From the time he was 12, financial writer Peter Sander has been fascinated by the stock market.
In junior high, he read the newspaper stock pages at the family breakfast table, took colored pens to chart stock prices on graph paper and eventually saved up $120 in allowance money to buy his first shares: Burlington Northern Railroad, Georgia Pacific and a long-defunct stock fund.
Fast-forward about four decades, the former Hewlett-Packard project manager is now a full-time professional author who's written 37 books, mostly on money matters.
His latest book, timed for the new year, is "The 100 Best Stocks to Buy in 2013," (Adams Media, $15.95), co-authored with Bay Area engineer and technology researcher Scott Bobo. It's the duo's fourth annual book of stock picks.
We caught up with Sander, 56, by phone from his Granite Bay home, where he's newly remarried and raising two teenage boys. Here's an excerpt of that conversation:
Why stocks? With so many investment options out there mutual funds, ETFs, muni bonds, isn't buying individual stocks sort of old-school?
The financial industry has put together all these products mutual funds, hedge funds, ETFs that are watered down in terms of the gains you can earn. These products tend to buy 100 to 1,500 stocks. Statistically, the more stocks you buy, the more losers you'll buy.
You've said too many stock advisers spend too much time looking in the rearview mirror. How so?
I believe a lot of stock analysts take too close a look at prior earnings, past financial performance. Earnings are such-and-such a share and will grow X percent. That tells me almost nothing about what will happen going forward. If you like what Starbucks is doing, if there are (customer) lines going out the door, that tells me it's doing well in the marketplace. There are intangibles you can't really measure, but you get a sense if the company is above the rest of the pack.
If I were to talk to somebody at Merrill Lynch, they'd say I'm not looking at "price to free cash flow" or "price to EBITDA," all kinds of exotic, sexy measurements that basically measure the same thing: how well it's done (in the past). I don't dislike those measurements, but I don't think they're the whole story.
I subscribe to the 'Buffett-ilian' (as in Warren Buffett) concept of buying a few good companies you believe in. Stocks aren't stocks, they're businesses. If you really understand the company you're buying, it'll put you ahead of the rest of the market.
A company has to have good financials and a go-forward feel for the marketplace.
Your book analyzes each stock, but also categorizes them, such as "Moat Stocks" (Apple, CarMax, Starbucks, Visa) and "Best for an Economic Recovery" (3M, Caterpillar, Paychex, Wells Fargo). How'd you derive those lists?
"Moat" stocks are companies that have significant competitive advantages that are hard for others to duplicate or catch up with: the dominant market position and customer acceptance of Apple or Starbucks, or the operational technology and supply chain leverage of CarMax.
For economic recovery stocks, I look at companies that would benefit from low interest rates or from demand that (was) depressed by the financial crisis.
What's your stock-picking technique?
It's not formulaic. It's a businessman's sense of what's going on. It's a lot of reading about company news: Economist magazine, Forbes, Reuters, The Sacramento Bee, the Wall Street Journal. My favorite (WSJ) section is "Marketplace" that talks about what companies are moving forward with this or that initiative.
I use Value Line (investment research website) for financials.
But it's an inexact science. It's looking at how HP stuff is doing at a Best Buy store, for instance. With a company like Starbucks, go to a few (coffee shops) and look around. If it's consumer electronics, follow the news in those industries. Stay in touch with smart friends people in those industries who know what's going on in their field.
You've pruned 14 companies from last year's book, including HP, Best Buy, Staples. Why'd they get bounced?
Companies change, business models change, companies get acquired. We want to have the best, freshest list we can have, but stocks you can hold for a five-to-10-year term. We didn't need two industrial gas companies and two dental product suppliers, for instance.
Ecolab fell off the list just because we thought it'd gone as far as it could go. Since then, of course, it's continued to go up (in price). That happens. Chipotle got too expensive a couple of years ago. For companies like HP and Best Buy, it was time to pull the plug, reluctantly, because they'd kind of lost their way.
When you were a kid, your parents bought 35 shares of GM stock, "carefully placed" the paper certificates in their safe deposit box and forever stayed loyal buyers of GM cars. Do those buy-and-hold strategies work anymore?
"Buy and hold forever" used to be a pretty good strategy. But the speed and rate of change is so fast now. Microsoft was the cat's meow in the 1990s and now they're basically fighting for their life. You can't just buy a stock and expect to retire with it in 40 years. Technology will make it obsolete. You need to review your investments every year. Even with these (100) companies, every one could be vulnerable in 10 years.
You're very bullish on dividend-paying stocks, listing how many times each company has raised its dividend the last 10 years. But Apple, which is on your Top 100 list, only paid out its first dividend in November 2012.
I have Apple on there because it's a unique company. The current return is not that great and you're taking a risk buying at $500 a share, but their dominance is almost unprecedented.
Going forward it's going to be a real hard call, because I think they'll suffer from OK-We-Got-Here-Now-What. I don't know if Apple will be on the list in 2014. With Tim Cook, not Steve Jobs, in charge and every company gunning for them, they may be a little more vulnerable. Stay tuned on Apple.
Not everyone is comfortable or confident enough to go it alone on stock buying.
Agreed. Not everyone has the expertise, the inclination or the time to do their own investing. To do it right requires all three. That's where an adviser comes in. But even if you "outsource" this important activity, you're still ultimately responsible for your own financial destiny. You should know enough to ask the right questions and to understand the answers.
I'm not saying you have to invest all your money yourself. But you could pick maybe half of your investment portfolio. That's a good place to start, maybe even 10-20 percent. It's a good way to get your feet wet Pick six or seven companies that align with your principles, that are industries you like, that are not all in one sector. Do the market research. If they lose value, you're not going to kill yourself. It's the strategy for someday managing all of it.