Recently Ken Fisher’s book The Making of a Market Guru, John Wiley & Sons, 2009 was read. The book is a collection of Mr. Fisher’s Forbes magazine columns from 1984 to 2009.

While many of the columns are commentary about the US stock markets and economy, some of the columns outline the tools Mr. Fisher uses in his search for undervalued companies. To have success, you must be able to narrow the focus and one of the tools is the stock’s price/sales ratio (PSR). To figure it out multiply the stock price by the number of shares outstanding and express the resulting sum as a percentage of revenues. Thus a company with a market capitalization of $100 million and revenues of $200 million would have a PSR of 0.5. A high number means unless there is a really compelling reason to buy, others companies would be a better choice. A low number suggests a strong balance sheet and at least you know the company should have a reasonable good year and if they do the stock price could rise.

Every year, Forbes has its columnists tell the readers how they did. Not everything goes up, but you can learn from making mistakes. Some lessons to be learned include if someone suggests a long list of companies to buy, be wary. The list should be short with reasons for each pick. You can always dispute the reasons, at least you know there is conviction and research done into the list. Another lesson to learn is do not buy themes – buy good companies. Remember small mistakes do not kill you, not learning from them does.

Linking to dividend paying stocks, stock prices will go up and down, picking stocks and learning lessons is a key. There are thousands of people trying to find value everyday which is a great thing. The ability to do it gets easier every year, which is great for the non institutional investor. We all bring something to the table, a great place to start is with the larger companies that are well run and paying a dividend. Learn from the professionals – the basics of a well managed company with a competitive advantage over its competition never changes.

There are more questions than answers, till the next time – to asking questions.