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Non-Tech : Claire's Stores (CLE) NYSE
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To: Brad Bolen who wrote (478)12/8/1997 10:54:00 AM
From: Chuzzlewit  Read Replies (1) of 619
 
Brad, I invest and I do not throw darts and I do significantly outperform the averages and I don't use TA. This is what I do: I seek out growth stocks in growth industries whose prices are not outrageously high compared to their expected growth rates. I buy those companies and hold them so long as the fundamental growth story remains intact. That's why I'm on SI -- to keep abreast of the news, so that if the fundamentals on CLE turn negative I can get out timely. I subscribe to the weak form of the efficient market hypothesis (a position for which a lot of statistical evidence exists) so it's important for me to be able to keep up on the news.

That's it! The entire system! The whole enchillada! And, on an annualized basis my portfolio is up over 50% this year. I also just recomputed my annualized returns from January 1, 1987 (note that this is before the crash!) through December 5, 1997, and that came in at about 31% per annum. I've been investing since the mid 60's, and had mixed results until I adopted this method around 1979.

My investment approach is easily mimicked by anyone. There is nothing inherently difficult about it. And it makes extensive use of modern portfolio theory as its underpinning. It also has two tremendous advantages over timing: it avoids excessive transaction costs and it minimizes capital gains taxes. I once did a study on the impact of these factors and found that a 40% annual rate of return could be reduced to under 24% in an actively traded account after taxes and transaction costs.

Financial analysis of a company is very important (but not predictive). It essentially has two uses:

1. You can eliminate companies that are financially weak, and thus have a greater potential for bankruptcy than other companies;

2. You can gain an understanding of the dynamics driving the profitability of companies; for example, while I made a great deal of money in IBM this year, after closely scrutinizing its financials I eliminated it from my portfolio because it was generating increasing profits through cost containment rather than increases in sales.

Regards,

Paul

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