One Up on Wall Street: How to Use What You Already Know to Make Money In
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• To come out ahead you don’t have to be right all the time, or even a majority of the time.
• The biggest winners are surprises to me, and takeovers are even more surprising. It takes years, not months, to produce big results.
• Different categories of stocks have different risks and rewards.
• You can make serious money by compounding a series of 20–30 percent gains in stalwarts.
• Stock prices often move in opposite directions from the fundamentals but long term, the direction and sustainability of profits will prevail.
• Just because a company is doing poorly doesn’t mean it can’t do worse.
• Just because the price goes up doesn’t mean you’re right.
• Just because the price goes down doesn’t mean you’re wrong.
• Stalwarts with heavy institutional ownership and lots of Wall Street coverage that have outperformed the market and are overpriced are due for a rest or a decline.
• Buying a company with mediocre prospects just because the stock is cheap is a losing technique.
• Selling an outstanding fast grower because its stock seems slightly overpriced is a losing technique.
• Companies don’t grow for no reason, nor do fast growers stay that way forever.
• You don’t lose anything by not owning a successful stock, even if it’s a tenbagger.
• A stock does not know that you own it.
• Don’t become so attached to a winner that complacency sets in and you stop monitoring the story.
• If a stock goes to zero, you lose just as much money whether you bought it at $50, $25, $5, or $2—everything you invested.
• By careful pruning and rotation based on fundamentals, you can improve your results. When stocks are out of line with reality and better alternatives exist, sell them and switch into something else.
• When favorable cards turn up, add to your bet, and vice versa.
• You won’t improve results by pulling out the flowers and watering the weeds.
• If you don’t think you can beat the market, then buy a mutual fund and save yourself a lot of extra work and money.
• There is always something to worry about.
• Keep an open mind to new ideas.
• You don’t have to “kiss all the girls.” I’ve missed my share of tenbaggers and it hasn’t kept me from beating the market.
Epilogue: Caught with My Pants Up
I started this book with a vacation story, so maybe I should end it with one. It’s August, 1982. Carolyn and I and the children have piled into the car. We’re driving to Maryland to attend the wedding of Carolyn’s sister, Madalin Cowhill. I’ve got eight or nine stops to make between Boston and the wedding. They’re all publicly traded companies within a hundred-mile radius of the direct route.
Carolyn and I have recently signed a contract to buy a new house. August 17th is the last day we can get out of the deal without forfeiting the ten percent we’ve put down. I remind myself that this represents my combined salary from my first three years at Fidelity.
The house purchase requires substantial faith in the future of my own income, which in turn is heavily dependent on the future of corporate America.
Lately the mood has been downbeat. Interest rates have risen into the double digits, causing some people to fear we’ll soon be as bad off as Brazil, while others are satisfied that we’ll soon be as bad off as the 1930s. Sensible bureaucrats are wondering if they should learn to fish, hunt, and gather berries, to get a head start on the millions of other jobless souls who will soon be heading for the woods. The Dow Jones industrial average is in the 700s, while a decade earlier it had been in the 900s. Most people expect that things will get worse.
If the summer of 1987 was optimistic, the summer of 1982 was the exact reverse. We grit our teeth and decide not to cancel the house deal. Somewhere in Connecticut we realize the new house is ours. The hard part is how we’re going to pay for it, long term.
Ignoring all this, I stop in to visit Insilco, in Meriden, Connecticut. Carolyn and the kids spend three hours at a video arcade, researching Atari. When I finish my meeting, I call the office. They tell me that the market is up 38.8 points. Starting from a level of 776, that’s the equivalent of a 120-point day in the summer of ’88. Suddenly people are excited. They are even more excited on August 20th, when the market is up another 30.7 points.
Almost overnight everything has changed. People who had reserved their campsites in the woods have rushed back to buy every stock they can get their hands on. They are stumbling all over each other to jump back on the bull. There’s a mad rush to invest in all sorts of prosperous enterprises that a week earlier were given up for dead.
There’s nothing for me to do, except business as usual. I’m fully invested—before and after this extraordinary rebound. I’m always fully invested. It’s a great feeling to be caught with your pants up. Besides, I can’t rush back to buy more stocks. I’ve got to visit Uniroyal in Middlebury, Connecticut, and then Armstrong Rubber in New Haven. The next day I’ve got to stop in at Long Island Lighting in Mineola, New York, and Hazeltine in Commack. The day after that it’s Philadelphia Electric and Fidelcor in Philadelphia. If I ask enough questions, maybe I’ll learn something I didn’t know. And I can’t miss my sister-in-law’s wedding. You have to keep your priorities straight, if you plan to do well in stocks.
Acknowledgments
Several individuals and organizations deserve recognition for their gracious and adept assistance in preparing this updated version of One Up on Wall Street: for general support—Doe Coover, literary agent; Paula Caputo, marketing director, Fidelity Capital; and Ellen Hoffman, Devonshire Publishing; for gathering and checking data—Ned Davis Research; FactSet; Dow Jones; Scott Machovina from Fidelity Market Research; and the Fidelity Technical Group, especially Patricia Mulderry, Denise Russell, Shawn Bastian, and Krista Wilshusen; for editorial assistance—Airié Dekidjiev and Doris Cooper at Simon & Schuster.
Since the 1960s I have had the wonderful fortune to be a member of a special family, Fidelity Management and Research, affectionately known as Fido. Fido is a corny, old-fashioned sort of place, appropriately located in an ancient nine-story building complex in Boston, where people get along in spite of their differences, where debates over stocks do not escalate into cubicle wars, and where birthdays are still celebrated with parties and cakes.
So many individuals have inspired me that it would take an entire chapter to list all their names. Below I’ve named a few, and I apologize sincerely to people I’ve omitted.
Over the past fifteen to twenty years, and in some cases back to 1966, I would like to thank: the late Mike Allara, Sam Bodman, Donald Burton, Bill Byrnes, the late Warren Casey, Sandy Cushman, Leo Dworsky, Dorsey Gardner, Joe Grause, Allan Gray, Barry Greenfield, Dick Haberman, Bill Hayes, Bob Hill, the late Mr. Johnson II, Ned Johnson, Bruce Johnstone, Caleb Loring, Malcolm MacNaught, Jack O’Brien, Patsy Ostrander, the late Frank Parrish, Bill Pike, Dick Reilly, Dick Smith, Cathy Stephenson, the late D. George Sullivan, John Thies, and George Vanderheiden.
I’ve been helped immeasurably by another group of dedicated Fidelity money managers, including: the late Jeff Barmeyer, Gary Burkhead, William Danoff, George Domolky, Bettina Doulton, Bill Ebs-worth, Rich Fentin, Karie Firestone, Bob Haber, Steve Kaye, Alan Leifer, Brad Lewis, Steve Peterson, Ken Richardson, Bob Stansky, Beth Terrana, and the late Ernest Wiggins.
I have also been helped by an outstanding group of securities traders who buy and sell stocks for the Magellan Fund, and I would especially like to thank those who made the smooth transition from a small fund to a multibillion-dollar enterprise: Robert Burns, Carlene De Luca O’Brien, and Barry Lyden.
Outside Fidelity, and in spite of everything I’ve said about the foibles of Wall Street professionals, I’ve been aided by friends and colleagues from two groups: industry analysts from the brokerage community and managers of other funds. Again I me
ntion just a few, and I apologize to many more I’ll think of later.
Analyst List
John Adams, Adams, Harkness & Hill
Mike Armellino, Goldman, Sachs & Co.
Steve Berman
Allan Bortel
Jon Burke
Norm Caris, Gruntal & Co.
Tom Clephane, Morgan Stanley & Co.
Art Davis
Don DeScenza (deceased), Nomura Securities
David Eisenberg, Sanford Bernstein
Jerry Epperson
Joe Frazzano
Dick Fredericks
Jonathan Gelles
Jane Gilday, McKinley Allsopp
Maggie Gilliam
Tom Hanley
Herb Hardt, Monness, Crespi, Hardt & Co., Inc.
Brian Harra, Brean Murray, Foster Securities
Ira Hirsch, The Fourteen Research Corp.
Ed Hyman
Sam Isaly
Lee Isgur
Robert Johnson
Joe Jolson
Paul Keleher
John Kellenyi
Dan Lee
Bob Maloney, Wood Gundy Corp.
Peter Marcus
Jay Meltzer, Goldman Sachs & Co.
Tom Petrie
Larry Rader
Tom Richter, Robinson Humphrey
Bill Ritger, Dillon Reed & Co.
Elliot Schlang
Elliot Schneider, Gruntal & Co.
Rick Schneider
Don Sinsabaugh, Swergold, Chefitz & Sinsabaugh
Stein Soelberg, Baird, Patrick & Co.
Oakes Spalding
Stewart Spector
Joseph Stechler, Stechler & Co.
Jack Sullivan (deceased), Van Kasper & Co.
David Walsh
Skip Wells, Adams, Harkness & Hill
Fund Manager List
James Roger Bacon, Putnam Management
George Boltres, Tiedman, Karlin, Boltres
Tom Cashman, Massachusetts Financial Services
Ken Cassidy, Cassidy Investments
Tony Cope
Richard Corneliuson
Gerald Curtis, Webster Management
Peter deRoetth, Account Management
Tom Duncan, Frontier Capital Management
Charles Flather, Middlegreen Associates
Richard Frucci, Putnam Management
Mario Gabelli, Gabelli & Company
Bob Gintel, Gintel & Company
Dick Goldstein, Richard Goldstein Investments
Jon Gruber, Gruber Capital Management
Paul Haagensen, Putnam Management
Bill Harris (retired), Massachusetts Financial Services
Ken Heebner, Capital Growth Management
Philip Hempleman, Ardsley Partners
Ed Huebner (deceased), Hellman, Jordan Management
Richard Jodka
H. Alden Johnson, Jr. (deceased), Massachusetts Financial Services
Donald Keller, Rollert & Sullivan
David Knight, Knight, Bain, Seath & Holbrook
Kathy Magrath, Valuequest
Terry Magrath, Valuequest
Ed Mathias, The Carlyle Group
Joe McNay, Essex Investment Management
Bill Miller, Legg Mason
Neal Miller, Fidelity
David Mills
Ernest Monrad, Northeast Investors
John Neff (retired), Wellington Management
Michael Price, MFP Investors, LLC
Jimmy Rogers
Binkley Shorts, Wellington Management
Rick Spillane, Eaton Vance (now Fidelity)
Richard Strong, Strong Corneliuson
Eyk Van Otterloo, Grantham, Mayo, Van Otterloo
Ernst H. von Metzch, Wellington Management
Wally Wadman, Constitution Research & Management Inc.
Matt Weatherbie, M.A. Weatherbie & Co., Inc.
I owe special gratitude to an outstanding man who has been a friend of my family for over forty years: Father John J. Collins, S.J., of Boston College. As chairman of the finance department when I attended the school, he taught me many useful things. Later he baptized all three of our children and has been a constant source of support to me and to hundreds of other B.C. students and graduates.
This book would never have been written without the hard work and persistence of Peggy Malaspina of Malaspina Communications. Thanks, also, to Jane Lajoie, and author Derrick Niederman who spent months researching and checking facts for this book. Many thanks to Cathy Davis and Jack Cahill, the Fidelity Research Library, Robert Hill of the Fidelity Technical Department, several individuals from the Fidelity Equity Research Department and other fund managers, Bettina Doulton for her special help, my four secretaries who so graciously contributed long and late extra hours, Paula Sullivan, Evelyn Flynn, Natalie Trakas, and Karen Cuneo.
Special thanks to Bob Bender, senior editor, Simon & Schuster, and Doe Coover of the Doe Coover Agency for their assistance on this project from beginning to end.
Finally I must pay the greatest tribute to John Rothchild for making this book possible. His attitude, talent, flexibility, and extraordinary hard work have been invaluable to me over the last year.
Index
Abbott Labs, 246
Acme Steel, 134
acquisitions, 145, 153–57, 252, 284
company spinoffs and, 135
by groups, 279
of Kraft by Philip Morris, 218–19
see also companies, diversification of; companies, spinoffs of
Adams, Harkness, and Hill, 58
advance/decline numbers, 20
Advanced Micro Devices, 128
Advo Systems, 134
Aetna, 102
Affiliated Publications, 141
Agency Rent-A-Car, 59, 66, 131–32, 159
aggregate producers, 140
Alan Wood Steel, 207
Albertson’s, 220, 247
Alcoa, 111
Alexander and Baldwin, 256
Alhambra Mines, 158
Alico, 126, 129
Allegis, 160
Allied Chemical, 155
Allied Stores, 128
Amazon.com, 11
American Airlines, 119
American Ecology, 134
American Electric Power, 162
American General, 138
American Greetings, 266
American Home Products, 98, 110
American Natural Resources, 214
American President, 134
American Solar King, 158
American Stock Exchange, largest trade in, 259
American Surgery Centers, 98, 158
Ameritech, 135
Amgen, 21, 25, 26
AMR, 119
Angelica Corporation, 266
Anheuser-Busch, 117, 118, 223, 246
annual reports, 194–97, 203, 215, 217
AP Green, 134
Apple Computer, 15, 35, 36, 42, 98n, 111
Massachusetts ruling and, 159
turnaround of, 192–93, 230, 231
Applied Materials, 202
Argonaut, 134
Armstrong Rubber, 288
Asbetec Industries, 158
Ashland, 141
assets, 101, 125–27, 174–75, 194–95, 209–13, 214–15, 231, 241, 256–257
see also companies, asset-play
Atlantic Richfield, 141
ATT, 10, 47, 135–36, 280
Augusta National, 50
Automatic Data Processing, 131, 132, 142, 223, 281
financial history of, 96–97
as multibagger, 97
Avis, 59
Avon Products, 88, 254
financial history of, 164, 171
p/e of, 171, 172
stock chart of, 166
balance sheets, 194, 195, 201–2, 208, 217
see also annual reports
Baldwin Locomotive, 71
Baltimore Sun, 141
bank debt, 202–3
banks, reg
ulations of, 63–64
Barkley, Charles, 16
Barron’s, 17, 54, 143
Bass brothers, 279
Batra, Ravi, 23, 81
Bayer aspirin, 108
Beard Company, 212
Beard Oil, 212
Beatrice Foods, 155
Bell Atlantic, 135
Bell South, 135
Belzbergs, 257
Bent, Bruce, 69
Berkshire Hathaway, 89, 155, 157, 208
Best Buy Co., 25, 26
Bethlehem Steel, 18, 34, 71, 88, 109, 129
hidden assets of, 213
pension plan of, 217
Bhopal, India, disaster of, 124
Biegler, Walter, 177, 178, 179
Big Boy, 157
Bildner, Jim, 181
Bildner’s, 42, 180–82, 192
Bilzerian, Paul, 279
Bioresponse, 157, 158
biotech companies, 21
Bird, Larry, 65
Blarney stone, 27, 28
blue-chip stocks, 71–72
bankruptcy of, 122
difference among, 122
dividends of, 205
in 1970s, 253
risk of, 71–72, 80
see also companies
Bob Evans Farms, 131
Boeing, 200–201
Boesky, Ivan, 106
bond funds, creation of, 69
bonds, 68–73, 88, 112, 172, 203, 237, 280
attractiveness of, 68
callability of, 68
corporate, 68, 70, 203
default of, 71, 72
funds, creation of, 69
Ginnie Mae, 72–73
government, 70, 72–73
interest rates and, 68, 72–73, 172
junk, 280
McDonald’s, 71
municipal, 69, 72
risk of, 72–73
savings, U.S., 69
stocks vs., 70, 88, 112, 237
Treasury, U.S., 68
Bonwit Teller, 155
book value, of companies, 207–9, 210–
Borg Warner, 134
Boston Business Journal, 143
Boston College, 49–50
Boston Globe, 141
Boston Sand & Gravel, 141
Bowmar, 159
Bradford, J. C., 158
Brae Burn golf club, 48–49
Braino Biofeedback, 33
brand-name recognition, 37, 142
Bristol-Myers, 72, 75, 112, 115, 118, 122, 129, 207, 246
Bufferin aspirin and, 108
cash position of, 201