Magazine article Management Today

Eye for the Best Buy

Magazine article Management Today

Eye for the Best Buy

Article excerpt

Buying a stock when it is temporarily down may yield high returns, if you're Warren Buffett or Philip Fisher, that is. For the masses pickings may be more modest.

Lots of stocks which fall out of orbit don't stop until they hit the ground. But not all. Think what just one of these would have done for you. Next shares were 12p in January 1991 - now they trade at [pounds]5.88. Airtours shares were listed at 27p in October 1990 and have risen to [pounds]6.73, while Perpetual stock has increased from 38p in October 1990 to [pounds]22.55.

Buying a stock when it has been laid low is a technique much exercised by experts. In 1964, young Warren Buffett figured out that in marking down American Express after its involvement in 'the salad oil scandal', Wall Street had not taken due account of the strong profitability of its card and travellers cheque businesses. For $13 million, he bought 5% of the company. Within five years, he had cashed that up into $65 million. Even more spectacularly, as direct insurer GEICO teetered on the edge of collapse in 1976, Buffett started buying its shares at $2. They had come down from $60. Continuing to buy as it recovered, he eventually owned half of the company at a cost of $47 million. Last year he bought the other half. That cost more: $2.3 billion.

Philip Fisher, another legendary stock-picker, was also well aware of the benefits of buying a stock when it is down. Fisher, whose investment career started before the Wall Street crash and continues to this day, is an expert in evaluating technology stocks. He spotted Texas Instruments in the 1950s and is said to hold the original shares still. Dow, Du Pont and IBM were other successful picks.

Fisher's eye has been on growth stocks. But it was not lost on him that they can look deterringly expensive in their early days. The conventional growth investor's answer to this problem is to ignore the expense. So it looks pricey. It won't be in the end. Even if it is, one good selection, returning ten-, twenty- or thirty-fold returns, will pay for several duds. Long-term investment success, though, means considering the cost of every investment, no matter what its promise. To the great investor, expensive growth stocks don't offer the same value as cheap growth stocks.

Fisher's answer therefore was to buy the growth stocks he wanted as they tripped. In his admirable book, Common Stocks and Uncommon Profits, he describes the formula. 'As word gets out about a spectacular new product... eager buyers bid up the price of that company's shares.' But it's an expensive, protracted and difficult road, he points out, to turn the prospectively spectacular product into actually spectacular profits. …

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