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Something Even More Predictable than Buffett's Success

John Price, Ph.D.

Believe it or not, there is something that is even more predictable than Buffett's success in the stock market. It is that when the market is at record highs, there will be a rush of books and articles saying that you ain't seen nothing yet. And when it is at a low, the naysayers will be rushing into print saying that it is going to go much lower.

It was only a few years ago when the Dow was at record highs that we had books on the best seller list such as Dow 40,000: Strategies for Profiting from the Greatest Bull Market in History by David Elias. Or, if that was not enough, how about a Dow of 100,000? This is the claim of Charles Kadlec and Ralph Acampora in their book Dow 100,000: Fact or Fiction.

Now when it has settled down to lower levels, many authors are rushing to print saying that it is going to go much lower. In Conquer the Crash: You Can Survive and Prosper in a Deflationary Depression by Robert. Prechter Jr we read that the Dow is going to go below 1,000.

The same applies with individual companies. When was at its record highs, many analysts were falling over each other recommending it as a buy. For example, when Amazon was selling for just over $200 a share back in 1999, a little-known Merrill Lynch analyst, Henry Blodgett, predicted it would go to $400 - even though Amazon had never made a profit. As we know, a little later Amazon started its slide to as low as $12 allowing for a 2-for-1 split.

Blodgett has said his prediction was based on sound analysis using new ways to measure a company's performance. Wall Street even coined a new verb: to "blodgett" a stock.

The point is that neither Blodgett or anyone else could value Amazon in a rational way. It had no earnings back then, and it has not had any earnings over a full year since. It was a speculation back then. It continues to be a speculation now.

It was a similar story with Mary Meeker of Morgan Stanley initiated coverage on in April 1999 with an outperform rating shortly after Morgan Stanley brought the company public in March 1999. Her initial outperform rating came when the stock was trading at $104 a share. The stock then advanced as high as $162 before starting its deep decent to $1.125 by December 2000. Ms. Meeker reiterated her outperform rating five times over the next two years.

Salomon Smith Barney analyst Jack Grubman was another person who strongly recommended dubious stocks.

It certainly gives you great faith in the marketing instinct of these authors and analysts. Play on the hopes, or the fears, of the average investor and you'll sell books or get hefty commissions.

Seriously, what are we to do? Actually it is so simple. Just stick to companies with a history of selling quality products and services that the general public use and want. Make sure that they have at least 5 years, preferably 10 or more, of stable and growing sales and earnings. Look for companies with not too much debt and a high return on equity.
Conscious Investor filters through over 6,000 USA companies doing just this. We also provide a check list with questions in six categories to make sure that all the points are covered.

We think of it like the check list used by an airline pilot before taking off. Unless everything checks out, then the plane is not cleared for take off. Similarly, unless everything checks out with a company, then we do not even consider purchasing it.

Once you have found a company that meets your requirements, the next step is to determine a sensible price for it. As Buffett has said, even for a great company you can still pay too much. Once again, Conscious Investor has the tools to help you do this. For example, it has a proprietary functions that determines the expected percentage profit on a stock. In this way, you can quickly compare different stocks in terms of their investment potential.

And just imagine the peace of mind to be free from the wild, and often willful, claims by authors and analysts such as those above.

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