Monthly Archives: June 2008

Seven Tips from Scott: Make Money Slow!

I began dabbling in the stock market in 1997. It’s been a fun ride, and I’ve learned a lot. My success can be summed up in 7 key tips:

1. Patience is a Virtue.

It’s not easy to make a lot of money in the market overnight. You really need to have patience and a (very) long-term outlook. I do a lot of homework before investing in a stock, and only invest in companies that I believe will be outperforming the overall market in 3, 5, or 10 years. I generally don’t invest in a company unless I’m prepared to hold that investment for at least 3 years. I don’t “invest and forget,” though — I continue to digest as much information about the company and market as I can, but in general I make few in-flight adjustments once I’ve picked a portfolio.

Holding a stock long-term also has significant tax advantages. Currently, the long-term capital gain tax rate (for any stock you hold for 12 months or more) is just 15%. There’s a certain joy in knowing that your money is working for you, and is only paying 15% taxes.

Patience is also key because you often don’t have a lot of principal to invest, which leads us to the second point:

2. You Don’t Need a Lot of Money

A year ago, a relative came to me with some questions about investing. She had about $1,000 in “play money” that she was willing to invest in stocks (she had never invested in individual stocks before), and I gave her some tips, but in the end she did not invest the money. Her rationale: “even if it doubled in a year, that would still only be $2,000.”

I had a discussion with a friend the other day who expressed similar reservations.

Had the relative invested that money in the stock she was looking at, she would have realized a 1-year gain of just under 80%. Her $1,000 would be worth $1,800 (before taxes). Instead, today it is worth $1,000 (or less, if you consider inflation). Granted, it could have been worth less than $1,000 — there are certainly no guarantees in the market.

But that brings us back to Point #1: Patience is a Virtue.

An 80% gain in one year is nothing to scoff at. (Heck, a 20% gain in one year is nothing to scoff at!) An extra $800 probably won’t result in any lifestyle changes — not in the first year. But if you’ve done your homework and keep that money invested, after a few years the magic of compounding begins to creep in. If you grab an 11% return on investment each year for the next 10 years, that $1,000 is now worth almost $5,000. It could be worth significantly higher if the stock has some banner years during that time. In my experience, stocks go through occasional periods where they absolutely surge. You want to be invested in them before — and during — that key period.

Let me provide a concrete example. In early 2000, I discovered an upstart restaurant chain called the Panera Bread Company (PNRA). I spent a couple months doing research on the company. This included hands-on research, which was a good thing: Panera makes yummy food and pastries. I made several observations in my research:

– Panera was extremely efficient. All stores were modern and had an eye-pleasing and high-end design, and the company had put into place state-of-the-art business practices to monitor performance and minimize costs. For example, many of Panera’s menu items rely on fresh sourdough bread (never frozen). Panera purchased or set up exclusive arrangements with providers of this key ingredient, locating them strategically close to clusters of stores. Panera also wired all stores into a master network and received real-time statistics on sales, allowing corporate to perform all kinds of useful data mining.

– Despite Panera’s ability to rapidly take and construct orders, every Panera store I visited was extremely busy — often the busiest restaurant around. People were willing to wait 10 or 15 minutes to get Panera food during the lunch rush. I spoke with friends and relatives across the country located near Panera stores, and they made the same observations — in Michigan, Ohio, Pennsylvania, and Maryland.

– Panera regularly updated its menu item, always staying one step ahead of customer tastes. I was surprised by how quickly new menu items were added.

– Panera was capitalizing on the new and growing “fast casual” market segment. Around this time, there was a backlash against fast food restaurants such as McDonalds — traditional fast food restaurants were perceived to offer low-quality, unhealthy fare. For about an extra buck per order ticket, customers could get a fresh sandwich, made with quality bread and quality ingredients. And they could eat it in a relaxed environment, with comfortable tables and chairs, and even fireplaces. There was also a perception that the food was healthier. (This is, sadly, a misplaced perception. Panera sandwiches have as much — if not more — sodium, fat, and calories as many popular menu options at fast food restaurants.)

– I was impressed by the management of Panera. The CEO of Panera had previously co-founded Au Bon Pain. But after Au Bon Pain’s growth curve began to flatten out, his entrepreneurial spirit kicked in and he wanted new challenges. In 1993, Shaich purchased a 19-store chain of restaurants in the St. Louis area called the Saint Louis Bread Company, which he re-branded Panera. He began to grow this new concept, and in 1998, sold all of the units of Au Bon Pain. This was a difficult decision for him, but it allowed him to focus all of his efforts on growing the Panera brand — and this part was key — it allowed him to do that from a position of capital, not debt. Many restaurants start off in debt, and are lucky to ever turn a profit. Panera started on a strong financial footing — with black, not red, ink. In my mind, this significantly reduced the risk of investing in a restaurant stock. And Shaich was clearly an expert in this market and passionate about it — no pun intended, this was his bread and butter. I had always been a fan of Au Bon Pain, so I was familiar with his track record.

– The company’s growth decisions were carefully considered and conservative. Many restaurants (such as Subway) immediately go to a franchising formula and try to maximize the number of franchise locations. They make their money on franchise fees and don’t care if two franchisees over-saturate a market and end up in competition with each other. A lot of franchisees have been taken to the cleaners in this way. Panera’s growth was much more measured. A large percent of the stores were company-owned (significantly higher than most restaurant chains), and the remainder were only given to hand-picked and carefully vetted franchisees. (Usually only ones willing to open a large number of stores in a region.) This resulted in careful quality control and helped to ensure that no market was oversaturated. Otherwise, the Panera brand could have quickly become a tired fad. (The industry is littered with examples of over-aggressive growth that eventually caved in: Boston Market, Krispy Kreme, etc.)

As you can see, I considered a lot of factors before I invested a dime in Panera. (I didn’t consider “traditional” metrics, such as P/E ratios, one bit.) Working in Chick-Fil-A in high school had given me some background on the restaurant industry and what makes a restaurant successful, and I was able to pair that with extensive research to develop a clear picture of Panera.

However, there was one problem: I was poor, and did not have that much money to invest.

On March 13, 2000, I purchased 23 shares of Panera for $6.625 per share. With commission, the total price was $172.33.

I received a bonus at work several months later and used it to purchase an additional 67 shares of Panera. And later that summer, I added another 10 shares of Panera. The total investment was about $1,000.

And then I waited. Patiently.

In 2002, Wall Street suddenly discovered Panera. Analysts began to talk up the stock, touting many of the same points I had discovered two years before. Panera’s careful growth continued unabated, with a strong balance sheet, and year-over-year growth in every location.

On June 25, 2003, Panera stock had a 2-for-1 split.

I sold my shares in Panera between late 2003 and mid-2004. Panera was still doing well in 2004, but by that point, the company was Wall Street’s darling, and the secret was out. The stock became too risky and the surprise growth story had already been told.

My original investment of about $1,000 had turned into $7,500 in about 4 years.

That’s not bad. My $1,000 in “play money” was suddenly $7,500 in “play money.” That’s definitely a lifetime supply of Panera bagels.

I turned around and re-invested that $7,500 in the market, and it’s worth significantly more today.

The original investment wasn’t that high. I just needed patience.

3. Do Your Own Research.

Wall Street analysts are bozos. There — I’ve said it. I am disgusted by all the talking heads pontificating about companies and the market, and I’m particularly disgusted by how the market reacts — in the short-term — to these bozos.

I have seen stocks move significantly (in some cases 10% in a day) based on public statements by analysts that I knew were flat-out wrong.

I’ve blogged about this sort of thing in the past. For example, one master analyst made this following bold proclamation in early 2007, discussing the possibility of a merger between XM Radio and Sirius:

    “… in a Banc of America Securities report, analyst Jonathan Jacoby put the probability of [government] approval of the merger at about 35 percent, but noted that it was likely much lower.”

Or, here’s a statement from wizard analyst Richard Farmer of Merrill Lynch from years past:

    “Farmer said he expects Apple to exceed his own earnings forecast of 37 cents a share.”

It’s breathtaking, isn’t it? What kind of analysis do you think goes into coming up with scientific-sounding numbers like 35% or 37 cents? Really insightful analysis, I bet. But analysts don’t just come up with these scientific-sounding numbers. They then wrap them with clever disclaimers that let them claim victory regardless of the results. (Hint: if you believe the merger chances are lower than your estimate, lower your estimate.)

What’s always annoyed me is that companies and investors are hurt when their actual performance doesn’t match the voodoo predictions of these brilliant analysts.

But I’ve discovered something: if you follow my first piece of advice — patience — and do your own research, and have a strong stomach (see next point), analysts always fall into the noise.

Because the market is self-correcting.

An analyst’s proclamation might cause a stock to fall significantly in the short term, but if the company is sound, actual results will quickly erase any effect of analyst pontifications. Because eventually the facts trounce everything. And you are investing for the long term, right? If you invest for the short term, you will be held hostage to the whims of Wall Street analysts.

The key thing here is to ignore analysts and do your own research.

Because the analysts are usually wrong. And if you’re following an analyst, everyone else is too. You want to find opportunities that are under the radar of Wall Street and the analysts. I have taken advantage of two types of opportunities:

– Discovering a promising company (such as Panera) before the market catches on. But there are lots of promising companies that never take off. You have to do your own research to get a gut feeling for whether a company has what it takes to surprise the market and succeed.

Peter Lynch famously suggested years ago to “buy what you know.” This advice is timeless, although I would amend it to say “consider what you know.” What you know may lead to opportunities, but the next step is to research those opportunities. Study opportunities in markets that are geologically close to you, or ones that you already have an expertise in. But then divorce your expertise from the equation and try to look at the company objectively. And even though a store might be doing gangbusters in your neighborhood, that doesn’t mean the formula will translate to a national growth one.

– Some promising companies suffer from a stigma that is unfounded. In the late 90’s, you could not find a story that mentioned Apple Computer without attaching the word “beleaguered.” This drove Apple stock to a split-adjusted low of less than 2 dollars per share. But I knew Apple’s products, saw the potential, considered factors such as the growth of the Internet, and zagged when everyone else zigged. Apple has been one of the best performing stocks on the market over the past decade. (Guess what? All of those analysts were wrong!) If you had invested in Apple when it was “beleaguered,” you’d be looking at an ROI of around 8500% today. Now, there are lots of beaten-down companies that never claw their way back to health. Once again, doing your own research is key. But you might find a gem or two that has already been written off by the “experts.”

4. Have a Strong Stomach

The market suffers from huge swings, and it is hard to be patient when you see one of those swings take a huge swipe at your investment and principal. Even if a company is healthy, an unforeseen event such as 9-11 can have a big impact. You can’t predict these events; you can only do your research, make sound investing decisions, and then hang on for the long term. There have been plenty of times when I have been tempted to panic and pull money out. I never did. Instead, having done my homework for the long term, I chose those times to buy more shares. Again, zag when others zig. And:

5. Dollar Cost Average Anytime You Can

Dollar cost averaging is a wonderful thing. By purchasing small amounts of stock or mutual funds at regular intervals, you even out the differences in price and minimize the overall risk. If you’re averaging in when the market is low, you’re getting extra bang (or shares) for your buck. The market is cyclical and there are inevitably times when the market goes down. If all of the factors that led me to purchase a stock are still in place, I use these times to buy extra shares at a discount. Everyone loves a discount!

6. A Down Market Can Be a Blessing

Everyone gets depressed when the market is down (such as right now), but for a young investor, this is a time to celebrate — and a time to invest, even if you don’t have much money to invest. Over the long run (decades), the stock market tends to be the best investment you can make — returning an average return of 10% or more. (Of course, individual stocks can do far better or far worse.) But those stocks don’t return 10% every year. They may go several years with steep losses, followed by relatively short burts of appreciation. Those short bursts are wholly responsible for those long-term average gains, and they’re relatively infrequent. You want to be on the roller coaster car when it starts up that climb. To do that, hop in when the market is down.

7. It’s OK to Take Profits Now and Then

And finally, it’s OK to sell your stocks when they’ve done well, or to lower your position. Don’t become attached to a stock just because it has done well for you. It was difficult for me to sell Panera at a time when analysts were all saying “strong buy.” I loved the company, and I loved the gains I had made, but I knew it was time to go. One of the original factors for buying the stock — that it was a relative unknown — no longer applied. Since I sold, Panera has done OK, but the stock has been relatively flat. It certainly hasn’t had the types of gains it had in those first several years. I was able to move the proceeds into companies that were still at the bottom of their own roller coaster hills.

From the (Really Old Film) Archives: Timber Lake Trail

I’ve taken several road trips out west, and on each trip I’ve lingered in Colorado. Colorado is a nice place to linger. I’m glad that I lingered there for the first 13 years of my life.

On one road trip a number of years back, I spent several days camping and hiking in Rocky Mountain National Park.

Under the dim glow of a flashlight, I huddled in my tent the first night and pored over topographic maps trying to pick out a hike for the next day, eventually settling on Timber Lake Trail. In the distance, I could hear the sound of elk bugling. In fact, those elk bugled all night long. They were very inconsiderate elk.

The next morning, I packed up my tent, and learned from nearby campers that a black bear had been milling about by my tent for much of the night. I was completely oblivious to this. Apparently other campers were quite alarmed by the bear’s proximity to my tent, but, naturally, had made no attempt to warn me, glad that the bear wasn’t milling about by their tent.

I made my way to the trailhead, glad that I had escaped a more personal encounter with a bear, and was greeted by a posted sign warning that a mountain lion had recently attacked a hiker on the very trail I was about to hike.


Although I had no intention of jogging, I couldn’t help but notice that I was alone.

This led to a few minutes of consideration. On the one hand, there was a mountain lion on this trail picking off humans, especially solo hikers. On the other hand, I was skinny; why would a mountain lion bother with me? I probably survived the scary bear milling encounter for the same reason.

So I decided to chart ahead. I was there, and I was going to hike. I didn’t drive through Kansas for nothing. For protection, I brought a road flare, and stashed it in my backpack. Evidently, I thought that if a mountain lion suddenly lunged towards me, in a split second I would have time to take off my pack, remove the road flare, strike it to ignite it, and then wave it in front of the lunging lion to scare it off.

So, yeah, it provided plenty of peace of mind.

Timber Lake is a 9.6-mile hike, with an elevation gain of 2,050 feet. The trail ends at 11,060 feet above sea level, in a meadow and glacial lake, surrounded by towering mountains and right on the intersection with the treeline. It’s also fair to say that the trail ends in a postcard.

Most of the trail goes through dense forest, slowly climbing its way up.

During the hike up, I took a total of one picture. (The following photos were prints that were “scanned” by me aiming my digital camera at them, because I’m too cheap to buy a real scanner. So the quality ain’t great. The original pictures were taken with a film camera. You can learn more about film cameras at your local Smithsonian museum.)

Here is a photo showing the trail:

Why only one photo? I think I was nervous about getting mauled by a mountain lion. And nothing attracts mountain lions more than the casual sound of a camera’s shutter releasing. It’s like the sound of a can opener to a housecat. I figured as long as I was moving at an even pace (but not JOGGING, for heaven’s sake! I read the warning sign — at least half of it!), the mountain lions would leave me alone.

But, all kidding aside, I didn’t linger because I was anxious to reach the top of the trail, and was worried about getting stuck above treeline in an afternoon thunderstorm.

The trail turned out to be a tease. Growing more exhausted, I kept expecting and hoping to see Timber Lake appear around the next bend. There were lots of bends; there was no Timber Lake. But, eventually Timber Lake made its debut.

And it was worth the wait. There I was, in one of the most serene and scenic places I had ever been. There wasn’t a soul around. Rocky peaks surrounded me and reflected off the crystal-clear water. Even though it was the middle of the summer, there were piles of snow around. It might have been chilly, if it weren’t for the bright Colorado sun shining down. I made my way around the lake, snapping photos, and eventually hopped across stones to a big island of a rock surrounded by water. I sat on this rock for awhile, taking in the sights, sounds, and smells while munching on a granola bar or two. I noticed some movement in the rocks above, and counted at least a dozen bighorn sheep. I looked up at them, and they looked down on me. I couldn’t help but be jealous; this was their home.









Why Garmin Has Lost Their Way

I’ve always been a fan of GPS technology, since it was first made available to consumers. Back in college, I saved up my money to buy a handheld GPS receiver: the Garmin GPS 45. It was a bit bulky, took forever to lock onto satellites, and plowed through batteries, but it was magical: it could tell me where I was, or how to get back to where I was when I last knew where I was. As an avid hiker, it opened up new possibilities for exploration.

Over the years, I’ve given Garmin a lot of money: tracking evolutions of both handheld GPS receivers and automotive GPS receivers. In the car, I went from an early black and white StreetPilot to my current one, which includes XM Radio, traffic, and weather, and can even say the actual names of roads (although sometimes with comical pronunciation). Garmin’s GPS receivers have accompanied me on nearly every hiking, mountain biking, and kayaking adventure I’ve been on. I’ve always found Garmin’s user interface to be best-in-class, so much so that even though my current car includes in-dash GPS, I continue to use the StreetPilot for its better software.

But, sadly, I think Garmin has lost their way.

They have lost their way in one fundamental way: their product map today can’t be navigated. And this is ironic for a company that produces navigation tools.

Garmin makes GPS receivers in a variety of categories. If you look just at their automotive category, this is what it looks like currently:

And this is absolutely, utterly insane.

There are 38 separate on-dash GPS receivers in their product line.


Some of the differences are subtle and sensible, while others make no sense at all. But when presented with this product matrix, how can you possibly decide which one is the best fit for you? In reality, the primary features (and underlying software) across all of these units are essentially the same. There is simply no reason for there to be such product diversity.

There is a company that went down this same path, and it almost didn’t survive.

In the mid-1990’s, Apple Computer’s product line had begun to multiply, even as sales began to shrink. There were multiple PowerMac models and multiple Performa models. There wasn’t much difference between them, and no salesperson could adequately describe how a Performa differed from a similar-looking PowerMac. (The difference was really in distribution and software bundles, a rather silly distinguishing factor that meant little to end consumers.)

When Steve Jobs returned to Apple, he could not figure out the product line. It was a huge matrix with seemingly-similar products. Consumers were confused. And by that point the products weren’t all that different than Wintel boxes.

One of the first things Steve Jobs did when he returned to Apple was to slash the Macintosh product line from dozens of models down to three: iMac, PowerBook, and PowerMac. The iBook followed a year later, bringing the total to a sensible four. Four was a good number. You had a consumer laptop and desktop (iBook and iMac), and a professional laptop and desktop (PowerBook and PowerMac). With build-to-order, customers could configure a specific model to their delight, but the product matrix was downright simple and easy for anyone to understand. Generally speaking, you knew if you were a consumer or professional user, and you just had to decide between a laptop and desktop.

Apple has stuck to this product simplicity philosophy, and it has certainly been a contributing factor to their recent success.

High-level managers at Apple have said that the toughest part of their job is deciding what not to do. The natural tendency is for companies to begin branching out, spreading their engineering resources thin across an ever-expanding but undistinguished line of products (e.g., look at all the printers HP sells). But a few companies resist, putting their “A team” on each of a small number of products. It helps a company remain focused, it helps ensure that each individual product stands on its own, and it also drastically simplifies the marketing message.

I have watched with dismay as Garmin has gone down the “product bloat” path.

Now, more than ever, they need to simplify their product matrix and marketing message. Because they not only have their traditional peers to compete with (e.g., Magellan and automobile manufacturers), but they also are about to receive huge competition from smartphones. Garmin needs to differentiate themselves from these new market challenges, and produce a smaller number of products that offer an obvious experience and benefit unavailable in alternative products.

It should be alarming to Garmin that someone like me, who has owned their products from their inception and has been a passionate user, can no longer figure out what Garmin products to recommend to friends.

Some of my Worst Photos Ever (Oh Yeah)

In today’s dredging through my digital photo album, I have extracted some of my worst photos ever.

The following photo didn’t turn out quite how I thought it would. I used multiple exposures on a single frame, capturing and blending some shots from around the Bellagio hotel in Las Vegas. There was also some zooming involved in at least one of the exposures. And why not?

There is nothing as beautiful as kayaking through the darkness. Unless you try to take a picture of it. Oh sure, the flash got the front end of my kayak, and a couple lights in the distance perform an uncanny impersonation of JPEG noise artifacts, but I’m left wondering why I risked capsizing in the dark to get this captivating photo.

I have absolutely no idea what happened in the following photo. I’m not even sure I meant to take it.

Ahh, rookie mistake. Let’s see — bright background behind underlit subjects in foreground — meter off of the bright background! Sorry Ray and Joey. At least I think that’s Ray and Joey.

In this next photo I try to do an effect that I’m sure will be very cool: zooming the camera suddenly in the middle of an exposure. There are probably some circumstances where this will produce a great shot. This is not one of them.

Yeah, that’s right — it’s a picture of a deer’s butt. A picture of an out of focus deer’s butt. For future reference: when taking a picture of a deer’s butt, please make sure it’s in focus.

The following is a picture of a wall. You heard me right — I took a picture of a white wall. There is nothing more exciting than that!

(In fairness to myself, I believe I took this picture in order to ferret out dust on my camera’s CCD. You can also see how a camera meters for 18% grey.)

This photo had so much potential. I was covering the 24 Hours of Snowshoe mountain bike race, and it had been raining practically every day for weeks leading up to the event, turning the course into a muddy mess. This increased the difficulty level enormously for the riders, and organizers came close to cancelling the event. While walking through the mud, I noticed a “Granny Gear Productions” (the race organizer) sign reflecting in muddy water. I thought this shot would very cleverly cover many aspects of the event.

Instead it really just turned out to be a picture of mud.

You wouldn’t think it would be hard to get a focused shot of a large object in the center of the frame, would you? I’m not sure what my camera was focusing on, but it obviously found something else very interesting.

This might of been a cool shot if the snowboarder was in focus. Or the trees. Anything, really.

This appears to be an unfocused picture of the camera’s strap in the middle of the frame.

Mental note: I can no longer pick on people who take a picture with their thumb or camera strap blocking the lens.

Another one of those “nice in concept” photos. This is a picture of an icy water fountain in front of my old car at an isolated rest area in the middle of the country in the middle of the winter. I am not sure why I thought this framing would be so fascinating, but this kind of photo doesn’t happen by accident, so obviously I thought there must be some symbolism to it. I’m just not sure what it is.