The Competitive Edge (Part 2)

How do you pick winning stocks?

That’s the question that many ask. Security selection is a key way to add value to a portfolio, one of the three approaches mentioned yesterday. Critical to finding winning securities is having a way to identify them.

One common approach is the value method. This looks at a company’s financial statements and compares them with its market value. If the company is cheap enough, it’s a buy. An example is the A&P chain store. After going public in 1929, it declined during the depression to a value below its working capital. Canny investors bought it and saw the price triple in a year.

Value investors tend to look at a company’s balance sheet to find opportunities. By contrast, growth investors look how a company is run—whether it is positioned to capitalize on demographic trends or new technology to expand into the future. Global growth investing involves understanding how countries develop, and to capitalize on these changes.

A growth investor might have seen database design as a critical future industry in 1990, and have invested in several competing database startups—Sybase, Progress, and Oracle. Over the next 20 years, these three firms returned an average of 15% per year, while the broad market advanced at half that rate. But it was a bumpy road!

Growth and value investing are different ways to deliver the same result: superior returns. Both require insight, intelligence, and patience. The key is knowing how an approach can fit into your style.

Douglas R. Tengdin, CFA

Chief Investment Officer

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