Growing Rich - Arabictrader.com

KIRK KAZANJIAN
worst and most mediocre businesses. I decided there must be a way
to bring these two disparate parts together.”
Over the following years, it became clear to Yacktman that he was
better off owning good businesses, bought at a fair price, since their
stocks acted more like escalators (always rising in price) than moving
sidewalks (cheap to buy, but without much upward movement). As
an investor, you can put this concept into practice by purchasing
quality companies when their prices are temporarily on sale in the
stock market for one bad reason or another. It might be a scandal
that’s big news today, but of little concern in the long run. A good
example is what happened to Intel in 1994. Word leaked out that the
company’s Pentium chips had a slight flaw. Even though it impacted
only a handful of customers, the story became front-page news around
the country, causing shares of Intel to come careening down. The
company offered to immediately replace any defective chips, and
once Wall Street put its commonsense cap back on, Intel shares continued
their upward rise. Those who bought on the day this news hit
the wires are very happy campers. Those who immediately panicked
and sold missed out on a huge opportunity.
WHY STOCKS GO ON SALE
Many times, stocks fall in price for one of three reasons: a market
decline, a threat to the cash flow, or a short-term problem that Wall
Street views as terminal. “A market decline always tends to shake
things up,” Yacktman rationalizes. “It’s sort of like when you shake
the apple tree, a few always fall to the ground. When companies have
a threat to their cash flow, it’s usually a case where some outside
force is threatening the company, like the current pending litigation
against tobacco producers or potential government regulation of the
drug companies in 1993. In effect, these events serve to shrink the
capitalization rates of all stocks in the industry, making them go down
or sideways. This trauma requires really keen judgment. In other
words, you must make an educated determination that, based on
current profitability and future cash flows, the company is worth a
lot more than it’s selling for in the marketplace.”
When a company does have a short-term setback, which might
impact earnings only in the next quarter, traders often see the slide
as being eternal. “Cash flow can fall due to some temporary problem
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