The Rest of the Story: Wasted Wish?

Perspectives, by Mark Robertson, Managing Partner

Originally Posted on January 1st, 2010 — we felt it was worth another look back at a visit from Santa … from a few years ago on the heels of a vicious bear market.

With certain apologies to Paul Harvey, we need to continue a look at our “Best Season To Invest?” theme from last month. Our December cover story included an exchange with Santa Claus where we playfully negotiated three wishes. The 3rd wish was for Santa to let us know the best day to invest during any given year.

Santa reluctantly agreed to see what he could do … after exploring our comments about lottery-related spam email. But his message was pretty clear, the perceived advantage isn’t nearly what most people think it would be.

We resumed the discussion where we left off during his visit to Rochester Hills, Michigan on a snowy December 25.


A Wish Already Granted? $100 invested into Tin Cup (our model portfolio) would have led to total assets of $1565 over the last ten years. The same $1000 invested on the best day for investing in each of those ten years stands at $1317. Investing regularly in quality companies with leadership projected returns turns out to be pretty compelling.


MI: So how’d it go in Omaha?

Santa: I’m still undecided. Buffett is on probation until I figure out why he said “Buy American!” and then bought a Chinese stock? But he gets good list points for pointing out long-term investing in general.

MI: Indeed. We think Buffett, and for that matter, all of us, should be willing to invest wherever your sled flies on Christmas Eve.

Santa: I might be mixed up on the years … but in any event, he’s on probation until I finish reading Snowball. If he’s gonna use one of my favorites for the title of the book, he’d better behave. I’m not convinced. For now, it’s a fly-by.

MI: Charlie Munger, too?

Santa: Not a chance. Charlie’s a hoot, one of my favorites. I may leave him a clump of coal just to play mind games with him. He’ll probably wonder if Buffett is out to buy an entire coal company next.

MI: Now who’s misbehaving?

Santa: Watch it. That 2010 list is already a work-in-progress. You’re already hanging in the balance.

MI: OK, I’ll add “being nice” to my list of resolutions for 2010.

Santa: It’s early. You have a shot.

MI: We’ve been doing some more thinking about that wasted third wish from last month. Is it possible that I wished for something less than we already have?

Santa: Ding. Ding. And two more angels get their wings. Your subscribers have already checked in with their own observations that Tin Cup gained 48% during 2009?

MI: Right. We’re thrilled!

Santa: Well … investing $100/year in Tin Cup and not worrying about “best day of the year” achieved $1565 over the last ten years vs. $1317 using the “best day” approach. Celebrate that. Hey! Nice touch on the beverage, chips and salsa … milk and cookies are great, but they get old after a few million stops.

MI: Thanks, Santa. Have a great year!

Fribbles: Mother’s Day Tribute

Motley Fool Fribbles

A Mother’s Day Tribute

by Mark Robertson (May 8, 1998)

In the early days of the Motley Fool kingdom, Selena Maranjian presided over an oasis known as Fribbles — tales about life and investing. This morning I was reminded that some things on the Internet are less permanent as access to some of these pages is no longer supported. However, via the magic that is Google, the content has been preserved in a cache making it possible to revisit, recapture, re-present and rekindle the moment.

After the past few weeks of tax season, it’s time to get back to what’s really important. For me, one of the most important resources and inspirations that I’ll always have, no matter what the future holds, is my mother.

Her outlook on investing and personal responsibility is one that you might carefully consider, applying the attributes as appropriate to your personal situation.

She raised four children in the grass-roots, meat-and-potatoes railroad junction in the prairie known as Savanna, Illinois. Until recently, we could proudly proclaim that we were without a stoplight in the entire county. In Savanna, the hard-working natives never needed a stoplight to tell them when to stop and go.

Dad is the greens keeper at the local golf course near their home. One of the highlights of a visit to Grandma’s house is the opportunity for Mom’s grand kids to drive Dad’s golf cart about the neighborhood. It’s a rural setting, but it’s charming to see Mom and Dad still nurturing responsibility as they hand over the keys to the cart to the grandchildren, some of them small enough to make most people squeamish with the prospect of them behind the wheel.

Mom’s two daughters became nurses; the youngest of them is a tenaciously Foolish saver, something that I wish had rubbed off a little more on me over the years. The older sister, while usually exercising good judgment is a Chicago Bears fan — a rabid one. ‘Nuff said, she’s usually pretty rational.

My brother is among the hardest working individuals that I’ve ever seen. I keep one of his recognition certificates on the wall of my office to remind me to try to work at least half as hard as he does.

I was educated as an engineer, and have recently worked with the National Association of Investors Corp. (NAIC) in the realm of investor education. Fervent Fools recognize the NAIC as the sponsoring organization of investment clubs and individual investors. The NAIC is committed to the education of individual investors, with a particularly Foolish message: “With some effort, anybody can take control of his or her personal investments… and achieve outstanding results.”

Consider handing over the keys to investing to the young people around you. Mom’s influence would suggest that it’s important to provide our youngsters and the young-at-heart in our lives with the challenges, responsibilities, and opportunities to achieve Foolish success. [Editor’s note: Start by pointing them to our Young Fools area!]

I believe that our existing educational system is bereft of opportunities to learn the fundamentals of personal investing. This gap, and its impact, is massive, and it’s sad that many of our financial institutions basically promote ignorance. They constantly remind us how challenging it is to understand and participate in the management of our own financial future. It’s part of the boom behind the mutual fund rush. (Let a professional do it for you. After all, you wouldn’t perform brain surgery or a root canal on yourself.)

Mom is an avid reader, consuming a few books every week along with a plethora of magazines and the local news. Unlike most Americans, judging from the explosion of movie theaters around us, she rarely goes to movies. Why? It’s not about exorbitant costs. She once told me that it was much simpler than that. She reads lots of books, many of which go on to reach the silver screen. The problem is, that in her experience, “nobody can quite make a movie like I make a movie as I turn the pages. Sure, every once in a while Spielberg (Jaws, Close Encounters) or Michael Crichton (Jurassic Park, E.R.) come close, but it doesn’t happen very often. Imagination is a powerful force, and the best of the best have trouble keeping up.”

It’s a small jump from Mom’s wisdom to taking personal responsibility for our personal investing efforts.

Thanks, Mom!

Patience, Commitment, Rewards …

… and the Nintendo Generation

Reprinted from April 1999 issue of Better Investing to celebrate a 35th wedding anniversary.  Recall that this was before the market breaks after the turn of the century and the Great Recession of 2008-2009 when the “gaming” and irresponsibility reached unprecedented levels.


When asked what SINGLE THING he would recommend to new investors to improve their long-term results, [investment club champion] Ken Janke had a one word answer, “Patience.”

It rekindled thoughts of a newsletter commentary that I had written for our investment club partners back in 1997.

Our [35th] wedding anniversary. It seems natural that the long-term benefits of a relationship with my partner sent from heaven might kindle some thoughts of rewarding moments.

In honor of our tenth anniversary, I “wifenapped” my spouse and whisked her away (without warning) to retrace our honeymoon voyage to Hawaii that we’d enjoyed ten years prior. Amidst tumultuous change, we actually found that some places had changed very little, a condition that is sometimes refreshing.

We rented a car and headed for the “Seven Sacred Pools of Hana,” a challenging journey that assails the tourist with winding, undulating roads that can turn the most seasoned boater green. Since my wife had set the all-time record for seasickness on a cruise in 1982, I was amazed that she didn’t throw in the towel. With white knuckles, we pressed on. We continued our quest, gritting our teeth as the roads got narrower, bumpier, and the peaks and valleys came with increasing frequency.

Finally, we arrived at Hana…

… a spectacular place where you can swim in crystal pools with the Pacific ocean surf roaring just a few feet away.

There are waterfalls, waterfalls, and waterfalls…

Hana would rival Niagara for newlyweds, if it weren’t such a challenge to arrive.

After a relaxing swim, we noticed a trail leading up the mountain that seemed to originate in the clouds.

We took a deep breath and began our ascent. The trail traced the river and several charming waterfalls were visited as we made our way. We kept lifting our feet and trudging forward.

Ninety-eight percent of the tourists began to turn back. We crossed the river on stepping stones and decided to venture further. The trail got steeper, the foliage and humidity got thicker, and it got hotter. We reached an “impenetrable” bamboo forest. It became stifling but we continued our foray.

A thunderous roar began as a whisper and now approached deafening proportions.

A few more steps and WOW! We were overwhelmed by an awesome vista… a gargantuan waterfall, and the arduous voyage meant that very few ever see this hidden splendor.

I can still smell the bamboo and hear the roar.

What’s this got to do with investing and the “Nintendo Generation?”

Investing, by definition, mandates a certain measure of patience and perspective.

As I watch the frenzy of traders, I’m reminded of this generation’s heritage of Pong, Space Invaders, Pac Man, and our current Nintendo distractions.

It seems to me that this generation is growing up on lightning reflexes and high speed transactions.

It’s a small jump from Nintendo 64 to the characteristics of day trading and short-term frenetic behavior. Most of the people that you read and hear about belong in this camp.

“Patience?” They ask, “Why?” “What waterfall?”

Patience, commitment, and a long-term perspective. Absence of change and steady focus on principles is extremely refreshing. The investment clubs and investors that we “hear from” are well on their way to living their own hidden waterfalls.

Portfolio Design: Building Bridges

The Art & Science of Portfolio Design

by Mark Robertson, Better Investing, August 2002

Building Bridges

“It still holds true that man is most uniquely human when he turns obstacles into opportunities.” — Eric Hoffer (1902-83), U.S. philosopher. Reflections on the Human Condition.

Portfolio design. Art or science? Or both? We build our portfolios with the expectation they’ll bridge to desired outcomes and financial independence. Perhaps visionary artist, scientist and Renaissance Man Leonardo da Vinci can inspire some insights on portfolio design?

The term renaissance literally means “rebirth” and was first used in 1855 by French historian Jules Michelet. The Renaissance was a period of intellectual revival, roughly from the 14th through the 16th century, and marked the transition from medieval to modern times. This period is regarded as a time of intellectual ferment that laid the foundation for future progress.

Some historians suggest the Renaissance was indeed the birth of modern humanity after a long period of decay. Modern scholars have since debunked the idea that the Middle Ages were dark and dormant.

Parallels to Our Current Stock Market?

The last two years have not been kind to investors. It’s a massive challenge to find solace in returns that haven’t receded as much as the market in general. Declines are still that — declines. In some ways, the decline of the last two years has been more severe than what was experienced in 1973-74. Experienced investors often describe their 1970’s experience as a sort of investing dark ages. The high inflation rates and recessionary conditions must have seemed interminable at the time.

But [our community of] investors who have “been there” seem to focus on something completely different. During a recent presentation in Cleveland, a gentleman used our question-and-answer session to share how everything he did during the 1970s — a systematic implementation of buying good companies at good prices — was merely the launch pad for what happened in the 1980s and 1990s. Thomas O’Hara speaks of the period in the same tone of voice and same life experience.

Some would have us believe we’re at the doorstep of another dark age. The last two years are their evidence. I believe the renaissance of American enterprise that ignited during the 1980s and caught fire during the 1990s is merely pausing to catch its breath.

Unleashing Leonardo — 500 Years Later

In 1502 da Vinci proposed building one of the largest bridges in the world for the ruler of the Ottoman Empire.The Sultan wished to span the Golden Horn, an inlet between the Turkish cities of Pera and today’s city of Istanbul. To the astonishment of the Ottoman court, the proposed design took the form of a giant arch. After conferring with advisers, the sultan responded with what seemed like commonsense — an arch that big would collapse in the middle. He declined the proposal.

In his book, How to Think Like Leonardo da Vinci, Michael J. Gelb shares his perspective on seven principles drawn from a study of the man and his methods. The first principle is Curiosita — an insatiably curious approach to life and an unrelenting quest for continuous learning.

Portfolio Design

The elements of portfolio design are the continuous selection (and accumulation) of quality companies and the continuous development of expected returns for the holdings that serve as our bridges. Be continuously curious.

Building Castles of Sand

Building Castles of Sand in The Great Valley


by Mark Robertson, Senior Contributing Editor

Few things are more contagious than emotions. One of our biggest challenges is to prevent emotions from clouding long-term perspectives. I believe that core fundamental growth and profitability is intact and that the assumptions and judgments that we make during our stock studies do not require massive adjustment. Long-term growth expectations may be slightly subdued but the impact probably isn’t all that material. If you believe as I do, then it follows naturally that some excellent companies are available at reasonable prices.

The events of a certain bright September morning brought us to our knees. Those memories will never leave us.

Our awareness of the passage of time was, at least temporarily, altered. Where days were once blurs and years and decades somewhat-defined horizons, instead the long term became blurred. In sharp contrast, the daily images burst forth in crystal clarity. Fear took on a precise nature.

The damage became even more pervasive as an already weakened economy mightily struggled to regain its balance. The effort proved futile. First one, then another supposed paragon was exposed. Confidence was breached. Fiduciary faith is one of the more fragile varieties. Only the passage of time combined with an uninterrupted demonstration of credibility and reason will restore consumer confidence to necessary levels.

Trust is still the biggest component of any P/E ratio.

Our National [Convention] and Bricks

Better Investing for Better Living.

Our theme is timeless and in many ways, immune to the challenges of this past year — so long as the long-term perspective is maintained.

NAIC co-founder and Chairman Emeritus Thomas O’Hara reminds us: “Times like these are when it is most challenging to capture the attention of would-be investors.” The distraction of a bear market is unfortunate. These times are also the best time to start (or augment) a lifetime program of strategic long-term investing.

A friend once commented that during market breaks, it seemed like his best clients would throw bricks through his office window. He didn’t mind the shattered glass so much. (After all, we build castles from sand.) But what he really wishes is that they would tie a few dollars to the brick before launching it. Then he would be enabled to invest on their behalf — in excellent companies, at good prices — when it was easier to do so.

Faith and Castles of Sand

Can faith be restored? In the Disney movie, “Land Before Time,” the main character is an adolescent dinosaur named Little Foot. During a pilgrimage to a so-called Great Valley, a land of plentiful green plants and fresh bodies of water, Little Foot’s mother is injured while protecting the herd from predators. With her last breath, she points Little Foot in the right direction and urges him to lean on faith. When Little Foot asks his mother exactly what faith is, she provides one of the best definitions of faith I’ve ever heard: “Some things you see with your eyes. Faith is when you see things with your heart.”

The preservation of faith and corporate credibility is an overwhelming responsibility. The actions of a few have grievously undermined confidence. Cardiac vision has been blinded and the moral melee has become a maelstrom. Seeing every single corporate [data point] has never been what [our investing method] is all about and I hope it never will be. This circus will be over when an executive can talk to us without inhibition. That day will come.

We will indeed return to building castles by the sea with the knowledge that tides, erosive winds and castle-smashing vandals are a fact of life. Sand castles are naturally swept away. Sand-castle virtues are precious and deserve better respect.

Profitability Forecasting

 We collectively owe all Value Line analysts an apology. We’ll use this household products leader — and walking, talking and breathing Up, Straight & Parallel business analysis — to take a closer look at profitability forecasting.

Church & Dwight (CHD)

Church & Dwight Co., Inc. engages in the development, manufacture, and market of household, personal care and specialty products. It sells consumer products under a variety of brands through a broad distribution platform that includes supermarkets, mass merchandisers, wholesale clubs, drugstores, convenience stores, dollar, pet and other specialty stores and websites all of which sell the products to consumers. The firm focuses its marketing efforts on its brands, which includes ARM & HAMMER, TROJAN Condoms, XTRA laundry detergent, OXICLEAN pre-wash laundry additive, NAIR depilatories, FIRST RESPONSE home pregnancy and ovulation test kits, ORAJEL oral analgesics and SPINBRUSH battery-operated toothbrushes. It operates through the following segments: Consumer Domestic, Consumer International and Specialty Products. The Consumer Domestic segment includes the eight power brands and other household and personal care products such as SCRUB FREE, KABOOM and ORANGE GLO cleaning products, ANSWER home pregnancy and ovulation test kits, ARRID antiperspirant, CLOSE-UP and AIM toothpastes. The Consumer International segment primarily sells a variety of personal care products, some of which use the same brands as its domestic product lines in international markets. The Specialty Products segment produces sodium bicarbonate, which it sells together with other specialty inorganic chemicals for a variety of industrial, institutional, medical and food applications in U.S. The company was founded by Dwight John and Austin Church in 1846 and is headquartered in Ewing, NJ. [Source: Wall Street Journal]


I think we might owe the Value Line analysts an apology.

This might be one of those moments when we realize that something we’ve believed, shared and taught just doesn’t work out the way we expected.

I hate when moments like these happen.

The culprit is usually a Value Line company report. You know the ones I’m talking about. The companies that have been running close to a 5.0% net margin for the last few years and the Value Line analyst has a 3-5 year forecast of 7.5% for the projected net margin. We snicker. Some of us guffaw. Almost all of us discount the forecast.

It’s probably time for a deep breath. A few more moments with curved shower rod curtains while we tack the ends of the ham and restore it to Grandma’s oven. (See Cutting Off The Ends for more on this subject)

The Management Report Card: Profitability

The second part of an SSG-based stock analysis includes a look at profitability trends.

Faced with slide rules and abacus beads, George Nicholson resorted to a moving average for “instant trend analysis.” It’s very straightforward. A comparison of current conditions (higher or lower) versus the trailing 5-year average tells us whether recent results are above (good) or below (bad?) the longer term trend. There is nothing wrong with this convention.

But we use the Preferred Procedure — a business model analysis — to build the long term return forecast for the companies we study and analyze. And we’ve generally used the trailing 5-year average net margin as the projected profitability.

(1) This will build in some conservatism, and (2) we lean on the “excuse” that we’re doing the analysis for each and every company the same — so it’s all “relative.” This too is a decent, but flawed, convention. Even if it’s WRONG.

The problem is that we’re striving for better absolute forecasts.

“The moving average forecast is based on the assumption of a constant model.” — University of Texas, Statistics


Does anything about that accompanying chart of long-term aggregate net margin (1940-Present) look CONSTANT???

Church & Dwight (CHD): Profitability Trends. The actual and forecast net margins for CHD are shown in the profitability graphic on the left. The graphic on the right supports a comparison of actuals (red bars, 2009-2016) versus the forecasts (purple bars) based on 5-year trailing averages back at the time the forecasts were formed.

The fact that we have embedded analyst estimates for profitability for this year, next year and 3-5 years out (when available) for our long-term forecasts means that we are less impacted by this condition than what is depicted on the right.

Bottom Line

I think it’s clear that we’d want a forecast for CHD that is essentially between the VL 3-5 year forecast and the exponential regression shown on the left image. It’s probably also clear that for a profitability profile like the one on the left, the trailing average forecast is going to consistently produce a lagging forecast.

Remember the example of margin expansion by Coca-Cola over the years cited by Steve Sanborn. It’s simply a reality that profitability characteristics shape and evolve over the life cycle of all companies.

The moving average forecast method really only works (accurately) for mature stocks with relatively constant profit margins.

The problem is that there aren’t very many companies that fit this description. Our database includes a forecast algorithm that essentially smoothes and weights the more recent years. When we use this method for Church & Dwight, our 5 year net margin forecast aligns very closely with Value Line’s 3-5 year construct. We checked about (50) more companies — and those forecasts that we snickered and guffawed about — all checked out very closely.

We may owe the Value Line analysts an apology.

We will begin infusing this method with updates going forward until the entire database (at Manifest Investing) is converted.

Just Like Home …

This Expected Returns cover story from April 2009 underscores the things that really matter during bear markets, corrections and recessions.  We were reminded at the time to focus on high-quality opportunities with vigilance for upstart, promising companies ratcheted up.  If you’re curious about our work at Manifest Investing and the resources we provide for long-term investors, and interested in a FREE 90-day test drive, let me know via … for now, may your investing brackets be “nothing but net.”

The stock market madness of early March has given way to a rally that at least delivers welcome respite from the cascading decline we’ve experienced for several months.

Triple Play: A Measure of Opportunity. History suggests that the discovery of companies poised with Triple Play characteristics can lead to rewards. We’ve leaned on Nicholson’s Triple Play concept often since the 4th quarter of 2008, citing potential impact on our shopping efforts. Finding companies with the prospects of potential profit margin and P/E expansion seems prudent. Combining that potential with high-quality companies exhibiting out-sized PARs could deliver a measure of success and shining moments for our portfolios going forward.


March Madness now extends into April as the NCAA basketball championships bring the current season to a close. And the stock market madness of early March has given way to a rally that at least delivers welcome respite from the cascading decline we’ve experienced for several months. In the movie ‘Hoosiers’, there’s a classic scene where Gene Hackman, coach of the underdogs from a very small town, leads the boys into the championship venue for their pregame practice. He hands a tape measure to the anxious players and urges them to confirm that the hoop is 10 feet above the floor … just like home … and the free throw line, 15 feet … just like home.

From “Just Like Home” …

As many of you know, we’ve discovered that NAIC/BI co-founder, the late George Nicholson, focused his attention on “the next bull market” during the dreadful bear market of 1973-74. As we studied his writings at the time, we learned that he looked back to the lessons of the 1937-38 bear market — days when he was launching a successful career and lifetime of successful investing.

He believed that the challenges and opportunities of 1973-74 were similar to conditions last seen in 1937-38 complete with year-over-year 50% declines in automobile sales (sound familiar?) and a variety of economic ailments related to scarcity of commodities and mischievous behavior in the banking and investing sectors, etc. He developed a set of criteria — intended to seek opportunities just like “home.”

Although we can’t be certain, I can imagine that he saw it as a sort of antidote to the poisonous paralysis that afflicts so many of us as stock prices decline. In fact, Nicholson “pleaded” with investment clubs to commit to decisions during early 1975 — citing a recent 80% gain in Coca-Cola over a span of less than six months as evidence that prices could and often do, move in sudden spurts. (The stock price of Coca-Cola proceeded to languish for the next 5-6 years.) If you missed the autumn 1974 opportunity to own the Real Thing and waited a few months before committing, your experience was considerably less rewarding.

… to “Shining Moments”

CBS Sports features the song ‘One Shining Moment’ to encapsulate the highlight reel celebrating the coronation of this year’s champion.

Nicholson shared that some of the best shining moments of a lifetime of successful investing could be traced to the elements of his Triple Play concept. Here are the three features that qualify a stock for Triple Play status: (1) A depressed stock price. Think elevated projected returns. (2) A potential for P/E expansion over a 5-year time horizon and (3) A potential for profit margin expansion. Such stocks are most frequently found at the end of a long bear market.

“I have been investing in Triple Play situations during 1973-74 in preparation for the next bull market. If past performance is any guide, the performance should exceed [stock market returns] by a wide margin.” — George Nicholson.

Triple Play Candidates. This listing of study candidates was shared with the attendees at the Better Investing regional conference in Lansing, Michigan on April 3-4, 2009. Our database was screened for companies with PAR>21%; Quality>60; EPS Stability > 60; and Financial Strength > 70. A large number of companies are poised for P/E expansion (not shown) and the screening results shown here are sorted by annualized net profit margin (%) expansion in descending order. Note Solomon Select company, Mettler-Toledo, and the other precision instrument companies.

Bear Down, Regularly

There’s an insurance company commercial running on television where the celebrity sponsor (President Palmer for ‘24’ fans …) shares that we’ve been through twelve recessions over the last 50 years or so. All of them ended and a period of economic expansion ensued.

During a recent seminar, Steve Sanborn, retired director of research for Value Line, and I shared that — in his wealth of investing experience — all bear markets have ended. In that seminar, we explored the history of bear markets and underscored the similarities between 1938, 1974 and 2009 as supported by the accompanying graphic.

The lessons of history suggest that it’s probably time to think less about poisonous paralysis — avoid remaining unduly mired in yesterday’s quagmire — and focus a whole lot more on an effort to engage tomorrow’s prosperity. The table displays a listing of companies with depressed stock prices and the potential for profitability and P/E expansion. Many of these companies were mentioned multiple times by some pretty effective stockpickers and educators at the regional conference in Lansing, Michigan on April 3-4.

The list includes some community favorites, a few newcomers and a few Solomon Select legacy features.

Growth by Recession

It’s probably time for a reminder that our emphasis on focus on size diversification includes a healthy nudge. That nudge entails the continuous pursuit of companies with higher top line growth expectations. It also includes an increased focus or emphasis during periods when we may be approaching the end of a recession.

Bear Market Comparisons. As shown here, the bear markets of 1937-38, 1973-74 and 2007-2009 exhibit some similarities when compared versus all of the bear markets that have come and gone before. No, Virginia, we’re not seeing conditions like the Great Depression (see 1929-32) yet. Nicholson seized the moment in 1973-74, seeking Triple Play candidates to ready his portfolio for the next bull market.


You’ll hear some pundits, rhinos and talking heads continuing to encourage blue chip companies and we’ll nod and agree that this pursuit should be continuous, too.

That said, we also heed the advice of Peter Lynch. The Magellan maestro suggested that small companies can be more nimble and recover more quickly coming out of recessions. This reality is one of the things that leads to frustrating periods where blue chip languish while “garbage companies” seem to flourish. An investor over-concentrated in slow-growth blue chips last experienced this during the 2003 bull market.

Dial up shopping efforts and maintain overall portfolio sales growth at the high end of your comfort range. Languish a little less.

I have a small confession. Much like Jim Surowiecki, I’m sometimes conflicted with doubts about how much this “quality stuff” really matters. After writing The Wisdom of Crowds, Surowiecki shares several experiences where he doubted the wisdom of a gaggle of chefs in some “predictive kitchen” only to discover that the collective wisdom held up well … again, despite and in deference to any doubt.

And every time I check, I’m stunned by the reinforcement and rediscovery that comes with it.

2-Year Annualized Returns for Low-Quality Companies. The companies shown represent approximately (20) of the lowest quality ratings as of March 2007. The average annualized loss for this group of companies is 60%. Yes, 60% … and that doesn’t count three companies no longer “on the board” because they’ve gone bankrupt and no longer exist. In a word, Ouch.

The accompanying graphic is from a couple of slides presented at the regional conference — updating a look at bear market performance for low-quality companies versus high-quality companies. Yes, we’re talking about the current bear market.

And yes, the contrast is stunning. And it hits a little close to home as we watch companies like General Motors (GM) drop from $29.27 to $1.94 over a period of two years — an annualized loss of 74% (per year!)

Nicholson’s Legacy Continues

The companies shown in the accompanying graphic are often found on subscriber dashboards and rank among the most commonly-held and widely-followed by our Community. We’re proud, yet humbled, that companies like Solomon Select feature Strayer Education (STRA) tops these charts, compelling us to continue our quest.

2-Year Ann. Returns for Highest-Quality Companies. In sharp contrast, the highest-quality companies combined for an average return of -19% versus a stock market down -27%. Note that three companies (including a couple of community favorites and a Solomon Select alum) managed positive returns!


Nicholson strongly cautioned avoiding lower quality companies as bull markets raged. In our vernacular and interpretation, we’d translate that to: “periods where MIPAR is historically low” as our measure of bull market condition.

Where’s your “investing tape measure?” In the spirit of Hoosier coach Norman Dale (Gene Hackman), we continue to urge that seeking Triple Play Candidates and heeding the repeating lessons of Quality are pretty good yardsticks to honor.

Just like home … Indeed.