Growing Rich - Arabictrader.com

GROWING RICH WITH GROWTH STOCKS
shareholders he felt the market would trade in the 3,000 to 5,000
range through the rest of the decade. “Clearly, I was wrong,” he now
concedes. “I based that prediction on the facts, though. The average
price-earnings multiple for stocks in the Standard & Poor’s 500 over
the last 50 years is around 15 times earnings. As we speak, that
number is above 20. This worries me. I think we’ll revert to the mean
at some point. But I must admit I’ve never seen financial conditions
quite as favorable as they are right now. We have low interest rates,
low inflation curves, high productivity, and a real focus on the bottom
line. American companies are more competitive than ever, and they
have an entire world to go out and conquer. The sun is shining, and
it’s a blue-sky day. I’m just saying that eventually we will have some
clouds.”
While investors overall seem to be exuberant, despite the severe
market correction in mid-1998, Davis is a little scared that many fail
to realize the risks you face when buying equities. “Investors today
don’t know what a serious bear market is,” he contends. “What
happened in 1973-1974 was a real nightmare. When you buy a stock
at 12 times earnings and the earnings do OK, yet the stock goes down
to 9 times earnings, you’ve lost 33 percent of your money. That’s
what happens in a full-fledged bear. We’re in a wonderful environment
right now. I’m not knocking it. But I’m nervous. I think the market
has been relatively well-behaved, considering how high it is.”
ON BECOMING A GSP
Unlike many of today’s most successful mutual fund managers,
Davis and his sons are not CFAs, or certified financial analysts. This
designation is awarded by the Institute of Chartered Financial Analysts
to those who have passed a series of three rigorous, numbers-based
exams on securities analysis. When he was at the Bank of New York,
Davis actually taught refresher courses for the CFA and took two of
the three exams required for the certificate. But he lost interest when
he started his own firm. “I said to myself in 1969 that I’d rather be
known as a GSP than a CFA, and that’s a ‘good stock picker,’” he
maintains. “I told my kids the same thing. Some books and professors
try to make this business so complicated. What we’re doing is about
as old-fashioned and uncomplicated as it gets. You just need to understand
what makes companies run, and that’s people. Find good
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