Primer On Stock Buying

Dear Nathan,

You’d like me to help you pick a stock, and I will. But first, let me tell you what I think buying stock is about. A share of stock in a public company is like a boat. It’s a vessel we put our money in so that it will ride with the great current of the stock market.

Our goal is to benefit from owning that stock by receiving dividend income during our holding period,  and to ultimately sell for more than we paid for it. The starting place for our research is not the stock. It is  is the condition of the stock market, because if the broad market is not going up, even the best companies will have difficulty going up. And when the market gets into a big falling period-known by investors as a bear market-well, we can just about be guaranteed to lose money.

So, what is the condition of the market today? Very expensive. It has been going up a long time and has been pushed up way beyond the value in relation to the ability of the underlying economy to produce the earnings necessary to sustain your stock. Take a look:

Stocks today

What’s more, the economy is starting to go down, so it won’t be long before the market comes down, too. That’s the way I see it, anyway, and, for various reasons, the orange line at the right of the chart is the trajectory I’m projecting for the market. In sum, let’s look at a stock to buy, but let’s plan on waiting until the market comes down and offers us a good chance to make money.

I believe you said you’d like to buy Apple. It’s a heck of a company, but it has a flaw: it is the most popular stock in the world today. More people and more institutions own Apple than any other stock. The problem, Nathan, is who’s left to buy it? You might just be the last guy aboard.

The time to have bought Apple was before they developed the iPod, the iPad, and the iPhone. The stock has gone up 10,000 percent since it came out with these wonderful things. Can they do this again? I don’t know, but technology companies usually have one exciting period, and then a new technology replaces them while they are struggling to hold on to what they’ve got:

Apple

Apple today

As you can see, Apple’s not cheap. I don’t know if the bloom is off the rose with it, but I have lost more money buying popular stocks than I like to think about.

I would rather have you look at a more basic industry, one with a good reason to have growing business in their products for many years to come. I’m thinking of Gardner Denver, manufacturer of industrial products with businesses the world over. To me, the interesting thing about GDI is that two thirds of the world is emerging from the backwaters to a modern economy.

Ironically, the fact that so many of these people already have cel phones, computers and social media devices (very easy to install internet and satellite communications in Tibet, or Gabon, or Nigeria, etc.) makes them eager to modernize, and to do that they need infrastructure and industrial development. Gardner Denver and other companies in the field would be worth looking at. They are not cheap today, of course, but, when the market comes down, I expect them to  be good long term investments–maybe pay for your college. So, let’s do a little research in those areas. I’ll be in touch as we go along. No rush, though, you don’t want to be loading your boat at a time like this:

After 165 years, a new company to operate Niagara Falls boat tours

My feeling is that anyone buying stock today is as likely to make any money in the next few years as the folks in this boat are apt to make it up Niagara Falls:

Talk to you soon,

Rod

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