Growing Rich - Arabictrader.com

GROWING RICH WITH GROWTH STOCKS
ments. That’s why I’ve never been that enamored of building earnings
models by quarter and trying to develop every statistic on a company.”
COMPANIES TO SHY AWAY FROM
There are certain kinds of companies Davis categorically avoids.
“In insurance, I stay away from those without regular underwriting
profits, because they’re not really generating free cash flow and may
be underreserving,” he says. “I try to steer clear of financial companies
at the high end of the risk spectrum. In the lending world, I really
don’t like subprime auto lenders that are making loans on used cars
to people on hourly wages or college kids with no credit ratings.
“I don’t usually buy small oil and gas companies that have plays
going in only one particular field, because if it doesn’t work out,
they’re out of business,” he shares. “I’ve seen reserves disappear in
insurance and oil in the same way - by the stroke of somebody’s pen.
They decide the oil and gas they thought was underground isn’t really
there. That’s why I like to own bigger companies. One of the things
that’s generally unrecognized about big companies is they have much
more staying power and diversification. You give something up in
that they often aren’t growing as rapidly, but you also gain something
in return. If you’re trying to compound money, avoiding substantial
losses is just as important as making huge hits. I think a big company
gives you more of a chance to avoid the significant losses, especially
if you’re not buying at a high price.”
What’s more, if you’re a buy-and-hold investor, like Davis, you’re
more likely to be able to safely stick with a large company for the
long term. “That invariably makes your portfolio more tax efficient,
because chances are those big companies can live through the inevitable
bear markets, interest-rate squeezes, and recessions,” he reasons.
“Big companies have more staying power on their balance sheets.
From my point of view, owning something for a long time is wonderful,
and not just for tax efficiency. It also fits into my system of getting
to know management. Most mutual funds have turnover of 200
or 300 percent a year. What’s the point of talking to management if
you’re going to turn the portfolio over three times a year? What are
you saying by doing that much trading? Are you trying to find out
what management is doing for the next three or six months? What
they’re eating for breakfast? It makes no sense. If you’re doing your
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