Just picked up ‘Finding the Next Starbucks: How to identify and invest in the hot stocks of tomorrow’ by Michael Moe.
It’s not a very new book, it was actually published in 2006 but I’m finding it pretty good so far. As you might guess, the gist of the book is to try and find the next hot stock; another Starbucks, Amazon or Google. The ten and twenty baggers as Peter Lynch likes to call them.
Finding the Next Starbucks
The author Michael Moe knows what he’s talking about. He’s been on Wall Street for over 20 years and was one of the first research analysts to identify Starbucks as a huge opportunity in 1992. Back then the company was worth around $220 million and today it’s worth over $56 billion, having gone up thousands of percent.
But that isn’t the only impressive stock pick Moe has made over the years and in this book he shows how he goes about looking for similar hot companies or Starbucks-esque ‘supernovas’. For example, he also picked Apollo Group and even called Google cheap at the time of IPO.
Opportunities in smaller cap stocks
Michael Moe strongly believes that if you want to obtain super sized returns you need to look at smaller companies. Moe claims that small-cap stocks are overlooked by Wall Street since they do not have the size to take large volume orders. That represents an opportunity for smaller investors to capitalise on their own knowledge and find the next big company while it’s still in it’s infancy. As the author states, nearly all big companies today were small caps once.
For example: Apple, Gilead Sciences, Nike, Home Depot, Wal-Mart, Cisco, Yahoo!, all these stocks began with a market cap (at IPO) of less than $1 billion.
After going through the book it’s clear that although Moe likes smaller companies that does not necessarily mean penny stocks. In general, it seems that Moe finds his best success stories in the small-cap range – between $200 million to $1 billion or there abouts. The reason for this is clear. Small-cap stocks outperform large stocks over time. For example $10,000 invested in small caps in 1973 would have been worth over $1 million dollars in 2005 (an annual gain of 16.3%) while $10,000 invested in large-cap stocks would have yielded only $127,963 (8.6% annual return).
Looking for bargains
One of the things Moe is keen to stress in the book is that finding the next Starbucks or Apple stock does not come down to luck. Rather it comes down to a lot of research and by using a system that he has honed over the years.
The essence of which is to find companies in their infancy that possess some key characteristics.
Firstly, Michael Moe suggests that earnings are the most important criteria by which to assess a stock and that a stock price will move in direct relation to it’s earnings over time (a fact the author repeats throughout the book).
Second, Moe talks about the ten commandments that govern his search process. These cover the long-term and short-term outlook of the company, the valuation, the management and the industry it operates in.
The Four Ps
Moe then writes about the 4 Ps that help him come to an investment decision. Which are:
Essentially then, Moe looks for companies with great people and he considers good management to be the biggest factor in finding ‘supernova’ stocks.
The company’s product must also be good. It must be unique and hard to replicate elsewhere and it could well be causing a stir among those who have come across it.
Potential is all about the opportunities for open-ended growth of the company. And this also comes down to global trends or as Moe puts it ‘megatrends’.
Finally, predictability means taking a professional, value approach to investing and minimising risk. Trying to find companies that in their short histories have been able to consistently drive up their revenue.
Without going too much further into the book, another key concept that Moe puts across in ‘Finding the Next Starbucks’ is the impact of ‘megatrends’, a term first coined by John Naisbitt. Moe gives several examples of these:
The Agrarian economy in the 18th Century, the Industrial revolution, the manufacturing boom around 1910, the services era in the 70s and the information economy brought on by the invention of the Internet.
Moe claims that we now exist in a knowledge megatrend and that knowledge jobs such as IT, health and business services will excel. The key is to study the world, look at what is happening and what people are talking about. Look at the things that are really changing people’s lives and where the money is flowing.
If the past is anything to go by, looking for a megatrend and hitching a ride seems like the surest way to get on board a tenbagger supernova and reaping the rewards.
All in all ‘Finding the Next Starbucks’ is an excellent book for stock pickers and written in a similar vein to Peter Lynch’s One Up on Wall Street or Chris Camillo’s Laughing at Wall Street. It’s easy to understand, somewhat inspiring, and a great read for those looking for small high growth stocks. While this book should not be number one on the list for new traders or investors it’s definitely quite high up.
To be perfectly honest, writing a stock market book was never very high on my list of priorities. Only after several years of experience trading in live markets and only after copious studying did I feel confident enough to put pen to paper. Even then, I wasn’t sure how well it a book would be received, particularly as I had no formal training in writing. Of course, now I’ve written it, I’m glad I did, and the response has been much better than I had anticipated.
I have always been interested in the stock market.
From an early age I would come home from school and watch the Money programme on TV, a weekly show that talked about UK investments. I remember picking a few names, writing them in my school book and then checking them every day to see whether they had gone up or down.
As I went through University, I still kept an interest in stocks but I also started to look at the forex market. For me, the forex market was ideal because it was highly liquid, always moving and cheap to trade. I began trading currencies using a spread betting firm while a student and I also played a lot of poker too.
After graduation, I continued to trade in my spare time but my education really went up a notch when I took a job as a futures day trader for a trading firm in London. To say the experience was intense is an understatement as I (and two other graduates) were thrown into the deep end from day one. It seems unbelievable now, but we were unfortunate enough to start trading the very day after Lehman Brothers filed for bankruptcy. Our first day of live trading was one of the most volatile day in the markets since 1987 and it only got worse in the coming weeks.
Learning the ropes
I won’t go into the details of my time as a day trader – it would probably read more like a drama than anything educational – but I will say that during that time I learnt just about all I could. I traded through the most volatile period in a generation, where I had to grind out a profit every day in order to survive. I read every book I could get my hands on, studied every article and put in hours of work. I had a good teacher in the form of an ex Deutsche Bank head of trading and needless to say I learnt a hell of a lot.
After working and struggling as a day trader for about a year, I started to realise that making money was easier and less stressful on slightly longer timeframes. It was then that I started to look more closely at trend following strategies and before long I branched out with a partner to create our own small fund. It’s the fund we still trade today and is based on a mixture of trend following and fundamental analysis, utilising a semi automated strategy.
My stock market book
In order to keep up to date with the markets, I found myself writing articles for sites like Seeking Alpha and this blog. Soon, I had a fair amount of content so it made sense to start putting it into a book. Of course, once I had made that decision there was no going back. Completing the book took a lot longer than I had hoped and was a lot more work than I bargained for but it was worth it in the end as the book is something I am now proud of.
How to Beat Wall Street: Everything You Need to Make Money in the Markets
In essence, HTBWS is a concise guide to the markets. It covers a large amount of material, reporting on many of the most important financial books and reports written.
It covers the fundamentals, financial ratios, technical analysis, trading systems and more, such as momentum trading and dollar cost averaging. It also comes with bonus material including historical data, excel files and the code for all of the systems in the book.
“This book is a great first book for new traders. The author takes the new trader step by step through explaining all the different dynamics of basic trading. This book does a great job of covering all the bases, fundamentals, timing, the risks, tips for beginning traders, the basics of technical analysis, along with the basic concepts of building a trading system. This is a rare book that actually gives some examples of basic trading systems along with their statistics and back tested profitability and their maximum draw down in equity.
This book is a great book chock full of educational material and information that are keys to a new trader surviving that first year in the markets and setting themselves up for profitability. I would put this on a top ten list of books for new traders and I have read hundreds and even written a few of those books myself.”
– Steve Burns, newtraderu.com
The author has provided a good overview of macro factors an investor needs if he aims to beat the market. Thorough introductions on requisite topics are provided. I wonder this might even be used by someone with,hardly much background knowledge to the subject. The book introduces 20 trading systems and Amibroker codes are provided upon request. A readable and usable book.
– Heman Wong, HK
Great book. Easy to read and clear. It gives an overall view of many aspects of trading (fundamentals and technical aspects of stock and forex trading, money management, diversification, economy in general). It helps you to visualize the the global aspects involved in trading, and not just stock trading.
I also appreciate the resources & bonus material that helps you tho develop your own trading system and continue your research.
– Ignacio Riera Fernandez
This is a great book that starts out by explaining the basics to a new beginners and then ends by giving some great advanced ways to increase your investment returns. I highly recommend this book for all levels of investors, the new, the old, and the in between.
– Curt Dalton
Where to get it
I Just finished reading Four and Twenty Rules For Buying and Selling Shares by Nigel McCarter, a New Zealand investor who has managed to capture returns of over 20% a year since 1997 using a strategy based on rules for selecting and selling shares on the Australian and New Zealand share market.
At just over 100 pages, the book isn’t long, but it doesnt need to be. It simply details the 20 rules that McCarter uses to select shares and the 4 that he uses to sell and does so in a way that most people would understand. It’s fair to say that I gained a great deal from this book and will look to incorporate some of it’s findings into my own investments.
One thing I like about the book is that it’s completely genuine, which sets it apart from most other stock market books straight away. The other thing I like is that Four and Twenty Rules For Buying and Selling Shares deals with investing in an objective way, using a quantitative approach that can be easily understood and tested.
Indeed, one of the things that puts me off investing in general is the thought of the unknown. At the end of the day, you can do as much analysis on a stock as you like, but if you haven’t backtested your valuation methods of past data – or future data for that matter – you can never be completely sure that your method will result in a profit.
McCarter’s rules (some of which are included below), seek to remove that subjectivity and in the process they make investing both accessible and rewarding.
Some of McCarter’s rules taken from the Four and Twenty Rules For Buying and Selling Shares book:
Rule 1 – You should understand how a company makes a profit
Rule 6 – EPS has been growing 10% or more for the last 3 years
Rule 12 – PE is > 5 and < 25
Rule 20 – Directors and managers hold shares in the company
The other good thing about these rules is that they dont just work for the Australian share market, they can work on any free market stock exchange. By running a stock screener on over 4000 US stocks I was able to identify 3 stocks with incredible fundamentals that fit the criteria.
I read a comment a while back about how blogs are better than books these days for learning about trading and finance and I had to reply because I don’t think it’s true at all. While blogs are often more up to date, they are too often lacking in great content.
I would argue that books generally provide much stronger analysis and advice than blogs. Online content is free (unless behind a paywall) which means that bloggers do not have as much incentive to write top quality content. This is why there are so many poor quality finance blogs and articles online, many of which are trying to sell another worthless product or service. As well as this, bloggers have to deal with SEO which means good articles can be hard to find.
Conversely, a good finance book is worth it’s weight in gold and can be referred to time and time again. Warren Buffett, for example, would not have got to where he is today if it wasn’t for many re-reads of Benjamin Graham’s classic investing Book:
Security Analysis: Sixth Edition, Foreword by Warren Buffett (Security Analysis Prior Editions)
Books, after all, have to go through many processes prior to printing to make sure they are up to standard and most books will never find a publisher willing to publish the material.
Granted, blogs were not around in Buffett’s day but it seems obvious to me that anything that costs money to research and produce is going to be more valuable than stuff you can get online.
The same goes for white papers and special reports. Indeed, I recently read that the value of a good 3-5 page report – the kind published by a trade journal or University is typically over $4000.
With this in mind, I believe it’s important to search out the best information and content available. I have read dozens of good finance books over the years and am always excited when a new one comes out. Blogs have there place and get better all the time, but you cant beat the value of a good book.