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Author: meecho Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 27575  
Subject: What does pricing power look like? Date: 1/4/2011 8:05 PM
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If you could boil down what investors should be hunting for into just two words those words would be: pricing, and power. Everything else is really just noise. At the end of the day, if you have found a company that has pricing power, you have probably found a great investment. Why? Because a firm that has the power to raise prices or charge higher prices than its competitors is likely doing a lot of things right (including driving those competitors out of business). In other words, pricing power is firm evidence of just about everything that investors look for in a company, including profitability, customer loyalty, brand power, defensible profits, wide competitive moats, etc.

My full analysis of Apple (AAPL) and its incredible pricing power here:

http://sigmaswan.blogspot.com/2011/01/pricing-power-what-doe...
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Author: temsike Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24236 of 27575
Subject: Re: What does pricing power look like? Date: 1/4/2011 8:45 PM
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I couldn't disagree with you more. AAPL is a great company. It's a terrible stock in to which invest. In short, great companies are lousy investments. Lousy companies are usually the best investments.

That said, I'm a strict index investor. My indexed stock and bond ETFs cover the entire world very cheaply.

IMHO, the investor can choose to be a gambler or play like the house. Index investing is playing like the house. The gambler may win over the short run, but the house is guaranteed to win over the long run.

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24237 of 27575
Subject: Re: What does pricing power look like? Date: 1/5/2011 12:34 PM
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Well said, temsike, but recent events show clearly the downside of index investing. We knew that autos, real estate, mortgage companies, and banks were in serious financial trouble for almost two years before they hit bottom and in somecases went bankrupt.

If you owned index funds in this time period, you rode those investments all the way down and hoped that they would recover. If you had gains, you counted on other stocks in the index to out perform the serious losers.

I prefer cherry picking the index. Yes, own the index, but pick out the winners and avoid the losers. Yes, you will miss the bottom with the losers and their early high percentage recovery, but I think that is a small price to pay. Generally, you can easily far exceed performance of the indexes by selecting the winners.

I think winners are winners for a reason. They have good products, good management, and they are in the right markets for the times. Losers often have trouble turning all those things around. I think its more likely that a stock setting new highs will continue doing so (as long as its not far over valued) than that a new low stock will turn around anytime soon.

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Author: temsike Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24238 of 27575
Subject: Re: What does pricing power look like? Date: 1/5/2011 4:15 PM
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pauleckler:
Well said, temsike, but recent events show clearly the downside of index investing.<snip>

I see absolutely NO downside to index investing. None. If there are any, I'm all ears (and eyes).

Now, if I knew which stocks of the different indices I use were going to go up, of course I'd only choose them. In fact, if I really knew, I'd only have one stock in my portfolio and I'd borrow every cent I could and invest that money into that one magic stock.

My problem is knowing which one's to pick! Since I don't, I just buy the index.

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24239 of 27575
Subject: Re: What does pricing power look like? Date: 1/5/2011 10:49 PM
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True, You have to be willing to spend the time.

Any list of stocks can easily be sorted into three groups (with minimal research).

Group 1. Those that are doing well

Group 2. Those that might be OK but are questionable for now.

Group 3. Those that are doing poorly.

There are always surprises and you will not get 100% right, but why buy Group 3 (nice gains when or if it ever recovers)? (These are value investors.)

I prefer buying Group 1 stocks. They usually are doing well for a reason and continue to do so. (These are growth stock investors.)

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Author: temsike Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24240 of 27575
Subject: Re: What does pricing power look like? Date: 1/5/2011 11:06 PM
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paulekler:
True, You have to be willing to spend the time.

Any list of stocks can easily be sorted into three groups (with minimal research).

Group 1. Those that are doing well

Group 2. Those that might be OK but are questionable for now.

Group 3. Those that are doing poorly.

There are always surprises and you will not get 100% right, but why buy Group 3 (nice gains when or if it ever recovers)? (These are value investors.)

I prefer buying Group 1 stocks. They usually are doing well for a reason and continue to do so. (These are growth stock investors.)


I only index. Cheaply and with the widest global diversification possible with both stock and bonds.

However, IF... I were to invest in individual stocks. I would ONLY choose small-cap value stocks. I LOVE group 3 stocks.

And that would be from 10 to 20% of the total portfolio. At my age, I couldn't stomach the volatility even while knowing that in the long run I'd plaster the indices.

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Author: chk999 Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24242 of 27575
Subject: Re: What does pricing power look like? Date: 1/6/2011 5:43 PM
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see absolutely NO downside to index investing. None. If there are any, I'm all ears (and eyes).


QQQQ (tracks the Nasdaq index)

March 20th 2000 117.xx
January 7th 2011 55.92


Over not quite eleven years you lost half you capital.

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Author: temsike Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24243 of 27575
Subject: Re: What does pricing power look like? Date: 1/6/2011 6:22 PM
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QQQ is NOT index investing. That was insane gambling.

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Author: JustMee01 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24245 of 27575
Subject: Re: What does pricing power look like? Date: 1/6/2011 8:19 PM
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The Nasdaq 100 is not an index? QQQ is most definitely index investing, and it demonstrates very well the potential danger of indexing in an overpriced sector.

There were techs that were most DEFINITELY good investments over that same timeframe. But, as a class they were overpriced, so the class performed terribly. So, people bought QQQ to try and participate without needing to pick the winners. In their minds, diversification was their protection from picking the wrong horse. That's the strength of indexing as a strategy, afterall...

Well, as you said, they were just gambling that tech would continue to inflate. They bought the bubble. They lost.

But, there WAS money to be made in tech if you bought individual stocks. There were winners, and they paid nice rewards.

Over the same timeframe, split adjusted per Yahoo:

AAPL $30.75 to $333.73
ATVI $1.11 $12.26

(for a couple)

on the other side of the coin:

MSFT $38.98 to $28.82
KLAC $70.51 to $38.20

This is one market segment that LOTs of money could be made only if you did NOT diversify. Riding all the horses at once killed you. Diversification was not safety. It was a death sentence.

No product type is perfect and none should be bought without careful thought. Unfortunately, some people think that ANY index product, no matter how specialized (commodity ETFs, financials, etc...) is safe BECAUSE of diversification. That's not necessarilly true if you're buying into a bubble or a distressed sector. There diversification providing safety can be a mirage. A point that IMO he illustrated quite well.

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Author: jackcrow Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24249 of 27575
Subject: Re: What does pricing power look like? Date: 1/7/2011 12:00 AM
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No product type is perfect and none should be bought without careful thought. Unfortunately, some people think that ANY index product, no matter how specialized (commodity ETFs, financials, etc...) is safe BECAUSE of diversification. That's not necessarilly true if you're buying into a bubble or a distressed sector. There diversification providing safety can be a mirage.

For every new investor reading this board that is worth clipping out and saving.

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Author: RunTex Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 24260 of 27575
Subject: Re: What does pricing power look like? Date: 1/8/2011 12:08 PM
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Yes, wise saying.

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