Superperformance stocks: An investment strategy for the individual investor based on the 4-year political cycle

Contents Parti

The Search for a Successful Investment Strategy Chapter 1 Buy to Keep or Buy to Sell? The Concept of Growth The Cyclical Approach Evaluate the Political Climate Is Inst~utional Investment Strategy Changing? Stock-Price Cycles Reading the Long-Term Charts Being Wrong Can Be Painful The Disadvantages of the Buy-Sell-Buy Approach

3 4 5 7 9 10 11 15 16

Part II When Should You Buy Stocks? Chapter 2 Business Cycles

21

Chapter 3 Washington Policies

25

Economic Control Through Fiscal and Monetary Policies Follow the Political Cycle Inflationary Policies Economic Planning vs. Political Reality Federal Monetary Policy and Stock Prices Do Not Be Misled by Short-Term Monetary Trends

26 27 28 30 32 33

Chapter 4 The Political Cycles

35

The Biggest Boom and Bust, 1927-32

39

The Roosevelt Recovery and Recession, 1932-38 World War II and Immediate Postwar Cycle 1: 1949-53 Cycle 2: 1953-57 CycleS: 1957.00 Cycle 4: 1960-62 Cycle 5: 1962-66 Cycle 6: 1966-70 Cycle 7: 1970-74 CycleS: 1974Summary of the Stock-Price Cycslei

54 55 56

Chapter 5 Look for Low Risk

59

Buy During the Selling Climax Trade With the Market's Primary Trend

59

40 44 44 45 46 48 49 51

61

Part III lMlich Stocks Should You Buy? Chapter 6 Safety First

67

The Biggest Also Decline Price Trends of Income Stocks Most Stocks Are Price-Cyclical Buy for Large Capital Gains A Superb Company Does Not Necessarily Have a Superb Stock

67 68 71 72 72

Chapter 7 Superperformance Stocks: The Record

75

Features of Superperformance Price Action Superperformance and Company Earnings Superperformance and Company Size Superperformance and Subsequent Stock-Price Action Characteristics of Superperformance Stocks

77 77 79 80 81

Chapters Look for Price Volatility

83

Stock Prices Reflect the Law of Supply and Demand A Tale About Volatility and Timing Price Distortions by Stock Exchange Specialists Look for Rebounds Which Stocks Rebound? Emotional Selling and Trend Following Leverage The Dangers in Leverage Leverage in Low-Priced Stocks Leverage in Warrants

84 87 89 91 92 94 96 99 100 101

Chapter 9 Look for New Earning Power

105

Change and Stock Prices Change Resulting From Discoveries of Natural Resources Change in Government Policies Technological Change Growth-Stage Companies Mature Companies Use Caution When Selecting Growth Stocks Good Management Is Vital Turnaround Situations A Comparison of Two Growth Stocks Anticipate Growth Earnings Explosions Be Skeptical of Reported Earnings Reported Earnings Depend on Accounting Procedures Higher Earnings Are Usually Anticipated Earning Trends Affect Superperformance Price Action The Role Future Earnings Play in Stock Prices Evaluate Reported Earnings

105 107 107 109 110 112 114 115 115 116 119 122 124 124 125 125 126 127

Chapter 10 Look for Expandable PricelEamings Ratios

129

Psychology and Stock Prices Establishing Stock Values Problems in Establishing Values Market Price vs. Inherent Value Market Price VS. Dividends Estimating Price/Earnings Ratios The Influence of Price/Earnings Ratios The Ideal Situation

131 132 134 134 138 139 141 147

Chapter 11 Look for Good Sponsorship

149

An Example of Sponsorship Sponsorship by Institutional Investors Trend Following Spotting Trends The Sequence of Trend Following News, Publicity, and Stock Prices Buy Stocks You Understand

151 152 161 162

163 164 167

Part IV When Should You Sell? Chapter 12 The Timing Rhythm

171

The National Economy and Stock Market Declines Presidential Elections and the Stock Market Watch Out for Surprises To Hold or to Sell? Be Alert to Federal Policy Switches A Possible Exception The Pricing Rhythm A Big Problem for Investors: The Stock Exchange Specialists How Specialists Operate

173 174 176 178 179 180 182 183 184

Do Call Options Depress Stock Prices? Remember the Political Cycle Declines in Individual Stocks vs. Declines in the Stock Market Watch for the Warning Signals Chapter 13 Selling Short Timing a Short Sale The Ideal Time to Sell Short Patterns of Boom and Bust in Real Estate Profitable Short-Sale Opportunities Have Been Numerous Select Short Sales Systematically Short Selling by Professionals Covering Short Sales

185 185 187 188 191 192 193 194 196 197 200 203

PartV The Strategy for Success Chapter 14 Sources of Information and Ideas

207

Publications to Review Regularly Learn to Recognize the Cycles Look for Potential Price Movement Individual Judgment Is Crucial for Success

207 211 214 214

Chapter 15 Points to Remember

217

When to Buy Stocks What Stocks to Buy When to Sell Stocks

218 219 220

Appendix A: Superperformance Stocks, 1962-74

223

Appendix B: Superperformance Stocks, October 1974-0ctober 1976

137

Charts

1. 2. 3. 4. 5. 6. 7. 8.

Presidential Elections and Stock Prices Ford Motor Metromedia Federal Budget Deficits and Surpluses Durations of Stock Price Cycles United Financial Corporation of California Dow Jones Utility Average American Telephone and Telegraph

9.S~line

10. General Motors 11. Jack Eckerd Corp. 12. Natomas 13. Trans World Airlines 14. Holiday Inns 15. Gulf & Western Industries 16. Vetco Off shore Industries 17. Bausch& Lomb 18. The S-CulVe in the Dow Jones Indusb"ial Average 19. Chrysler 20. Polaroid 21. Kresge 22. Syntex 23. McDonald's 24. International Flavors and Fragrances 25. International Business Machines 26. Du Pont E. I. de Nemours

12 13 14 29 37 63 69 70

m 85 86 95 98 102 103 108 111 113 117 120 121 123 142 143 145 146

27. Athlone 28. U.S. Steel 29. Burroughs

30. Xerox 31. 32. 33. 34. 35. 36. 37. 38.

Winnebago Industries Outboard Marine Avon Products MGIC Investment Grolier Rite Aid Eastern Airlines Thiokol

153 158 159 160

172 177 181 195 198 199 201

208

Tables

Table 1. The Stock Price Cycles

37

Table 2. Presidential Elections Compared With Beir Market Lows and Bull Market Highs 56 Table 3. The Disparity Between Book Value and Market Price

135

Table 4. Book Value Lower Than Market Price

136

Table 5. Book Value Higher Than Market Price

137

Table 6. Accumulation of Xerox by Institutions

157