, thus
turning an “unrealized” gain into a “realized” gain. Since funds
with high turnover do a lot of selling, these funds generate a lot of
realized gains each year, and these realized gains are distributed to
fund holders. When this occurs, current shareholders of the fund
incur a tax liability. The bad part is that all fund holders must pay
the tax on realized gains that are distributed each year. That means
that even if you bought the fund in the last month of the year and
weren’t holding the fund when the big gains were posted, you still
must pay a capital-gains tax on the realized gains if you received
them. In fact, even if the value of the fund has dropped since your
investment — in other words, you’re holding a paper loss in the
fund — you still have to pay taxes on realized gains distributed to
you.

 

Even funds with low portfolio turnover cannot escape the tax
issue. Mutual funds with low turnover have large unrealized capital
gains. While a fund that has huge unrealized gains is an indication
of a fund that has been successful in picking winners, it also poses
potential bombshells for new investors in the fund. Indeed, at some
point, the fund will sell these stocks and distribute the “realized”
gains to current fund holders. Thus, buying a fund with low turnover
may mean that you are also buying a fund with potentially huge
“hidden” tax liabilities.

 

Keep in mind this tax burden is aside from the usual taxes you
have to pay on dividend distributions the fund makes during the
year as well as taxes you must pay when selling fund shares at a
profit.

 

The tax issue concerning mutual funds is especially significant
at this time given that the markets have been strong for many years
and a plethora of funds have large unrealized gains. Should fund
managers sour on the market and begin selling stock, the size of
the distributions of realized gains — and therefore the size of your
tax headache — could grow.

 

Fund investors are at the mercy of fund managers when it comes
to incurring an unwanted tax liability. The fund managers decide
when and how much realized gains to distribute. Fund managers
also determine what types of stocks to purchase — high dividend paying
stocks, which create additional tax liabilities for fund holders,
or low dividend-paying stocks. The fact is that fund managers
don’t manage the fund based on tax considerations. That’s because
mutual funds don’t pay taxes — you do. However, with stocks, you
control your tax destiny. You decide when to realize capital gains.
You decide if you want to invest in high dividend-paying stocks —
and incur the tax liability for dividend income — or low-dividend
paying stocks or stocks paying no dividend. You decide when to offset
capital gains by taking losses. In short, stock investors control when
and how much to pay in taxes on their investments. This control,
which is not available in mutual funds, can have huge implications
in terms of investment returns over time.

 

Conclusion
This chapter is an attempt to discuss what are common misconceptions
about mutual funds versus individual stocks. Are all
mutual fund managers guilty of trading for their own accounts at
the expense of their fund holders? Of course not. Nor do all mutual
fund families care only about asset accumulation at the expense
of performance, or that all fund managers use certain brokerage
firms because they provide the neatest computer toys. Nevertheless,
history shows that abuses and scams go where the money is, and
there’s plenty of money in mutual funds. Compounding the possibility
is that the regulatory police to uncover abuses in the fund
industry are limited in number.

 

Do mutual funds have a place in a portfolio? Certainly. Mutual
funds provide excellent ways to gain representation in foreign
markets, for example. Funds are also good choices for diversifying
investments in fixed-income investments, such as bonds as well as
government securities. However, to assume that mutual funds are
the only game in town is to overlook the many positive benefits
of individual stock ownership, especially ownership in emerging
growth stocks.

 

EIGHT
Conclusion
The following remarks were originally written for the first edition
of “The Winning Edge On Wall Street” back in 1981. Please
read with that in mind.

 

At the time of this writing there is a downturn in the activity of
smaller companies in the country. A continued policy of tight money
is slowing the economy, and even the most dynamic of the smaller
companies are beginning to feel the pinch. Stock prices have fallen,
and the new issues market has dried up. Indeed, the failures of Ray
Dirk’s John Muir & Co. and W. S. Wein put a damper on the attractiveness
of new issues and, indirectly, smaller company stocks.

We feel, however that this is just a temporary condition. Too
many important social and economic trends are sowing the seeds
for a tremendous advance in the economy and the stock market.

 

Now, with the benefit of 20/20 hindsight we are very pleased
with our observations and forecasts.

 

But where do we go from here? In our view, a long period of
prosperity may lie ahead with accompanying dramatic strength in
well-selected common stocks. There will be periodic setbacks along
the way, of course, and maybe even a bear market or two. But we
are of the opinion that common stocks will afford many investors
tremendous profit opportunities during the years ahead.

 

For timely individual stock recommendations, consult any of
the newsletters published by Horizon Publishing Company:

 

Dow Theory Forecasts
Upside
DRIP Investor

 

 

 

Horizon Publishing Company
Hammond, Indiana 46324-2692

 

The Winning Edge On Wall Street. Sixth Printing. Copyright © 1981, 1985,
1995, 1999, 2000 by Horizon Publishing Company. All rights reserved. No
part of this book may be reproduced in any manner whatsoever without
written permission of the publisher. For our most current recommendations,
be sure to see the current issue of Dow Theory Forecasts, Upside and DRIP Investor. For information, address inquiries to Dow Theory Forecasts: 7412 Calumet Ave., Hammond, Indiana 46324-2692.