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August 29, 2005

The Cara investment philosophy, Mon., August 29, 2005, 7:34 PM

This evening I happened to be reading an article by Derek DeCloet in the new Report On Business Magazine (September), p.82, entitled Sticking to basics".

It's about the investment philosophy of a Toronto-based money manager by the name of Tony Arrell. I don't think I've ever met Tony, but I know a lot about him.

It seems that about 30 years ago, Warren Buffett sent Arrell, who was a Bay Street investment analyst at the time, a letter complimenting his report on Thomson Corp. In fact Arrell was impressed by Buffett.

As the article says, Arrell, 60, is making a fine living by emulating the Oracle of Omaha's style, which he culls to 14 words: Good companies bought when they're out of favor and held for the long run".

Then it hit me, I may have taken in these words over the years by way of osmosis, but I didn't know " or had never thought about " how close my own philosophy is to Buffett's and Arrell's.

As you know, I frequently talk of the Cara Best 100 Companies list, for which I buy additional positions every couple years, and for which I supplement the core portfolio with put and call option premium income. Not very exciting, but it works.

Look at ten of the Dow 30 components that are in my Best 100 companies list: C, DIS, GE, HD, JNJ, MMM, PG, UTX, WMT, XOM. These are all well managed companies based on comparative financial results (ROE, ROCI, etc).

In every case, every three of four years there will be a great buying opportunity, which happens to coincide with a good time to write put options, as well as there is later a good time to write covered call options, or possibly lighten positions.

You'll see that whenever the RSI technical indicator gets to be lower than 30 (and starting to rise) for both Monthly and Weekly data, that's a good time to buy. And when RSI has been above 70 but starting to all, that's the time to protect your portfolio.

WMT is in that accumulation zone right now, as I wrote in my last Week in Review.

Sometimes, good companies like PFE and MRK run into serious problems, and have to be dropped from the list. At other times, some of the stocks in my portfolio have to be sold because the price and the promotional hype gets too much for me to stand. The two usually go hand in hand.

I believe that, over the years, you cannot lose with such a simple system. Just remember: Buy good companies when they're out of favor and hold them for the long run".

Posted by Posted by Bill Cara on August 29, 2005 07:35:10 PM | Category: Cara Global 100 Best Companies

Discourse

Posted by: sergio [TypeKey Profile Page] at August 29, 2005 9:49 PM [link]

Posted by: sergio [TypeKey Profile Page] at August 29, 2005 10:06 PM [link]

Bill-
For those that didn't look closely, here's Bill's buying opportunities for all these fine companies. I may be a bit off because of the condensed nature of the charts:
C Fall 1998
PG Spring 2000
JNJ Spring 2000
WMT Summer 1998
DIS Fall 2001, Summer 2002
HD Fall 1998
GE Summer 1998, all 2d half 2002
MMM Fall 1998
UTX Fall 1998, Summer 2002
XOM Summer 2002

Looks like in Fall of 1998 and Summer of 2002 Bill was a very busy guy.

Posted by: Mark at August 30, 2005 5:26 AM [link]

Mark,

Your point is precisely the important one I have been trying to make. While there are a few more buying opportunities, as well as opportunities to buy at different times, from the other 90 stocks in the Cara Global Best 100 Companies list (i.e., not Dow 30 components), the Extra-Year (i.e., long-term oriented) Trader does not have to be busy in order to build wealth quickly.

For traders who do not have strategies in place to buy and sell once every few years, two things happen: (1) when the time is appropriate to buy/sell, they suffer 'in extremis' and nothing gets done, and (2) most of the time, they permit the Gnomes, Wall Street, penny stock promoters and the mass media to play their emotions, causing them to do trades when they should not.

Once the key strategy is understood, and effectively implemented, the Extra-Year Trader can (if he/she so desires) make an effort to learn how to be an Intra-Year Trader. In that case, they would be "busy" about once every year.

Again, depending on the interest and resources (time and money), an Intra-Year Trader may wish to learn how to be an Intra-Month Trader, and so on.

But, without a plan, most traders fail. When I formerly practised trading in a large money management firm, I knew which traders had a plan, and the discipline to follow it, and which ones did not. It's not just Mom & Pop that fails at trading -- as you can see from the results of many (most??) of the mutual funds being marketed to you.

What I try to do in this website/blog is provide leadership to people who, for one reason or another, have not been successful traders, or at least not as successful as they'd like.

Have a good day,

Cordially, /Bill

Posted by: Bill Cara at August 30, 2005 7:36 AM [link]

Bill,

Once a stock is in your accumulation zone, what would make you sell the stock at a loss? If you accumulate WMT today and the entire market takes a nose dive, would you sell or accumulate more? Do you use mental or physical stops on your trades? I have been struggling with this issue of protecting my capital/profits while still keeping exposure to the market.

Thanks for everything you do!

Posted by: Miggs [TypeKey Profile Page] at August 30, 2005 10:11 AM [link]