J. Paul Getty, at one point in time, was labeled by Forbes as the richest man in America, and by others as the richest man in the world. He accumulated his massive wealth in the oil business, but he was no stranger to profiting from his stock picks.
Mr. Getty was the classic “buy low, sell high” contrarian investor who bought boatloads of shares when doomsayers were proclaiming the worst. When Getty first started investing, a successful financier told him, “Buy when stock prices are low – the lower the better – and hold onto your securities. Bank on the trends and don’t worry about the tremors. Keep your mind on the long-term cycles and ignore the sporadic ups and downs.”
On the surface, this appears to be common sense, but most people practice the opposite. They are fearful of bargains and would rather wait until a stock goes up, buying because they feel they are getting in on a sure thing. Tragically, this is usually right as a stock is reaching its peak.
Getty purchased shares of Tide Water Associated Oil Company in 1932 (during the Great Depression) at $2.12 per share. By 1937, the shares were trading at $20.83, netting him nearly ten times his original investment in just five years.
In 1932, Getty was gobbling up shares left and right because he recognized their bargain-basement prices. Another example is when he started buying Petroleum Corporation Stock in May 1932. He bought steadily until September 1933, when he owned 190,000 shares. Although his average per-share cost of the stock was only $6.54, the shares were worth nearly $15 each.
Here’s a direct quote from his book, How to Be Rich: “The big profits go to the intelligent, careful and patient investor, not to the reckless and overeager speculator. Conversely, it is the speculator who suffers the losses when the market takes a sudden downturn. The seasoned investor buys his stocks when they are priced low, holds them for the long-pull rise and takes in-between dips and slumps in his stride.”
In that book, he also gives ten questions investors should ask themselves when buying stock. They are still relevant today, perhaps now more than ever. Getty’s questions are in bold, and I’ve included my thoughts below each question.
1. Is the company solid, with efficient and seasoned leaders?
Without good leaders, a company doesn’t have much. I feel I should note that you should invest in companies where you don’t need to be an amazing manager to run. If you can teach a teenager to manage operations (think fast food chains), this is a business you should consider.
2. Will there be demand for the company’s products/services in the future?
Since a company’s stock price is a theoretical “price willing to be paid” for future earnings, you should stay away if you don’t think there will be any future earnings.
3. Is the company in a good competitive position? (I would ask, “Is it a moat-y type business?”)
You don’t want the company to be eaten alive by competition.
4. Are company policies and operations aggressive without calling for dangerous over-expansion?
The company should willing (and able) to grow naturally. Forcing unnatural growth stretches resources too thin, and is often a recipe for disaster. Watch out for what Peter Lynch called “diworsification”.
5. Will the corporate balance sheet stand up to close scrutiny?
Are they cooking the books? Do the numbers make sense?
6. Does the company have a satisfactory earnings record?
I like to make sure that earnings have increased steadily in the past few years. If there is a blip on the record, figure out the reason for it.
7. Has the company been paying dividends?
Stocks that pay dividends, as a whole, outperform stocks that don’t pay dividends. Look at the dividend payouts over the past five or ten years. If they’ve been increasing, that’s a great sign.
8. Does the company have a manageable amount of debt, if any?
This is one of the first things I look for, essentially asking, “Will this company go out of business tomorrow?” Also, if there’s a slowdown in our economy, the company with the least amount of debt has a greater chance to survive and thrive.
9. Has the price of the stock had any violently wide and apparently inexplicable fluctuations?
You should have a strong stomach anyway, and shouldn’t worry about fluctuations in price, but if they’re too large and unexplainable, stay away.
10. Does the per-share value of net realizable assets exceed the stock exchange value of a common stock share?
Ah, value investing. Is the stock worth more “dead” than “alive”?
Finding stocks that can pass all ten questions with flying colors is like finding a needle in a haystack, but they’re well worth the find. Put Getty’s advice to good use and you’ll be well on your way to raking in the millions…!
Getty's book, How To Be Rich, as referenced in the post.