This Is How You Should Look at Your Stocks

From Chris Mayer, chief investment analyst, Bonner & Partners: I recently gave a talk at a conference in Chicago in which I gave a bit of advice: Don’t measure the performance of your stocks on a quarterly, or even annual basis. It can be very costly.

Today, I want to show you what you should be looking at with a great example from my rich archive of 100-baggers history.

As you know, I’ve done my own study of all the stocks that returned $100 for every $1 invested from 1962-2014. This was an update of the study in Thomas Phelps’ 1972 book—100 to 1 in the Stock Market (click here to find out how you can get a free copy of this book).

Based on these studies, I’ve come up with a list of things to look for in a stock that I call the “Four Corners.” Quickly, here they are:

• The ability to earn a high return on capital. One way to think about this is: If you invest $100 in a business and it earns a $20 profit, that’s a 20% return on equity (ROE).

• The ability to reinvest profits and earn that high return again and again. Can the business take that profit, reinvest it and earn that high return again? That’s where you really enjoy the power of compounding.

• The ability to grow into something much larger over time. Self-explanatory, but we don’t want to bother with firms that are already huge (Apple, Walmart) or that have lousy growth prospects (utilities).

• The stock price represents a good value. It’s hard to earn great returns if you pay crazy prices.

Now for that example…

One of the reasons you shouldn’t keep such a close tab of the performance of your stocks is that it takes your eye off what matters. What matters is what’s happening with the business itself.

The stock price bounces all over the place. But as long the business keeps performing, you should hold the stock—and not worry about the price action.

One of my favorite tables from Thomas Phelps’ study covers the story of Pfizer. (And this is not an isolated example. There are many, many such similar examples from both Phelps’ study and my own.)

In 1942, you could’ve bought Pfizer at any time and by 1970 you would’ve been up 141 times… that’s enough to turn $10,000 into $1.4 million.

But…

You had to hold on. Pfizer trailed the market from August of 1946 to May of 1949. That’s almost three years of holding a “dog.” It also trailed again form August of 1951 to September 1956. That’s almost five years of the stock not “acting well.”

And yet, let’s look at the business.

I’ll just extract one column of data for you here from Phelps’ book. It shows you the annual ROE for Pfizer for two decades. (ROE is readily available on most financial sites. If you have to do it by hand, it’s not hard, as you just need two other readily available figures: earnings and book value. ROE is simply earnings divided by book value.)

Take a look:

The business was a solid performer every year. And yet the stock bounced all over the place. The market went up and down. There were wars, inflations, elections, Fed moves, economic twists and turns…

And yet, as Phelps then asks:

Would a businessman seeing only those figures have been jumping in and out of the stock? I doubt it… The secret of success in your quest for hundred one-stocks is to focus on earnings power rather than prices. Can you do it?

This doesn’t mean you have to hold everything for three decades. But it does mean you will should focus on what’s going on in the business, not the stock price.

So I’ll ask you Phelps’ question again: Can you do it?

Reeves’ Note: Chris is holding a special invitation-only presentation for his new service, Focus. He’s spent three years and $138,545 developing a blueprint for it. And he’s so convinced that it’s the best way to make 10-to-1 gains in the markets today…. he’s putting more than $1 million on the line to prove it to you.

But time is running out… This invitation expires in less than 36 hours. Click here to watch this 100% free presentation… before it closes for good.