New Investors, Here's One Way You Can Beat the Market
Last month, I had the opportunity to interview the man CNNMoney called "the best buy-and-hold blogger" on the Web, Eddy Elfenbein.
Elfenbein writes about investing at Crossing Wall Street, and on that site he goes about the very Foolish mission of demystifing investing and the markets.
During our hourlong interview, I asked him about the advice he gives to self-described new investors. Watch the following video for the exchange. (Run time: 4:09; there's also a transcript under the video player.)
Brian Richards: When you get questions from new investors, what's your advice to them?
Eddy Elfenbein: Well, it sort of depends how you want to invest. I think that there's nothing wrong with passive investing, and for a lot investors that's great if you put half your money in a stock ETF and half your money in a -- 50% in SPY [the SPDRs S&P 500-tracking exchange-traded fund] and 50% in TLT [the iShares Barclays 20+ Year Treasury Bond ETF], you're going beat a lot of people who are paid a lot of money. And that's fine. There's nothing wrong with that at all.
Now, for investors who enjoy it and like to be part of the investing game -- which I am; not everybody is. So people who are interested in that, then my advice is look for companies that aren't followed by everybody else. Go off the beaten path. Everybody's got an opinion about Google. Everybody's got opinion about [ExxonMobil] or similar companies. There's 40 analysts who follow them. There are hundreds of companies that aren't followed by a single analyst. These are orphan stocks -- it's not worth it to Wall Street.
I'll give you an example -- and let me preface by saying I'm not recommending this, but there's a small company called Nicholas Financial, which I read about a lot. It's not covered by any analysts. And I made a few calls, talked to the people there. You call up and you say, "I'd like to ask some questions." Some companies, sure, they'll be happy to talk to you. Nobody called you up at your job and asked you about it. You can read the financials, and it doesn't take long and you know as much as anybody.
And this company really impressed me by what they did, and I felt like I was a kid in a candy store. Nobody knew about this company. They make used-car loans, car loans for used cars. And with that you can charge about 25% in certain states. So they have -- I'll give you some rough numbers -- about $270 million in used-car loans. They get about 25% on that, so that's $68 million coming in the door each year. They are about $100 million in debt, and that's at 5%. So think about that spread they're getting. So it's $68 million coming in the door, $5 million going out, so you're netting $63 million. The total operations to run the business is about $27 million, so that brings you down to about $36 million, and then taxes, which is a big hit. That's about another $14 million. So last year they cleared about $22 million and they have 12 million shares outstanding. It's a tiny company. I mean, Citigroup is a thousand times larger than them. They made $1.85 a share; at their March 2009 low they were at $1.85, right about that. So they were treating 1 times earnings, not one year out, not two years out, but between 24 and 36 months out they were trading at 1 times earnings and nobody knew that.
And I think they were dumped and people thought they were a subprime lender. And at no point were they losing money, at no point. They turned a profit every single quarter, and people were trading it. They really were going at pennies on the dollar, and the stock was at $1.85 and now it's at $12.50 today and I still think it's a bargain. I think it should be at least $17‑$18.
Richards: It's like One Up on Wall Street, Peter Lynch -- I think his example is Pep Boys.
Richards: It had a silly name. Nobody followed it.
Elfenbein: It's too goofy to even follow. Who thinks it could be that profitable?
At the time this article was published Fool.com managing editor Brian Richards holds no position in any company mentioned. The Motley Fool owns shares of ExxonMobil, Google, and Citigroup. Motley Fool newsletter services have recommended buying shares of Google. The Motley Fool has a disclosure policy.