Growing Rich - Arabictrader.com

GROWING RICH WITH GROWTH STOCKS
it hit $168. The company was competing head-on with IBM, which
wanted to squash it. Once interest rates started going up, the stock
came spiraling down. You don’t know where it’s safe to buy when
the multiple is that high. I began buying some more at $70, after it
had dropped more than 50 percent. Pretty soon it was down to $40.
That’s when I ended up selling at a loss. I went from having a triple
to a loss. It ultimately sank to $3. The problem with a high-multiple
stock, in my mind, is that if the market turns down, you don’t know
where the floor is. It’s hard to have an instinctive feel for that. If a
stock trades for 30 times earnings, that’s a 3 percent earnings yield.
If it drops to 20 times earnings, that’s only a 5 percent earnings yield.
In either case, that’s not very competitive if interest rates move up to
8 percent or more.
“Sometimes you sell because of a secular shift in the growth outlook
for an industry,” Davis continues. “For example, oil and gas went
sour on me in the early 1980s, and I finally recognized those stocks
weren’t going back up any time soon. The supply-and-demand
equation was too unequal. A second reason is more personal. If a
company disappoints me on a regular basis, I begin to believe the
management is a bluffer, not a doer. I always say to my kids, ‘Say
what you mean and mean what you say.’ It’s a pretty good rule. If
one of my companies doesn’t mean what it says, I begin to lose faith
in it. I like honesty, even if the facts aren’t favorable. Along those
lines, I want to see accurate numbers. If I smell bad accounting or
sense any fraud, I’ll get out. That tells me the people in charge are of
low quality and unfit to be one of my partners. Remember, my premise
is that I’m a partner in a business when I own the stock. Management
is the operator of my business.”
Other times, things may be fine with a company he owns, but
Davis gets the sense he’s better off in cash because the overall market
is too exuberantly priced. “Nobody talks about this anymore, because
it’s been so long, but sometimes you have to cut back on your holdings
because you feel more comfortable on the sidelines,” he adds. “If you
feel the risk-free rate on bonds is going up considerably, you know
PE ratios will come down. My marketing department wouldn’t be
happy if I raised a lot of cash in my funds. But I would still do it if I
felt we were running into long-term trouble with the market. I
wouldn’t take it all out, maybe 20 percent or so. I’d write to my
shareholders and say I was no longer thinking as much about beating
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