Motley fool investing philosophy quotes

Imagine what could happen if people actually traded investment ideas among themselves online! Q: Your critique of Wall Street has been pretty harsh. Have you gotten the same from investment pros? Tom Gardner: In general, we've been treated fairly well, especially by the research community on Wall Street. We have a great relationship with analysts who use our sites regularly. We're most in conflict with the retail side, with Jack the broker who still thinks he knows more about stocks than the rest of us.

Our belief is that Jack has been trained as a salesperson, and Jack spends more of his time trying to sell you products, rather than researching the best investment opportunities for you. Q: The Wall Street establishment still sees you as a threat - they take you seriously. Tom Gardner: Yeah, do you know about our April Fool's prank last year? Well, for a long time we've said that 90 percent of mutual fund managers do worse than the stock market indices. But on April 1 at midnight, we wrote a letter of apology to our readers.

We said we were wrong; we had typed the wrong data into the spreadsheet. In fact, we said that 90 percent of mutual funds actually beat the market. We got 3, e-mails the next day. Five law firms threatened to file class-action suits against us. One broker said he knew we were wrong all along, and we should be stood up against a wall and shot as punishment. It took a few hours before he realized he'd been fooled.

Q: Your investment model and philosophy seems to be evolving. Before, you wouldn't have touched high-risk Internet stocks. Tom Gardner: Our basic ideas are the same. Investing over the long term. Thinking less about stock price valuation and more about where the business is going, whether the company will be around in five or 10 years, whether it will succeed in its market.

Q: You guys are starting to sound suspiciously like every other market expert. Tom Gardner: Much of Wall Street is based on predictions, on what's gonna happen in the market the next three months. Unless you have a psychic connection to Alan Greenspan, we still believe anyone who tries to call the market is an idiot.

So we're still contrary to the conventional wisdom out there. We also distinguish ourselves in how we communicate our investment message. We're not investment advisors or money managers. We enable businesses and individuals to do it themselves. Q: Have you lived down the big stock-hyping controversy over Iomega by now? David Gardner: The stock had an amazing run, which some people ascribe to the Motley Fool.

But Iomega was always only one investment in our portfolio. We never were hyping the stock. The Iomega story isn't finished. Iomega has come way down from its high in '96, but we continue to hold it today. If we were short-term thinkers, we might have sold out and made a lot of money.

But we've held onto Iomega for a percent gain. Q: The touting of stocks is still a danger, though? David Gardner: It will always be a danger. There's always a possibility that someone can come in and talk up a stock or shoot it down. Often, it's a coordinated attack among brokers or short sellers, who try to manipulate a short-term share price movement, usually of low-priced, microcap stocks.

But we don't think it's a serious problem. Anyone who comes in and touts something leaves a paper trail, their e-mail address. We're also partnering with securities regulators and the industry. I just joined a committee on the New York Stock Exchange board that represents the concerns of individual investors. We're advocates of how to improve things for the individual investor.

An investor's purpose, though, should be to know both the price and the value of a company's stock. The goal of the value investor is to purchase companies at a large discount to their intrinsic value - what the business would be worth if it were sold tomorrow. In a sense, all investors are "value" investors - they want to buy a stock that is worth more than what they paid.

Typically those who describe themselves as value investors are focused on the liquidation value of a company, or what it might be worth if all of its assets were sold tomorrow. However, value can be a very confusing label as the idea of intrinsic value is not specifically limited to the notion of liquidation value. Novices should understand that although most value investors believe in certain things, not all who use the word "value" mean the same thing.

The person viewed as providing the foundation for modern value investing is Benjamin Graham, whose book Security Analysis co-written with David Dodd is still widely used today. Other investors viewed as serious practitioners of the value approach include Sir John Templeton and Michael Price. These value investors tend to have very strict, absolute rules governing how they purchase a company's stock. These rules are usually based on relationships between the current market price of the company and certain business fundamentals.

Growth investing is the idea that you should buy stock in companies whose potential for growth in sales and earnings is excellent. Growth investors tend to focus more on the company's value as an ongoing concern. Many plan to hold these stocks for long periods of time, although this is not always the case. At a certain point, "growth" as a label is as dysfunctional as "value," given that very few people want to buy companies that are not growing.

The concept of growth investing crystallized in the s and the s with the work of T. Rowe Price, who founded the mutual fund company of the same name, and Phil Fisher, who wrote one of the most significant investment books ever written, Common Stocks and Uncommon Profits. Growth investors look at the underlying quality of the business and the rate at which it is growing in order to analyze whether to buy it.

Excited by new companies, new industries, and new markets, growth investors normally buy companies that they believe are capable of increasing sales, earnings, and other important business metrics by a minimum amount each year. Growth is often discussed in opposition to value, but sometimes the lines between the two approaches become quite fuzzy in practice.

Although today common stocks are widely purchased by people who expect the shares to increase in value, there are still many people who buy stocks primarily because of the stream of dividends they generate. Called income investors, these individuals often entirely forego companies whose shares have the possibility of capital appreciation for high-yielding dividend-paying companies in slow-growth industries.

These investors focus on companies that pay high dividends like utilities and real estate investment trusts REITs , although many times they may invest in companies undergoing significant business problems whose share prices have sunk so low that the dividend yield is consequently very high. The world according to GARP investors combines the value and growth approaches and adds a numerical slant. If the growth does not come, however, the GARP investor's perceived bargain can disappear very quickly.

Because GARP presents so many opportunities to focus just on numbers instead of looking at the business, many GARP approaches, like the nearly ubiquitous PEG ratio and Jim O'Shaughnessy's work in What Works on Wall Street are really hybrids of fundamental analysis and another type of analysis -- quantitative analysis.

Most investors today use a hybrid of value, growth, and GARP approaches. These investors are looking for high-quality businesses selling for "reasonable" prices. Although they do not have any shorthand rules for what kind of numerical relationships there should be between the share price and business fundamentals, they do share a similar philosophy of looking at the company's valuation and at the inherent quality of the company as measured both quantitatively by concepts like Return on Equity ROE and qualitatively by the competence of management.

Many of them describe themselves as value investors, although they concentrate much more on the value of the company as an ongoing concern rather than on liquidation value. Warren Buffett of Berkshire Hathaway is probably the most famous practitioner of this approach. He studied under Benjamin Graham at Columbia Business School but was eventually swayed by his partner, Charlie Munger, to also pay attention to Phil Fisher's message of growth and quality. Arguments Against Fundamental Analysis.

Those who do not use fundamental analysis have two major arguments against it. The first is that they believe that this type of investing is based on exactly the kind of information that all major participants in publicly traded markets already know, so therefore it can provide no real advantage. If you cannot get a leg up by doing all of this fundamental work understanding the business, why bother?

The second is that much of the fundamental information is "fuzzy" or "squishy," meaning that it is often up to the person looking at it to interpret its significance. Although gifted individuals can succeed, this group reasons, the average person would be better served by not paying attention to this kind of information. Quantitative Analysis - Buying the Numbers Pure quantitative analysts look only at numbers with almost no regard for the underlying business.

The more you find yourself talking about numbers, the more likely you are to be using a purely quantitative approach. Although even fundamental analysis requires some numerical inputs, the primary concern is always the underlying business, focusing on things like management's expertise, the competitive environment, the market potential for new products, and the like. Quantitative analysts view these things as subjective judgments, and instead focus on the incontrovertible objective data that can be analyzed.

One of the principal minds behind fundamental analysis, Benjamin Graham, was also one of the original proponents of this trend. While running the Graham-Newman partnership, Graham exhorted his analysts to never talk to management when analyzing a company and focus completely on the numbers, as management could always lead one astray. In recent years as computers have been used to do a lot of number crunching, many "quants," as they like to call themselves, have gone completely native and will only buy and sell companies on a purely quantitative basis, without regard for the actual business or the current valuation - a radical departure from fundamental analysis.

Many investors believe that if they just find the right kinds of numbers, they can always find winning investments. Shaw is widely viewed as the current King of the Quants, using sophisticated mathematical algorithms to find minute price discrepancies in the markets. Company Size. Some investors purposefully narrow their range of investments to only companies of a certain size, measured either by market capitalization or by revenues. The most common way to do this is to break up companies by market capitalization and call them micro-caps, small-caps, mid-caps, and large-caps, with "cap" being short for "capitalization.

Others believe that because a company's market capitalization is as much a factor of the market's excitement about the company as it is the size, revenues are a much better way to break up the company universe. Some statisticians believe that the perceived outperformance of these smaller companies may have more to do with "survivor" bias than actual superiority, as many of the databases used to do this performance testing routinely expunged bankrupt companies until pretty recently.

Since smaller companies have higher rates of bankruptcy, excluding this factor helps "juice" up their historical returns as a result. However, this factor is still being debated. Screen-Based Investing. Many quantitative analysts use "screens" to select their investments, meaning that they use a number of quantitative criteria and examine only the companies that meet these criteria.

As the use of computers has become widespread, this approach has increased in popularity because it is easy to do. Screens can look at any number of factors about a company's business or its stock over many time periods. While some investors use screens to generate ideas and then apply fundamental analysis to assess those specific ideas, others view screens as "mechanical models" and buy and sell purely based on what comes up on the screen.

These investors claim that using the screen removes emotions from the investing process. Those who do not use screens would counter that using a screen mechanically also removes most of the intelligence from the process. One of the proponents of using screens as a starting point is Eric Ryback, and one of the most famous advocates of screens as a mechanical system is James O'Shaughnessy.

For more information on screening, check the Foolish Workshop in the Motley Fool. Momentum investors look for companies that are not just doing well, but that are flying high enough to get nose bleeds. Momentum companies often routinely beat analyst estimates for earnings per share or revenues or have high quarterly and annual earnings and sales growth relative to all other companies, particularly when the rate of this growth is increasing every quarter.

This kind of growth is viewed as a sign that things are really, really good for the company.

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