Contents Parti The Search for a Successful Investment Strategy Chapter 1 Buy to Keep or Buy to Sell? 3 The Concept of Growth The Cyclical Approach Evaluate the Political Climate Is Inst~utional Investment Strategy Changing? Stock-Price Cycles Reading the Long-Term Charts Being Wrong Can Be Painful The Disadvantages of the Buy-Sell-Buy Approach 4 5 7 9 10 11 15 16 Part II When Should You Buy Stocks? Chapter 2 Business Cycles 21 Chapter 3 Washington Policies 25 Economic Control Through Fiscal and Monetary Policies Follow the Political Cycle Inflationary Policies Economic Planning vs. Political Reality Federal Monetary Policy and Stock Prices Do Not Be Misled by Short-Term Monetary Trends 26 27 28 30 32 33 Chapter 4 The Political Cycles 35 The Biggest Boom and Bust, 1927-32 39 The Roosevelt Recovery and Recession, 1932-38 World War II and Immediate Postwar Cycle 1: 1949-53 Cycle 2: 1953-57 CycleS: 1957.00 Cycle 4: 1960-62 Cycle 5: 1962-66 Cycle 6: 1966-70 Cycle 7: 1970-74 CycleS: 1974Summary of the Stock-Price Cycslei 54 55 56 Chapter 5 Look for Low Risk 59 Buy During the Selling Climax Trade With the Market's Primary Trend 59 40 44 44 45 46 48 49 51 61 Part III lMlich Stocks Should You Buy? Chapter 6 Safety First 67 The Biggest Also Decline Price Trends of Income Stocks Most Stocks Are Price-Cyclical Buy for Large Capital Gains A Superb Company Does Not Necessarily Have a Superb Stock 67 68 71 72 72 Chapter 7 Superperformance Stocks: The Record 75 Features of Superperformance Price Action Superperformance and Company Earnings Superperformance and Company Size Superperformance and Subsequent Stock-Price Action Characteristics of Superperformance Stocks 77 77 79 80 81 Chapters Look for Price Volatility 83 Stock Prices Reflect the Law of Supply and Demand A Tale About Volatility and Timing Price Distortions by Stock Exchange Specialists Look for Rebounds Which Stocks Rebound? Emotional Selling and Trend Following Leverage The Dangers in Leverage Leverage in Low-Priced Stocks Leverage in Warrants 84 87 89 91 92 94 96 99 100 101 Chapter 9 Look for New Earning Power 105 Change and Stock Prices Change Resulting From Discoveries of Natural Resources Change in Government Policies Technological Change Growth-Stage Companies Mature Companies Use Caution When Selecting Growth Stocks Good Management Is Vital Turnaround Situations A Comparison of Two Growth Stocks Anticipate Growth Earnings Explosions Be Skeptical of Reported Earnings Reported Earnings Depend on Accounting Procedures Higher Earnings Are Usually Anticipated Earning Trends Affect Superperformance Price Action The Role Future Earnings Play in Stock Prices Evaluate Reported Earnings 105 107 107 109 110 112 114 115 115 116 119 122 124 124 125 125 126 127 Chapter 10 Look for Expandable PricelEamings Ratios 129 Psychology and Stock Prices Establishing Stock Values Problems in Establishing Values Market Price vs. Inherent Value Market Price VS. Dividends Estimating Price/Earnings Ratios The Influence of Price/Earnings Ratios The Ideal Situation 131 132 134 134 138 139 141 147 Chapter 11 Look for Good Sponsorship 149 An Example of Sponsorship Sponsorship by Institutional Investors Trend Following Spotting Trends The Sequence of Trend Following News, Publicity, and Stock Prices Buy Stocks You Understand 151 152 161 162 163 164 167 Part IV When Should You Sell? Chapter 12 The Timing Rhythm 171 The National Economy and Stock Market Declines Presidential Elections and the Stock Market Watch Out for Surprises To Hold or to Sell? Be Alert to Federal Policy Switches A Possible Exception The Pricing Rhythm A Big Problem for Investors: The Stock Exchange Specialists How Specialists Operate 173 174 176 178 179 180 182 183 184 Do Call Options Depress Stock Prices? Remember the Political Cycle Declines in Individual Stocks vs. Declines in the Stock Market Watch for the Warning Signals Chapter 13 Selling Short Timing a Short Sale The Ideal Time to Sell Short Patterns of Boom and Bust in Real Estate Profitable Short-Sale Opportunities Have Been Numerous Select Short Sales Systematically Short Selling by Professionals Covering Short Sales 185 185 187 188 191 192 193 194 196 197 200 203 PartV The Strategy for Success Chapter 14 Sources of Information and Ideas 207 Publications to Review Regularly Learn to Recognize the Cycles Look for Potential Price Movement Individual Judgment Is Crucial for Success 207 211 214 214 Chapter 15 Points to Remember 217 When to Buy Stocks What Stocks to Buy When to Sell Stocks 218 219 220 Appendix A: Superperformance Stocks, 1962-74 223 Appendix B: Superperformance Stocks, October 1974-0ctober 1976 137 Charts 1. Presidential Elections and Stock Prices 2. Ford Motor 3. Metromedia 4. Federal Budget Deficits and Surpluses 5. Durations of Stock Price Cycles 6. United Financial Corporation of California 7. Dow Jones Utility Average 8. American Telephone and Telegraph 12 13 14 29 37 63 69 70 9.S~line m 10. General Motors 11. Jack Eckerd Corp. 12. Natomas 13. Trans World Airlines 14. Holiday Inns 15. Gulf & Western Industries 16. Vetco Off shore Industries 17. Bausch& Lomb 18. The S-CulVe in the Dow Jones Indusb"ial Average 19. Chrysler 20. Polaroid 21. Kresge 22. Syntex 23. McDonald's 24. International Flavors and Fragrances 25. International Business Machines 26. Du Pont E. I. de Nemours 85 86 95 98 102 103 108 111 113 117 120 121 123 142 143 145 146 27. Athlone 28. U.S. Steel 29. Burroughs 30. Xerox 31. Winnebago Industries 32. Outboard Marine 33. Avon Products 34. MGIC Investment 35. Grolier 36. Rite Aid 37. Eastern Airlines 38. Thiokol 153 158 159 160 172 177 181 195 198 199 201 208 Tables Table 1. The Stock Price Cycles 37 Table 2. Presidential Elections Compared With Beir Market Lows and Bull Market Highs 56 Table 3. The Disparity Between Book Value and Market Price 135 Table 4. Book Value Lower Than Market Price 136 Table 5. Book Value Higher Than Market Price 137 Table 6. Accumulation of Xerox by Institutions 157