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It is good practice to check each company that we invest in every quarter to insure that they continue to fit our needs. In my case, I only invest in Good Companies (which also appear on the Watch List). If you follow my advice on this site (and in the soon to be published book) you will know that I slowly accumulate stock with my earnings in those companies that are extremely high quality. However, when a company is no longer rated Good, I sell my holdings as quickly as possible.

There is one single event that can make a company fall out of favor. A company must continue to be profitable! Unprofitable companies are too likely to do rash and stupid things to recover. They tend to worry about short term gains to stop bleeding cash. They tend to not do the right things that will make them successful for the long term.

While irrational behavior is not universal among managers of unprofitable companies, it happens enough that I don’t take the chance. This site is called Confident Investor – this means I need to be confident that the company is doing the right things. For unprofitable companies, I do not have that confidence. Since I have many choices (as do you) as to where I stick my investment money, I will simply choose to invest in companies that are only rated Good.

For the next several days, we will be repeating our looks at our Watch List and see if they still should be there. Our first company will be Goldcorp as it is has turned unprofitable and therefore no longer a Good Company. I have liquidated all of my investments in Goldcorp.

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Dilbert.com

Does your retirement plan and wealth accumulation plan allow you to be Wally and you are bragging to your co-workers or are you the pointy-hair boss that is jealous of the wealth of others?

If your plan includes conservative investment into mutual funds, you are likely the boss. If your plan is to concentrate your investments on great companies (like those on the Watch List), you can be Wally!

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This is a guest post written by David Lewis

I’m going to go out on a limb and say that managed mutual funds should not be long-term investment vehicles. Very few people are experiencing stellar results. DALBAR Inc. has gone on record to say that the average mutual fund return is less than the index it is made up of.

There is one reason that products are sold in the financial world, and that is to make money. It doesn’t matter what you buy: insurance, annuities, mutual funds, stocks, bonds, ETFs, or anything else. The only question is,

How efficiently can you buy these products?Read More →

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Dilbert.com

There are studies that have been done that show that many mutual funds cannot beat randomly choosing stocks (including throwing darts at a list of stocks). Most professionals that run a mutual fund don’t perform better than a standard index fund over the long term.

This is why I typically suggest that investors split their portfolio into 2 main groups. A portion of their income is invested in index funds and the other portion in great stocks like I show on the Watch List.

Don’t trust the ‘rat’ in Dilbert’s world – invest only in great companies. If you want to use a dart, print off the Watch List, put it on your wall, and throw darts to pick the ones to start your portfolio.

The above Dilbert cartoon is embedded via the Dilbert image embedded technique. No copyright laws were broken.

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Earlier, I spoke about the earning estimates of the “experts” and that, at least in the case of Target [stckqut]TGT[/stckqut], the numbers didn’t make sense for a 5-year projection of their earnings growth.

Let’s dig in a bit deeper. We will stay with MSN Money (I am not beating up MSN Money – it is simply reporting data supplied by others – you can find the same numbers at Morningstar or probably your favorite broker’s website). A few items below Earnings Estimates, you will see Financial Results and then Statements will appear and it will show a page that includes a tab for 10 Year Summary.

Let’s compare Sales over the last 10 years to Earning before Interest and Taxes (EBIT). We can quickly calculate that Earnings has varied from about 5.5% to 7.5% and averages about 6.3%. We can also see that for the last couple years, Target has been a bit below average on its Earnings compared to Sales (5.92% for last year).

Earlier, we saw that the analysts are saying the company is going to increase earning 12% per year for the next five years. That would mean that either Sales are going to increase at 12% (something that when you look at the Sales column hasn’t happened in the last 3 years) OR the earnings/sales would have to increase very dramatically – something that also has not happened in the past.

My prediction is that Target will not grow earnings at greater than 12% per year for the next 5 years. The evidence of the company to pull off that level of performance is simply not available.

A quick side note – why do I care about earnings growth? Simple, earnings growth should result in a higher stock price meaning my investment in the company will continue to appreciate. The growth of one company compared to another company is a major factor in my decision to invest my hard-earned capital in any given company. I want to maximize my rate of growth of my investment – don’t you?

P.S. Tomorrow, I will post my analysis on Target Corporation. Sorry to use them as my whipping boy for this commentary.