Motley Fool Investment Guide (David & Tom Gardner)

• Funds: cheap index ETFs are the best. You will get market-average returns with almost t no time investment.
• If you want to beat the market, stocks can be better. Long term (hold for years, maybe forever), fundamentals-based investing with some diversification but not too much, so you can follow your companies without spending too much time (because there are more important things in life than investing).
• Blue chips are good for sleeping well at night. Small caps are where retail investors have the biggest advantage over institutions (because big funds often can't effectively invest in small caps).
• Tom's framework:
  • Great culture
    • Ambitious mission, aligned with customers, positive change in the world,
    • Happy people (CEO approval on glassdoor.com, retention numbers),
    • Visionary and aligned management (interviews, insider ownership),
    • Happy customers, fan base.
  • Strategy
    • Pricing power (ability to raise the prices when needed),
    • Market size (watch for TAM manipulation, what is the real TAM?),
    • Consumer loyalty.
  • Financials
    • High and improving sales, earnings, ROC, ROIC, ROE,
    • Smart capital allocation.
  • Safety
    • Proactive approach to change,
    • No disruption in sight,
    • Room to grow,
    • No dependence on single customer/supplier.
  • Valuation
    • How is the the cash flow?
    • Don't look for $29 stock that sells for $24, look for stocks that can become $100 stocks in 5 years and sell for $24.
    • Investors consistently undervalue proven long term growth stories.
    • Companies focused on the long term often look overpriced in the short term.
  • Mandatory 5 year minimum holding period
• David's Rule Breaker approach:
  • If a company disappeared overnight, would anyone notice? Would anyone care?
  • Rule breakers break the rules of the market. And if everything goes well, they might shape a new market.
  • 6 signs:
    • Top dog and first mover,
    • Sustainable advantage,
    • Past price appreciation,
    • Good management (better mediocre business with a great management team than a great business with a mediocre management),
      • Also being backed by great VCs is a good sign.
    • Consumer appeal, strong brand,
    • Considered overvalued by the experts.
  • The hype cycle (get in early and hold through all phases for best returns):
    • Tech trigger,
    • Inflated expectations,
    • Trough of disilusionment,
    • Slope of enlightenment,
    • Plateau of productivity.
  • Try to formulate a 2 minute investment thesis. A one sentence investment thesis is even better.
• Quantitative screens:
  • Sales < $500M (because otherwise it's very hard to grow them)
  • Average daily volume $1M < V < $25M (somewhat liquid, but not actively traded by institutions yet).
  • Price > $7 (how did it get so low, penny stocks are hard to trade).
  • Net profit margin > 7%.
  • Earnings and sales growth > 25%. Margins going up or steady.
  • Insider ownership > 10% (some insider selling is ok).
  • Positive cash flow from ops.
  • Price is going up.
  • R&D expenses are going up.
• Income statement, cash flow statement and balanche sheet gotchas:
  • Inflated net earnings because of intermittently lower taxes.
  • Watch out for dilution.
  • Lots of cash is good.
  • Lots of debt is bad.
  • Accounts receivable, inventory ~ sales (investigate any imbalance).
  • Do some ratios, but understand why.
  • Is the company generating cash?
  • Discussion of "liquidity and capital resources".
• Trading on margin
  • Borrowing to buy stocks, gains and losses are amplified.
  • Margin calls.
• Short selling basics
  • Also margin calls.
  • Stop loss on shorts to limit maximum loss.
• Options
  • Basics
  • Selling puts on stocks you like to get them cheaper.
  • Buying calls on stocks you like, for leverage (buy very long term 5-20% in the money calls for best results).
  • Bearish put buying as alternative to shorting.
• Take it easy, rushing things leads to big mistakes!