There are three ways to generate extraordinary returns from stocks. You don’t need a degree in finance, or tons of experience to practice these methods. Like doing anything well, you do need diligence and discipline. Beyond that, time is the only necessary ingredient.
- Follow and learn about a company that no one else follows, to gain an information advantage. Thousands of listed stocks are available, and 99% of these are vying for your attention. Some, like General Electric, attract hundreds of analysts. It’s hard to know anything about GE that other people don’t know. But among smaller companies, information is scarcer – buried in SEC filings, or locked up in the CFO’s mind, even in footnotes to annual reports. Reading about a company you never heard of might bring a diamond to light.
- Look at the information everyone else ‘knows’ in a different way. Take IBM. Everyone knows it has a legacy business that is sliding; that it is in a turnaround; that the turnaround will take a long time; that it may not work. The market has been obsessed with these negatives. But also in the company’s reports are indications that its cloud computing business is growing fast. We’ve recently seen reports of the company’s efforts to gain contracts overseas with telecom companies; it may be just a matter of time before it is able to sign a major-ish contract with a US telco. Focusing on the positive, instead of the negative, might lead to a different conclusion about IBM’s stock.
- Behave differently, related to #2 above. A great example of behaving differently was buying corporate bonds in 2008 and 2009 instead of selling them. Back then, Nordstrom’s bonds yielded close to 11%. IBM bonds were near double digits. The carnage was spectacular. Everyone and his brother was selling. Behaving differently – buying instead of selling – made a lot of money. In nearly every market, there is an opportunity to behave differently. Right now, energy stocks present that opportunity.