By Stanley Marvin Burnstein,
Author, Speaker, Attorney and Inventor of the MarvinMatrix™ Algorithm.
Investing in the stock market can be very difficult. It’s very risky. There are a lot of tough decisions to be made. There is money to be made, and there is money to be lost.
I was having great difficulties, through the years, in trying to make the right decisions – because you have all this subjective information and you are trying to make what is, essentially, a quantitative decision.
So, here’s what I’ve done. For the last seven years, I have been developing an algorithm, a formula, to help turn subjective information into an objective decision. By that I mean, a real decision: Yes or No. Do I buy? Do I sell? Do I stay out of the market? Which stocks do I buy? Which stocks do I sell? When do I buy? When do I sell?
How do you know what to do? Well, the matrix that I have been working on was to help me make those kinds of decisions. And now that I am approaching retirement, I am willing to share with other people what I have learned, and how I have used the matrix, so that perhaps, you can benefit from my mistakes and benefit from what I’ve learned.
The Marvin Matrix algorithm was initially for me to use, and I’ve tried to make it easy to follow now so that other people can use it.
My very first experience with stocks and the stock market was when I took a course in my senior year in college. I was looking for a course that would teach me something about the stock market. The only course that seemed to be available was a course called, “Security Analysis.” I thought that would teach me to analyze securities, to learn about stocks. I thought this was what I perhaps might want to do, some time in the future.
Unfortunately for me, the instructor of that course assumed that we were already well educated about the stock market, that we understood stocks and bonds, and that we were now ready for some advanced study about analyzing securities, including stocks. Well, this was my first exposure to the market, and the presentation style was just way over my head. Well the lesson to be learned, to me, from that experience, was that if I ever had a chance to teach or lecture on financial topics, I vowed that it would be in plain English. So, when I began lecturing to CPAs, lawyers and trust officers some 20 years later – and even today, when I write and lecture, it has to be at a level that everyone can follow and can understand. I hope that my discussion today complies with that goal.
My first job was with a small CPA firm in Beverly Hills. By then I had been educated about financial statements. I had experience in auditing of companies. I had experience with public companies and private companies and had reviewed hundreds of financial statements. I was interested in studying about the market.
So I took my first paycheck and went to the office of the world’s best-known stock brokerage operation and asked to see a broker. After all, I wanted to start investing, so how else was I going to do it? So I figured I had three choices: I could either spend the money, invest it in real estate, or I could try the stock market. I concluded that spending was not going to make me any money. And real estate required some down payment, and $25 wouldn’t do it. So, I figured the only way for me to make it as an investor was to consider the market. Could I invest $25 a month in the market? So I asked the broker, “What do you suggest? I’ve got $25 a month to invest.” And he suggested to me an in-house product that would accumulate shares in a particular company by allowing the investor to invest the full $25 a month in one company and buy whatever number of shares or partial shares the $25 would buy. I was naïve. I didn’t know what to do. I believed him, and I followed his advice. So I asked him, “What stock should we start with?” He said, “Well, we’re currently recommending Pam American World Airways.” What did I know? I bought into the program. I don’t know if that company even exists anymore. But the lessons I learned then are important to me now, and should be important to you.
Number One: Don’t put all your money in one stock.
Number Two: Don’t buy the stock unless you have done your homework about the downside risk of the company.
Number Three: Determine whether or not the stock is reasonably priced. Unfortunately, you are going to have to do a little bit of homework. There are those people who are investors who say that the market itself determines if the stock is reasonably priced, and if not, it quickly adjusts.
Well, I don’t agree with that. There are times when the public is overly optimistic about the market, or overly optimistic about a particular stock. By the same token, they may be overly emotional or overly pessimistic about the future of a stock on the downside, or about the market on the downside. That is when you must have the stamina and the discipline to act as a contrarian, to act contrary to the market: to not follow the herd; to act differently from what everyone else is telling you to do. You must have the guts to sell when everyone is buying, and to buy when everyone appears to be selling. Avoiding the downside risk is one of the three major themes of the Matrix. Preservation of principal is critical. You don’t want to take a huge risk and lose your investment.
One of the other themes of the Matrix is, you don’t buy a stock unless it’s a bargain. The algorithm that I have developed helps you in making that determination.
The third prong of the Matrix is, if you don’t have the discipline to be a contrarian, then stay out of the market. I remember a family friend whose wife kept second-guessing her husband on his stock market investments. “I don’t know why you bought that stock! You should never have bought that stock! You should have known it was destined to be a loser. You should have bought ABC stock.” Well, she kept on, and she was unrelenting in her criticism of the so-called bad investment decisions, of course, always using hindsight. So the lesson is this: If you have a close friend or family member who always tries to second-guess your investment decisions (of course, after the fact), then, unfortunately, you are doomed for failure, and you need to stay out of the market.
Since I have an accounting background, I was really interested in reading financial statements, believe it or not. I really found them interesting. I read about new issues. I read prospectuses. I read annual reports. I read about new companies. I read about corporate transactions and the prospectuses that came out with 60, 70, 80, 90, 100 pages, describing the transactions. I know it sounds strange, but I even read the balance sheet, the profit and loss statement, and all of the footnotes – there were plenty of footnotes. But that’s where the real meat was. You had to read the footnotes to know what was really happening inside those companies. And that was the best way to find out.
The only other way to learn about companies was to talk to your stockbroker, who would sometimes provide you some information; or to go to the public library where you could peruse some information. In those days, what was there were some binders with some loose-leaf reports from companies like Standard & Poor’s and Moody’s, which wrote up reports about public or listed companies. I read as many of those that I could. But those were all historical; they were rarely up to date. And when I read them I felt like I was reading yesterday’s newspaper. Well, unfortunately, that was all that was available at the time.
Later on, I was asked to join an investment club. I learned a lot from my experience as a member of an investment club. The group at that time was very much interested in growth stocks. The problem was, they tended to focus too much on growth without focusing on the downside risk. But I was a member of the investment committee and I had an opportunity to provide input and to learn as much as I could, not only about stocks, but about human nature. There were those in the club who wanted to buy as the market got higher, and, I thought, became over-priced. But our philosophy was, “We’re going to stay fully invested, during good times and bad. We’re not going to try to second-guess the market.”
It was not until later that I learned that there really is a time to be out of the market. There were those in the club who bailed out when the market dropped. Well, to me, that’s when the real opportunities present themselves and when you should be buying more shares.
You may ask, what is my personal strategy. Well, many years after taking my first course on security analysis, I began to discover – or I should say, rediscover – the philosophy of Benjamin Graham. Benjamin Graham is the author of the best book about investing that I have ever read; it’s called The Intelligent Investor. That is the book that Warren Buffett keeps recommending and constantly reminds people that this book is the best-kept secret on Wall Street. So, I began reading, and re-reading, until the philosophy of Benjamin Graham finally soaked in. It was a game-changer for me.
Part of my theory is that you need to predict the future – I know you’re going to say, “That’s impossible! How do you predict the future?” Well, I believe that there are times when you can predict the future. Now, no one can do it every time and be accurate all the time, but there are times when you can. There are times when you can gather information that would be extremely helpful. For example, if you own property that has a lease that is about to expire, and the lease is below market rates, and you know of several tenants who want to occupy the property, then the past rents are irrelevant; it’s the future rents that are critical. It’s the future.
Sometimes the companies that you are evaluating have information about the future. They know what the backlog is. There are those that insist that you just can’t predict the future. I disagree. Inside the company are the key management people who know what the backlog is, how large it is, how profitable it is. They are the insiders. They never used to share that information, but today that information is more easily accessible. They know if they are losing customers or gaining customers. They know if they are about to launch a new product. They know if there is a price change that is good or bad. They know if there are problems with a source of supply, or that a competitor has gone out of business. And they are sometimes helpful in providing some guidance about the future earnings of the company.
We are fortunate today, in that most publicly-held companies have quarterly conference calls, on the phone and on the internet, for analysts and for investors. These calls are usually held immediately after they release their quarterly earnings report. You now have the opportunity to hear about it at the same time that the analysts hear about it. This is an opportunity you didn’t have a few years back. You’re sitting in on a discussion by management and letting them talk to you about the earnings of the company and their feelings about what the future is for the company. You hear the analysts ask penetrating questions of management, and you have the opportunity to hear it first-hand.
Most importantly, the analysts will sometimes provide some guidance as to their future earnings estimates, and sometimes the company will give you some guidance. Or they may give you a clue, or respond to a question by an analyst when they’re talking about the future of the company and actually say that the analyst is on target or way off target.
The above information is sometimes available on the company’s website under a category of “investor information.” Many of the financial resources out there, such as Yahoo Finance, and many other websites, will discuss this analysis and also provide for you a summary of the various estimates that the analysts have made on the particular company that you are trying to evaluate.
For me, the internet was a game-changer. The internet allowed me to do research all day long, if I wanted to. I could check out any number of companies in depth, without bothering a stockbroker.
I can now find out about the price, right now, without calling up the broker every 20 minutes, saying, “Has it gone up? What’s the price now?” But more importantly, the commission structures are just unbelievably low. You’ve got also the ability to buy and sell at your convenience and to set limits. I need to emphasize the importance of not placing an order to buy or to sell without setting a limit. And by that I mean, if the stock is selling for $30 a share and you put in a buy order for $30 a share, you may not buy it; you may have to put in a limit order and say, “I want to buy, but don’t pay more than $30.25.” Put a lid on the price that you’re willing to pay, because that price can change in an instant; and if you just say, “Buy it at the market,” that $30 stock might be $40 by the time your order is processed. So that is pretty critical.
In general, I am a value investor. But I am also a growth investor. And you’re going to say, “How can you be both?” I understand that preservation of principal is primary. But I also want to buy into a company that is growing. The trick is to buy a growth stock and be a growth investor, but only if it’s priced right. That’s the problem most people have; they pay no respect to the reasonableness of the price. You wouldn’t buy a house or a car without checking the reasonableness of the price. But people buy stocks without even inquiring about whether the price is at all reasonable. That is a critical part of the analysis, and that is something that we require of our investors who use our philosophy.
Let’s talk a little bit about how you evaluate whether the price is reasonable. When we evaluate a stock, we’re looking at the earnings, and we’re looking at the projected earnings per share, and we’re looking at the price today for the stock. So, let’s say that the stock is selling for $10 a share. But let’s suppose that the financial statements show that it’s earning $1 per share. It earns a dollar; it sells for $10; it’s selling for ten times its earnings. We say that that is a price-to-earnings multiple of ten, the ratio of the price ($10) to the earnings ($1) is ten times ( a Ten to one ratio). A P/E Ratio of ten would normally be considered a pretty good deal, if the stock is growing and is not a stock that is actually declining in earnings each year.
But let’s suppose that the stock that we pick out, that we’re evaluating, is a stock that is expected, by the company and by the analysts, to grow at the rate of 20 percent per year. But at the moment, it is selling for 10 times earnings. A $10 stock that is earning $1 per share. It is expected to grow 20 percent per year. So if, indeed, it does grow, and its earnings per share grow at 20 percent per year for three years, then three years from now, instead of earning $1.00 per share, it will earn $1.00 plus 20 percent plus 20 percent (because it is growing at 20 percent per year). It will earn at least $1.60 per year. But it is compounding, so it is probably going to be closer to $1.70 per share per year.
If it is still selling at that time for 10 times earnings, and if the earnings per share is growing at the rate of 20% per year, it’s probably selling for 15 times earnings. But if it is selling for 10 times earnings, that stock that was $10 when you bought it, is now earning $1.60 to $1.70, and if it is selling for 10 times earnings, that means it’s selling for $16 a share. And if the P/E Ratio (the ratio of the price to the earnings) has expanded, and it is now selling for 15 times earnings, and it is earning $1.60 to $1.70 per share, that means the stock is selling for $24 a share. That was a $10 stock when we bought it three years ago. That, to me, is where the real upside is: Buying a growth stock, but looking at the Price/Earnings Multiple and trying to evaluate the growth, and seeing if it is reasonably priced.
So, even though I am concerned about the downside risk, and this is one of the prongs (one of the key ingredients or one of the steps), in running a stock through the Matrix system. The big upside is when you can buy a growth stock at a reasonable price.
We’ve been talking about the Matrix, but the more important matter is how to use the Matrix. So what I’ve done is taken the Marvin Matrix algorithm that I have used the last several years and made it available so that investors can use it by going to a website that allows you to run the calculations. That website is where the calculations are, with lots of information about how to run a particular stock through the Matrix so that you can analyze whether you ought to be buying it, selling it, or maybe staying out of the market.
The Matrix calculations were designed for me to use, but now that I’m approaching retirement, I think it is reasonabe to make it available to others. Right now, it’s free. You can go there and pick out a stock and run it through. And I also discuss on that site about how to pick some stocks to consider running through the Matrix.
Now, in the Matrix, I am concerned about three things:
- We are concerned about downside risks. Part of the analysis in the Matrix, on the website, is to go through the steps to evaluate the downside risk.
- The second step is to measure the upside potential. Even though I am a strong believer in growth stocks, I don’t want to overpay; and to that degree, I’m a value investor. That’s a difficult task. It requires patience. But I think that if you run your stocks through the second phase of the Matrix, you will have some feeling about the downside potential, and you will get a scorecard that will help you in making a decision as to whether it’s a buy or it’s a sell.
- The third step of the Matrix, and what some people tell me is the most important part of the Matrix Algorithm on the website, is to help you evaluate your temperament to be in the market. Do you have the discipline to act contrary to the general public? Can you be an optimist when others are selling?
There is a commentary in Benjamin Graham’s book, The Intelligent Investor, written by Jason Zweig (who is just remarkable). He gives an example that if you set aside the cash that you need for paying your bills, and you have plenty of time before you have to retire, then you should welcome a bear market (a down market) as an opportunity. I know that sounds crazy, but I, for one, don’t care if the market goes up or goes down. If it goes up, I’m making money, it’s great. And if it goes down, it’s a buying opportunity.
What you have to remember is to set aside enough cash, and have enough money that is not committed to the market, so that if the stock you are interested in, or the group of stocks, or the market in general, really has a huge drop, that you’ve got the discipline that you need that you can be able to not follow the herd, and that you do the opposite of what everybody else is doing and be able to seize a down-market as an opportunity. If you don’t have the discipline to follow that kind of advice, then you really shouldn’t be in the market. You need a money manager. You need to be in a mutual fund. You need to look at other ways for other people to handle your investments. But for me, it’s more fun to do my own investing.
What is most important is that you’ve got to have the discipline. Part of that discipline is this: If you’ve got someone in your family who is second-guessing you all the time about your investment decisions and making you feel bad about the fact that the market is down, and causing you some anxiety and forcing you emotionally to sell out at the bottom, you can’t be in the market (or you need a divorce).
So what is the next step? The next step is to get prepared to run the calculations. But before you run the calculations, you need to go to Marvinmatrix.com and buy my book, if you haven’t bought it already, and if you’ve already bought it, read it carefully, because the book explains to you how to navigate the website where the calculations are located.
The book contains the name of the website that allows you to run those calculations. If you run the calculations, that will help you determine what stocks to buy, what stocks to sell, when to buy, when to sell, and when to be out of the market. The book explains how to navigate that calculation website. So read the book thoroughly. Go to the website that is described in the book. Get started. Run the calculations. I can tell you this, it works for me! I think it will work for you.
So, in summary, I suggest that after you read my book, that you try my website as described in the book, where the calculations are located, and use it as a guide, and see if it works for you. It works for me.