The Competitive Edge (Part 2)

How do you pick winning stocks?

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

One commonly cited approach is the value method. This practice 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 the level of its working capital. Canny investors who purchased it there saw the price triple the next 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 exponentially into the future. Global growth investing might involve understanding how different cultures develop, and how a firm might capitalize on these dynamics.

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 whether either approach fits you.

Douglas R. Tengdin, CFA
Chief Investment Officer
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