408 Appendix CHAPTER 9

Buy the least expensive stoclcs within an industry, as determined by the four contrarian strategies, regardless of how high or low the general price of the industry group.

RULE 21

Sell a stock when its P/E ratio (or other contrarian indicator) approaches that of the overall market, regardless of how favorable prospects may appear. Replace it with another contrarian stock.

CHAPTER 10

RULE 22

Look beyond obvious similarities between a current investment situation and one that appears equivalent in the past. Consider other important factors that may result in a markedly different outcome.

RULE 23

Dont be influenced by the short-term record of a money manager, broker, analyst, or advisor, no matter how impressive; dont accept cursory economic or investment news without significant substantiation.

RULE 24

Dont rely solely on the "case rate." Take into account the "base rate"- the prior probabilities of profit or loss.

RULE 25

Dont be seduced by recent rates of return for individual stocks or the market when they deviate 8 1 from past norms (the "case rate"). Long term returns of stocks (the "base rate") are far more likely to be established again. If returns are particularly high or low, they are likely to be abnormal.

RULE 26

Dont expect the strategy you adopt will prove a quick success in the market; give it a reasonable time to work out.

The push toward an average rate of return is a fundamental principle of competitive markets.

RULE 28

It is far safer to project a continuation of the psychological reactions of investors than it is to project the visibility of the companies themselves.

CHAPTER 12

RULE 29

Political and financial crises lead investors to sell stocks. This is precisely the wrong reaction. Buy during a panic, dont sell.

RULE 30

In a crisis, carefully analyze tiie reasons put forward to support lower stock prices-more often tiian not they will disintegrate under scrutiny.

RULE 31

(A) Diversify extensively. No matter how cheap a group of stocks looks, you never know for sure tiiat you arent getting a clinker.

(B) Use the value lifelines as explained. In a crisis, these criteria get dramatically better-as prices plummet, markedly improving your chances of a big score.

CHAPTER 14

RULE 32

Volatility is not risk. Avoid investment advice based on volatility. CHAPTER 15

RULE 33

Small-cap investing: Buy companies that are strong financially (normally no more than 60% debt in the capital structure for a manufacturing firm).

RULE 34

Small-cap investing: Buy companies with increasing and well-protected dividends that also provide an above-market yield.

CHAPTER 11

Small-cap investing: Piclc companies with above-average eamings growth rates.

RULE 36

Small-cap investing: Diversify widely, particularly in small companies, because these issues have far less liquidity. A good portfolio should contain about twice as many stoclcs as an equivalent large-cap one.

RULE 37

Small-cap investing: Be patient. Nothing works every year, but when smaller caps click, retums are often tremendous.

RULE 38

Small-company trading (e.g., Nasdaq): Dont trade thin issues with large spreads unless you are almost certain you have a big winner.

RULE 39

When making a trade in small, illiquid stocks, consider not only commissions, but also the bid/ask spread to see how large your total cost will be.

RULE 40

Avoid the small, fast-track mutual funds. The track often ends at the bottom of a cliff.

CHAPTER 16

RULE 41

A given in markets is that perceptions change rapidly.