Blue Chips or Purple Chips?

In the world of investing blue-chip stocks are defined as a stock of a  large, well-established and financially sound company that has operated for many years. A blue-chip stock is generally the market leader and is often a household name. While dividend payments are not absolutely necessary for a stock to be considered a blue-chip, most blue-chips have a record of paying stable or rising dividends for years. The term is believed to have been derived from poker, where blue chips are the most expensive chips.

In John Schwinghamer's Purple Chips, he further refines his investment strategy to purple-chips, stocks that are of the highest quality blue-chips. What are the criteria for a blue-chip stock to pass as a purple-chip stock? Here are the three criteria listed in Purple Chips:

1. A minimum 7 years of positive earning per share (EPS) growth.
2. Smooth and predictable growth in EPS.
3. A minimum market capitalization of $1 billion.

In addition to these three criteria John lists three Financial Health Ratios that helps separate the purple-chips from the blue-chips:

1. 5-year return on equity is greater than 10%.
2. 5-year return on assets is greater than 10%.
3. 5-year net profit margin (average) is greater than the industry average.

Here's a short video introduction to the book:

Are You Ready for the Fastlane?

The Millionaire Fastlane by MJ DeMarco is unlike most personal finance books. DeMarco explains that the road to significant wealth isn't through saving and scrounging, or trying to deprive ourselves of lattes, but it is through entrepreneurship that great wealth is made. He mentions that most personal finance gurus are quite wealthy, however they didn't attain their wealth from the same advice they peddle, such as "pay yourself first" and "save 10% of your income" (most attain their wealth through writing books). Although this is still good advice, it's not how the affluent gained their wealth.

So the "fastlane" to wealth is entrepreneurship. One of DeMarco's quotes that stuck with me is that "to make millions, you have to affect millions." I think this quote sums up entrepreneurial success, successful businesses help solve problems for a lot of people. They provide a service or product that's in demand.

Building a successful business is incredibly difficult and may not be for everyone. It's important to get into business for the right reasons, which DeMarco says is to help people solve their problems. Going into business just for the money will inevitably lead to failure.

The premise of what DeMarco is saying is true, vast wealth is held by a select few who have risked their livelihood on an idea that their service or product was something the world needed. The reality is that the majority of the population is risk adverse and would never want to attempt to start their own business. There's nothing wrong with that, however it's important to note that you won't be travelling down what DeMarco calls the "fastlane" to financial freedom, but the "slowlane."

Here's a video book review:

Common Stocks and Uncommon Profits

In our quest for investment knowledge it is best to learn from the best.  Renowned investor, Warren Buffett, has said that his investment style is 85% Benjamin Graham and 15% Philip Fisher. This naturally leads us to wonder, what is Philip Fisher's investment style? In Philip Fisher's 1958 publication Common Stocks and Uncommon Profits, he distills his wisdom from a career as a securities analyst.

First of all Fisher sees stocks as part ownership in companies and thus they should be analyzed as such. One key lesson Fisher shares is the way he gains knowledge about companies he's considering investing in. He calls his method the "scuttlebutt" method. The scuttlebutt method is a way of learning about a company through the business grapevine. After thoroughly researching the fundamentals of a company, Fisher would start asking questions to people with knowledge about the dealings of the company such as competitors, customers, former employees, suppliers, etc.. This is a way of gathering information that may not be accessible by reading annual reports and helps paint a picture of the company's economic future. The scuttlebutt method seeks a deeper understanding to what makes the company a success, or uncovers any alarm bells signaling upcoming dangers.

Also, within Common Stocks and Uncommon Profits is Fisher's 15 key questions which he asks about the prospective investment:

1.  Does the company have products or services with sufficient market potential to make possible a sizable increase in sales for at least several years?
2. Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited?
3. How effective are the company's research and development efforts in relation to its size?
4. Does the company have an above average sales organization?
5. Does the company have a worthwhile profit margin?
6. What is the company doing to maintain or improve profit margins?
7. Does the company have outstanding labour and personnel relations?
8. Does the company have outstanding executive relations?
9. Does the company have depth to its management?
10.  How good are the company's cost analysis and accounting controls?
11. Are there other aspects of the business, somewhat peculiar to the industry involved, which will give the investor important clues as to how outstanding the company may be in relation to its competitors?
12. Does the company have a short-range or long-range outlook in regards to profit?
13. In the foreseeable future will the growth of the company require sufficient equity financing so that the large number of shares then outstanding will largely cancel the existing shareholders' benefit from this anticipated growth?
14. Does the management talk freely to investors about its affairs when things are going well but "clam up" when troubles and disappointments occur?
15. Does the company have a management of unquestionable integrity?

Fisher elaborates on each question, explaining the importance of the question and the answer he is looking for. If the answer to a majority of these questions are favourable than it is likely that the investment has great long-term growth potential.

Today Philip Fisher would be labelled as a "growth" investor since he seeks capital appreciation in companies with long-term growth potential. In some cases he may even prefer a company that doesn't pay a dividend so that profits can be re-investing into the company financing its growth. In this case the belief is that the company has the capability to grow faster than the gains the investor could obtain investing elsewhere.

Common Stocks and Uncommon Profits is a classic investment guide and should be on the book shelf of any do-it-yourself investor:

Valu-Mart Student Discount on Tuesday 10% Off, Waterloo Ontario

As of September 2014, the 10% student discount at Valu-Mart in Waterloo, Ontario has changed to Tuesdays.

Tips to save on groceries:

Welcome to the World of Income Investing

 

Yes, You Can Be a Successful Income Investor by Ben Stein and Phil DeMuth is a great introduction to income investing. This book covers the basics income investments available to investors which include:

• Bonds
• Stocks
• Preferred Stocks
• Real Estate Investment Trusts (REITS)
• and Annuities

Armed with this knowledge you can start to build your own income producing portfolio. One of my goals is to completely replace my earned income with passive (portfolio) income. I've estimated that in order to do that I'll need a portfolio worth approximately $800,000. Although this sounds like a lot, reaching this goal will become easier as the portfolio grows. This is because the income the portfolio produces grows as the portfolio grows, accelerating its growth (given that you reinvest all the income that your portfolio produces).

One important thing to note is that as your income portfolio grows you should be investing in lower risk income options, such as bonds. My recommendation would be to invest aggressively at first, when your portfolio is relatively small, then over time as your portfolio grows invest into safer, lower yield investments. As you're closer to reaching your goal it will be more about capital preservation than growth.

Here's some advice from Ben Stein: