The Tycoon Report

How to Find An Investing Mentor

Wednesday, October 10, 2007 | Dylan Jovine

ANSWERS TO SOME MORE OF YOUR QUESTIONS ...

Audrey Asks:  How do you know when management of a company is good if they are not Warren Buffet or someone well known?  What is it you look for to tell you?

Excellent question, Audrey.

There is only one proven way I know of to truly discover if the management of a particular company is good:  analyzing the financials.

You see, Audrey, the financials of every company tell a story.  An objective story.  An honest story.  The kind of story that isn’t clouded by smooth- talking CEOs.

That’s why it's imperative that you ignore what Wall Street analysts say, what company representatives say, and what friends and neighbors say when it comes to investing in stocks.  Focus on the financials first, and everything else will fall into place.

Let me explain what I mean with a simple but revealing example.

Let’s say there are two companies who manufacture widgets.  Since widgets are in high demand this year, both companies are selling them like hotcakes.  As a result, both companies have announced record earnings.

Now if you just listened to the conference calls and heard the good news from both companies, you may think both are great businesses and potentially great investments.

But take a step back and look at the earnings for each company for the preceding five years (I go back ten) before you come to any conclusion.

Because as you can see below, one good year does not mean management of the company is good.

                    Company A             Company B
            2003        .18                        (.06)
            2004        .24                        .12
            2005        .38                        (.29)
            2006        .47                        .23
            2007        .58                        .65   


As you can see, Company B has had a rocky go of it during the past five years.  Some years it makes money, some years it doesn’t.

In contrast, Company A has produced consistent, steady and increasing earnings growth.

Since the financials are a by-product of management’s ability to manage, it’s clear to me that the executives from Company A are better managers than the executives from Company B.

Indeed, I would argue that the people managing Company B simply don’t understand how to manage the business they have or the industry they compete in.

This is just but one small example of how to judge whether management is good or not, but it’s a good starting point.

Listen to no one at a company except the numbers, and your investing success is sure to follow!

Eduardo Asks: Who was your mentor and what kinds of people should I look for to be my mentor?

Thanks for your question, Eduardo.  Having a mentor is indeed a great thing.  Not only does it speed your development as an investor (and in all walks of life), but it's great to have somebody to talk with when you need a sounding board.

Unfortunately for me, the one great mentor I had (the person who brought me to Wall Street) wasn’t a mentor long enough for me to really get the most possible out of the relationship.  We worked together for about a year.

The good news is that some of the greatest investors in the world have shared their experiences with the public, and you can use that in lieu of a mentor.  For example, I remember being stunned when I first came upon Warren Buffet’s Shareholder Letters.  I actually felt that he was talking directly to me, sharing the secrets to the billion-dollar kingdom.

So the simple answer is to search out the smartest people you can find and study everything they’ve said, written or done.  Learn it, live it, and over time you will master it.

For example, after reading everything Buffett ever wrote, I wanted to learn where he learned everything from so I headed to Benjamin Graham and Phillip Fisher and read everything they ever wrote.  Then I began researching who their influences were, and before I knew it, I found myself studying investors from the 1870’s!

But the best “mentor” you will ever have in the stock market is EXPERIENCE.

Before every trade I make, I write out a full “research paper” that is sometimes 50 pages long.  As I hold onto the stock and events change, I find myself constantly readjusting my assumptions.

Whenever I sell I stock – win or lose – I carefully study my moves.  What’s important to me is to improve my game as an investor, not to flatter my ego, so make sure you are brutally honest with yourself.  You’ll NEVER be able to become a great investor until you can admit when you messed up.  That’s what begins the learning process.

Last but not least, read The Tycoon Report each day.  Of course, that advice is self-promoting.  But we do have a stable of writers with some great experience, and that alone is worth its weight in gold!

Dmpcards Asks: Can a person really expect to beat 10%-13% annual returns with an effective game plan?  What is reasonably attainable over a 10-15 year period of time?

Thanks for the question.

Of course, a person can really beat 10% - 13% annual returns with an effective game plan.

(In fact, I can tell by that question that you aren’t a member of any of our services where we do that quite consistently.  Try signing up for a free 30-day trial to Fallen Angel Stocks and see for yourself.)

Here’s a hint on how it's possible, though (using my investment style):

Over the long-term, returns on the S&P 500 tend to approximate returns-on-capital for the average American company.

That’s why the S&P 500 returns roughly 12% each year - the average company in America gets roughly a 12% return-on-invested capital.

So here’s the hint:  start by looking for companies that have returns-on-capital in excess of 12% (my minimum is 20%), and you’ll already be fishing in the right pond.




Dylan Jovine
Contributing Editor
The Tycoon Report