Growing Rich - Arabictrader.com

GROWING RICH WITH GROWTH STOCKS
unforeseen liabilities such as these. “That’s one of the reasons I think
financial companies tend to get lower multiples,” Davis surmises.
“Another reason is that there are a lot of them to choose from. There’s
only one Coca-Cola and one Procter & Gamble. Sure, there are maybe
50 great consumer-product companies around the world. But there
are many more financial companies than that.”
Financial companies, other than undercapitalized insurers, also
come with less valuation and product obsolescence risk. For one thing,
they tend to trade at low price/earnings multiples to begin with. These
multiples can go lower, but a solid financial-services stock almost
never trades at a P/E below 6 or 7 times earnings. “If they’re at 14,
12, or 10 to begin with, you’ve got a maximum 50 percent risk if
everything goes bad,” Davis says. Financial-services companies also
face relatively low potential product liability. “It’s possible someone
may eventually prove that drinking 500 Coca-Cola’s a day gives you
cancer,” Davis suggests. “By contrast, in financial companies, it’s hard
to prove that money is a disaster, so the problems are usually manmade,
having to do with poor management decisions. Even then, the
business will continue to go on in some shape or form. Maybe that’s
why I’ve always felt so strongly about managements, because they
are absolutely critical to the success of financial companies.
“I would also say the entry price at which you invest and the
longevity of the businesses a company is in have a lot to do with reducing
risk,” he adds. “Take insurers such as Travelers (now part of
Citigroup), Aetna, and Cigna. They’ve all been around since the 1800s.
Until recently, they haven’t been very well managed, yet they’re still
in business. They’ve survived wars, depressions, periods of inflation
and deflation, and so on. This proves financial companies will stay
around unless they go bankrupt. On the other hand, many technology
companies eventually disappear once their current lineup of products
becomes obsolete.” Don’t be misled. Davis isn’t recommending that
you avoid financial services and insurance stocks. In fact, those are
his favorite areas of the market. He just wants you to know what to
look out for as you do your homework before investing.
AVOID CYCLICALITY
Davis must feel confident that a company he’s considering for
purchase is in an industry that is making money and has growth po-
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