Common stocks and uncommon profits key takeaways

What to buy
Does the company have products/ services with sufficient market potential to make possible a
sizable increase in sales for several years.
-As the industry grows, would it be relatively simple for newcomers to start up and displace the leading units (new sales growth potential has low barriers to entry)

Does the company have a worthwhile profit margin.
-the only reason for considering a long range investment in a company with an abnormally low profit margin is that there might be a strong indication that a fundamental change is taking place within the company
-One deviation is companies deliberately elect to speed up growth by spending profit they would otherwise earned.

What is the company doing to maintain or improve profit margins.
-Success of a stock purchase does not depend on what is generally known about a company at the time the purchase is made. It is the profit margin of the future that it’s important to the investor.

Does the company have outstanding  labor relations.

Does the company have outstanding management.

Does the company have a long range outlook in regards to profit.

Does the management talk freely to investors or “clam up” when troubles occur.

Will the growth of the company require issuing shares negating the existing stockholders’s from anticipated growth.

When to buy 
The company is doing things under the guidance of exceptionally able management. The investor should be throughly sure in his own mind that these troubles are temporary rather than permanent. If these troubles have produced a significant decline in the price of the affected stock and give the promise of being solved in a matter of months rather than years, he can consider that this is a time when the stock maybe bought.

There is a worthwhile improvement in earnings and this particular increase in earnings has not yet produced an upward move in the price of that company’s shares.

An investor should ignore any guesses on the coming trends of general business. He should invest the appropriate funds as soon as the suitable buying opportunity arises.
He is making his bet upon something which he knows to be the case, rather than upon something which he is largely guessing.

He should stagger the timing for further buying. By doing so, if the market has a severe decline during this period, they will still have purchasing power available to take advantage of such a decline.

When to sell
1)A mistake has been made. The factual background of the company is less favorable than originally believed.
-More money has been lost by investors holding a stock they really did not want until they could at least come out even.

2)Sales should be made if the company no longer posses the desirable investment characteristics as to the same degree it qualified at the time of purchase.
-Deterioration of management
-Deterioration of moat
-Lack of growth prospects. Whether at the next peak of a business cycle, per share earnings will show at least as great an increase from present levels as the present levels show from the last known peak of general business activity.

3)Selling a satisfactory holding in order to get a better one.

Once a stock has been properly selected and has borne the test of time, it is only occasionally that there is any reason for selling at all.

An investor should never sell out of an outstanding situation because of the possibility that a bear market may be about to occur. Do not risk losing a permanent position in a company which over the years should continue to show unusual further gains just because it is currently overpriced. Do not disturb a position that is going to be worth a great deal more in future.

When do stockholders get no benefits from retained earnings?
Managements pile up cash far beyond any present or prospective needs of the business.

Substandard management can get only a sub normal return on capital already in the business, yet use the retained earning merely to enlarge the inefficient operations rather than to make it better.
-Economic environment forces each competitive company to spend money on so-called assets which in no sense increase the volume of business, but which would cause a loss of business if the expenditure had not been made.
-flaw in accounting shows no differentiation between such assets and assets which have actually increased the value of the business.

If invested in the right company, investors are better off when the management of such companies reinvest increased earnings than they would be if these increase earnings were passed on to them as larger dividends which they would have to reinvest themselves.

High dividends yield does not mean much. An otherwise good management which increases dividends and sacrifices worthwhile opportunities for reinvesting increased earnings is like a farmer rushing to sell his livestock rather than raising them to a maximum profit.

Don’t for investors
Don’t assume that the high price at which a stock maybe selling in relation to earnings is necessarily an indication that further growth in those earnings has largely been discounted in the price.
-A stock discounting its future earnings ahead might be overpriced but the assumption is that the company would be trading at the average pe of the index. If this is an outstanding company, new products and earnings in the ensuing decade will swell earnings, and the industry is promising, the pe in future would still be much above than the market pe
-If the earnings spurt that lies ahead is a one-time matter and the company’s nature is not such that new sources of earning growth will be developed. The high price earning ratio does discount future earnings.

Don’t quibble over 50cents and 1 dollar
- if the stock seems the right one and the price seems reasonably attractive at current level, buy” at the market” the additional 50cents paid is insignificant as compared to the foregone profit if the stock is not obtained.

First dimension of a conservative investment
Not only must it be a low cost producer, it must give promise of continuing to be so in the future.

Second dimension of a conservative investment- human factor
The company with real investment merit is the company that promotes from within. A large company’s need to bring in a new chief executive from the outside is a damning sign of something basically wrong with the existing management.

There must be evidence that the employees feel that their company is a good place to work.