Once again, I’d like to thank everyone who has emailed, messaged, or tweeted at me since my book Dead Companies Walking came out. I’ve tried to reply directly to as many folks as possible but running my fund has taken up most of my time and attention, so I thought I would post my responses to a few interesting questions, comments, and criticisms I’ve received in recent weeks here. Unfortunately, I couldn’t fit everything into one post, so I had to break my responses up into two parts. I’ll post the second half on Wednesday.
First up, an email from a reader named Greg:
“I am a private investor who has been investing on the long side for most of my career. I’ve almost finished your excellent book, ‘Dead Companies Walking,’ and it has inspired me to start trading the short side as well. My immediate question is: Where do you find all the good ideas? It’s fairly easy to find long ideas in places like Value Investor’s Club (of which I am a member), or the published portfolio lists of hedge fund managers. But where do you get quality short ideas? Thanks for your help with this!”
Before I get to this week’s post, three quick notes:
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Thanks to everyone who has bought the book recently and commented on it online or by writing in to me directly. I’ve been extremely busy lately running my fund, so it’s been difficult for me to respond to email messages and/or comments on my articles, but I am hoping to write a post soon addressing some of the questions I have received.
Okay, on to this week’s post …
Study after study has shown that most individual investors underperform the indexes. Why? They neglect a few simple rules. The first, as I have repeatedly warned, is never to buy a stock below $5. These junkyard stocks are usually over, not undervalued, and most are heading to oblivion. The second rule is to avoid excessively valued stocks in “cult” industries. Today, social media stocks fit this description, as do Tesla and many companies in the renewable energy space.
So, where should an investor place his or her chips? One place to look is companies paying meaningful (but not excessive) dividends. Historically, those stocks have outperformed the indexes. A second winning strategy is to identify companies that generate big cash flows but trade at low multiples of earnings. I recently traveled to Reno, Nevada to meet with the managements of two regional gaming companies that fall into that category: Eldorado Resorts (ERI) and Monarch Casino (MCRI). I purchased shares in both companies shortly after those meetings.