Model Portfolio timbo56:SSOF1

The stock market is a part of the larger world, and as such should be analyzed in the context of the world as a whole. Accordingly, I begin with a world view that is constantly updated by way of voracious reading of the New York Times, The Economist, The Wilson Quarterly, The New Yorker, The Wall Street Journal (online), The People's Daily English language website and a stream of books. Based on this world view, I form opinions about which stock market sectors will perform well in the immediate future.

Then I look for stocks in this sector that have a good chance of outperforming the sector as a whole. One thing I look for are stocks that are a particularly good fit for my worldview. For example, in March of 2008, when the financial sector had declined so far that it looked as though some bargains could be available, I looked for small regional banks that make agricultural loans, because U.S. agriculture was booming and I felt it was likely to continue to flourish. When considering which steel stock to purchase, I considered the fact that U.S. Steel owns its own iron ore deposits, and so would be less affected by the rise in iron ore prices I had predicted.

Other than that, I tend to look in the "dog house," meaning stocks that are poorly rated by the analysts. Simply being poorly rated would not inspire me to purchase a stock. But if the rating seems excessively negative, based on my assessment of the fundamentals of the company, then I appreciate the fact that the stock could be benefited by some sensible upgrades in the future. After all, "buy cheap" is one half of the famous maxim, "buy cheap, sell dear." I also read the annual report to see if everything fits together and I try to get a sense of the style and the stability of the management team.

I am particularly keen to find anomalies in stock valuation. For example, I find that valuations across a sector will sometimes presume rapid growth for one company, without appearing to recognize that this would have to come at the expense of a competitor or two. In the 1990s I felt that either Wal-Mart was overvalued or Kmart was overvalued, because Wal Mart could not have the growth that clearly had been factored into its stock price, except for at the expense of Kmart. This was especially true considering that these two "marts" were in as directly competitive a stand off as any two companies would ever be likely to be. In 2002 Kmart filed for bankruptcy.

One advantage that I have as a patent attorney is that I can review a company's patent portfolio and make an assessment of how it will affect that company's future profitability. Unlike many analysts who are not very familiar with patents, I know that it is impossible to tell a patent's value simply by its title. The difference of a single word in the portion of a patent known as "the claims" can make the difference between having great value, or no value at all. I can also get a sense for the overall strategy the company has toward patents, and can make an assessment of the efficacy of that strategy.

Posted by Marketocracy at 05:02 PM | Permalink | Comments (0)