Chapter 3 - Holding On to Become Rich

Question 1

How did Jesse Livermore make the big money?

Answer 1

“It never was my thinking that made the big money for me. It was always in my sitting. Got that? My sitting tight!”

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Question 2

What is one of the biggest mistakes investors make?

Answer 2

They own extraordinary companies but treat them like ordinary companies from which an investor gets ordinary returns.

The great ones must be held over an extended period of time if investors wish to earn the big money.

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Question 3

What can we learn from the chart of Cisco below?

Answer 3

The great ones must be held over an extended period of time if investors wish to earn the big money.

Downswings are inevitable on the way to making big money.

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Question 4

The _____ the company, the _____ _____ its goals.

Answer 4

The better the company, the more specific its goals.

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Question 5

Great companies issue their own _____ _____.

Answer 5

Report cards.

The lesser ones do not do this very well, and often can only offer excuses because they are losign to the great companies.

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Question 6

What are core indicators to watch?

Answer 6

Market-share gains and losses.

Must watch them for a few years to allow strategies to unfold and also to let stocks perform and make you great profits.

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Question 7

In what way was Cisco like Molex?

Answer 7

Cisco exhibited a “Molex style” in working closely with customers in product development, creating new routers and swtiches to control, direct, and send Internet traffic to where it should go.

Moreover, Cisco met customers’ most important needs and anticipated future needs by spending money, time and energy to work closely with customers.

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Question 8

“Patience is not only a virtue, it’s a _____.”

Answer 8

“Patience is not only a virtue, it’s a necessity.”

All too often impatience costs investors dearly, because they might have only “intellectual patience”–they know what to do but just can’t fight their emotions and the market swings.

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Question 9

What are key metrics to monitor in your investments?

Answer 9

Key Metrics

1) Sales growth
2) Earnings growth
3) Return on assets

* key predictor of future growth *

4) Profit margins
- Gross margin
- Net profit margin

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Note: Terry Smith of Fundsmith also monitors these metrics!

Question 10

When deciding upon whether to keep a stock or not, what should you do?

Answer 10

1) Look at the company’s metrics
2) Project what a company can earn (ie determine its earnings power)

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Question 11

What does Kobrick say about market timing?

Answer 11

“Not only is market timing impossible, but it also takes people out of great stocks that could have made them rich.”

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Question 12

What wins in the long term and generates the big money–hot products or great product cycles?

Answer 12

“It is not hot products that win in the long term and generate the big money, it is great product cycles that repeat again and again, and give both customers and investors confidence.”

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Question 13

Building real wealth comes over time. What are the implications of this?

Answer 13

Start investing early!

Invest as much and as often as you can!

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Note: This conclusion is actually a combination of The Big Money and The Contarian’s 13

Question 14

What is the first thing to look for in a business model?

Answer 14

First, look for a true route to profitability.

Also, look for growth and protecting against competition.

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Question 15

If you love a company and really know it…

Answer 15

you get many chances for great stock buys from the volatility and uncertainty of the stock market, and the price swings that occur over time.

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Question 16

When you understand that a company is a great company…

Answer 16

the downturns are most likely temporary; and when the market gets emotional and sells off, those drops give long-term investors chances to scoop up their favorite companies at very attractive prices.

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Question 17

Keep your investment mistakes _____.

Answer 17

small.

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Question 18

What to do after you sell a company?

Answer 18

Watch the company and its stock performance carefully for a while. If it starts to recover, it could be showing you elements of greatness. That is when you must buy it back, even if you pay up a few dollars.

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Question 19

_____ is the best weapon against risk.

Answer 19

Knowledge is the best weapon against risk.

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Question 20

How do people get rich from one or two great stocks without having too much money in their stocks?

Answer 20

Usually, they have bought a bunch of stocks with great potential, watched them, and then bough more of the best corporate performers (in terms of BASM) along the way. Each stock represented only a modest portion of the portfolio, or total assets, at the beginning, and only later became a large chunk of the investor’s assets because the investor weeded out the weak stock, flowing the sales proceeds into the best. That approach, coupled with enormous appreciation, means wealth. p61

Question 21

What did Kobrick learn about selling from Home Depot?

Answer 21

Selling was a terrible idea, because even if great companies are temporarily overvalued, leeway should be given on the valuation sell discipline, since great companies so often do surprise us all on the upside with earnings and company performance.

In other words, it’s often a mistake to sell great companies, even if they have high valuations.

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Question 22

If you know it is a _____ company, you might want to take your lumps and _____ with it.

Answer 22

If you know it is a great company, you might want to take your lumps and stick with it.

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Question 23

Why should you have more patience with great companies than with an average stock?

Answer 23

Two reasons

1) The greatest companies are more likely to fix mistakes, and so price moves by impatient investors become huge buying opportunies
2) While it is always risky to stay with or buy back (if you do sell) companies that are fixing a problem, patience has a far, far bigger payoff with the great companies than with an average stock. The payoff usually means many times your investment at the least, and getting rich at the best.

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Question 24

Every time there is a big drop in the market…

Answer 24

the best companies “go on sale.” p62