The market dipped 1.7% today (Feb. 21, 2025) with fears of tariff wars and inflation, but I sleep well. This CFP generally encourages securities investors to buy diversified baskets of low load mutual funds and ETFs for stocks, options or bonds.
Stockpickers usually won’t beat the market consistently betting against full-time institutional investors who use tools described below, and brokers don’t have time for this research if they serve clients well.
Since Securities Analysis came out in 1934, the laborious method of analyzing company accounting, leadership, markets and economic prospects has enabled clients of acclaimed fund managers like John Templeton, Peter Lynch and Warren Buffet to prosper. Benjamin Graham’s main investment principles are:
- “Invest with a margin of safety.” Knowledge preserves safety if it discovers company assets which may be sold.
- “Anticipate volatility and benefit from it.” Buffett expands, “Price is what you pay; value is what you get.”
- “Know what type of investor you are and therefore what type of investing you are good at.” Buy companies you understand.
Graham’s student, Warren Buffett, is one of the 10 wealthiest men in America with $120.6 billion net worth. He mastered self-control: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” Peter Lynch, whose Magellan Fund averaged 29% returns in the ’80s, deliberately sought out companies others ignored because the names are boring, the industries are fast growing and overpriced, or the company dominates a niche market secure in a volatile economy.
Insider trading is illegal, but investors will always ask whether insiders are buying or selling. John Templeton’s Growth Fund averaged 15% per year for 38 years, often in international stocks. This contrarian stated: “If you want to have a better performance than the crowd, you must do things differently from the crowd.”
Peter Lynch sought “stories” of securities based on expectations of their growth based on SEC filings, industry journals and purchased financial analysis (e.g. Morningstar). The business model of a company may not be obvious. McDonald’s, for instance, deliberately earned money from real estate with investors who had little control over products and services.
Competitive advantages in patents, trademark and capitalization assure investors, and the best investors successfully study board structure and interview management teams. Is the team happy or will it drag tails while customers depart? Finally, fundamental investors must know industry trends (what happened to Blockbuster?), regulations, taxation, interest rates and business cycles.
Key ratios derived from financial statements include price-to-earnings (P/E) ratios, earnings per share (EPS), returns on equity (ROE), and debt-to-equity (D/E) ratios, which show how much stock pricing can be justified based on earnings and debt—particularly bank debt. Gross profit margins divide revenue minus cost of goods sold by revenue to determine profitability. Hopefully, earnings are increasing and the ratio between price and earnings is below historical and industry averages. The current ratio divides available assets by current debt payments to assess short term liquidity. Fundamental analysts use measures like these to determine “intrinsic value” which can be compared to market price.
The alternate theory, Technical Analysis seeks patterns in the graphs of pricing and suggests buying and selling based on familiar market trends. Yet there may be no stable patterns of squiggles in graphs or predictability in “market sentiment” when human choices like the Syrian revolution astonish; otherwise, computers would dominate markets. Investors might well pick stocks with fundamental analysis but time daily purchases with technical analysis if they believe.
Buy mutual funds to invest with managers with graduate education and patience for rigorous quantitative calculations from accounting and thorough qualitative judgements. The data may be inaccurate (or even mendacious) and judgements of profitability and pricing are ultimately based on historical trends and assumptions about intangibles that may prove false. Still, these assumptions are based on knowledge and facts others may not possess, so the fundamental analyst gains better judgment for sounder long-term prospects.
Templeton humbly concludes: “I never ask if the market is going to go up or down because I don’t know, and besides it doesn’t matter. I search nation after nation for stocks, asking: ‘Where is the one that is lowest-priced in relation to what I believe it’s worth?’ Forty years of experience have taught me you can make money without ever knowing which way the market is going.”
Robert Arne, EA, CFP, MS, of Carpe Diem Financial Life Planning, gives holistic financial advice as his client’s fee-only fiduciary. He serves mostly Santa Cruz Mountain dwellers. These articles must not be read as personal financial, mortgage, tax or investment advice; consult appropriate professionals. Learn more at www.carpediem.financial.
