Just follow the steps in Chapter 3 of this book Determine if its a wonderful

Just follow the steps in chapter 3 of this book

This preview shows page 243 - 246 out of 263 pages.

Just follow the steps in Chapter 3 of this book. Determine if it’s a wonderful business on sale, at retail, or overpriced. I just did that to Nokia, the #1 holding for Fidelity Magellan at the time. Without digging
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into the numbers too carefully, if the analysts are right about the 11 percent growth rate and we start with today’s earnings, a fast and dirty Rule #1 analysis says it might be worth $11 billion or so. It’s selling for $50 billion. Even if the starting-point earnings are too low because of the recession, we’re still way off if we buy this thing for $50 billion, wouldn’t you say? We’d like it, maybe, at $6 billion. But the fund manager owns it at $50B. NOT a good sign. He probably can’t get out without triggering a huge drop in the stock price. Well, when he does finally dump it and the price crashes, maybe you can be there to pick it up on sale. But only if you join the revolution. Keep doing what you’re doing and you are going to keep getting mutual fund results. Which, let’s see, have been about a zero return on investment for, oh, the past ten years or so. Step Five: Follow suit with the top ten stocks. Chances are good that most of them are overvalued. I did this a couple of years ago on the one hundred stocks in my friend’s money manager’s portfolio. It took about an hour. Ninety-six were either at retail or overpriced. She got out and then the market crashed, and that portfolio went down 50 percent. Overpriced stocks in a mutual fund are a major clue as to why most fund managers don’t give you a good return on your investment. Nokia might be a good business, but it isn’t a good investment unless the price is right. Step Six: Make a decision. If most of the stocks are overpriced, then get out of this fund now. If some of the stocks are overpriced, but most are at their retail value, then get out of this fund now. There is no need to pay fees when you can do the same job with a no-fee ETF (Exchange Traded Fund). But if most of the stocks are underpriced, you may have found the rare gem fund manager who can actually tell an overpriced business from one that’s on sale.
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Step Seven: Do more work. Now dig in and look into the businesses in the well-managed funds. Are the three Ms good? If so, then this is da Man. He must be a Rule One Revolutionary. Let us all know at PaybackTimeBook.com . And, if we agree with you, who knows, maybe we’ll all put some money in there! (And we’ll be sure to send him a Rule One Revolution T-shirt!) Step Eight: Sell the funds that are bad or neutral. You sell the neutrals, too, because there is no sense owning a full retail fund and paying a bunch of fees for it. Don’t get nailed by penalties. First check with an adviser who has your real interests at heart. Step Nine: Buy inexpensive mutual fund alternatives. If all you want to do is to replace your funds with a cheap alternative to mutual funds that will perform at the market rate of return, buy Spiders, spelled SPDR (ticker symbol SPY), Diamonds (ticker symbol DIA), and the Qs (ticker symbol QQQ) with the money you pulled out of the funds.
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  • Spring '20
  • Warren Buffett

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