Home | Help | Feedback | Bookshop
| Investment philosophy | Recommended reading | Frequently asked questions | Putting it all together |

 The Wisdom of Fools

[Article reproduced with permission from Investing for Growth newsletter, January 1998.]

I recently read The Motley Fool Investment Guide, written by David and Tom Gardner, two young Americans who have become a phenomenon in the US through their hugely successful internet site. Many of their investment beliefs are very similar to my own.

A running theme throughout the book is that it is often the apparent Fool who speaks the most wisely. By presenting themselves as innocents abroad in the world of investment, the Gardners can take potshots at the institutions and debunk the myth that investment is mysterious or the preserve of the select few.

Although tongue-in-cheek, this is a serious book. One of its main contentions, with which I agree wholeheartedly, is that ordinary private investors are in many ways much better placed to make consistently good returns from shares than highly-paid professionals in the City and on Wall Street.

According to The Motley Fool, 90% of US mutual funds with a 10 year record underperform the market. No wonder it advises anyone happy to settle for the market's historic record of 10.5% compound growth to ignore the heavily promoted active funds and put their savings into a tracker fund.

Like me, however, the Gardner brothers are not just interested in keeping up with the index, but in outperforming it by a wide margin. Their next step up the investment ladder is the version of Michael O'Higgins's high yield theory, which has a better track record in the US than in the UK.

Where the book gets really interesting is in its analysis of my favourite hunting ground, small-cap growth stocks. We do not agree on all of our criteria, but I am glad to welcome the Gardners to the Low PEG club. They call this crucial measure, in their own irreverent style, the Fool Ratio, but their thinking is essentially the same as mine.

They work on trailing 12 months PERs. These are more conservative than mine, which are based on forecasts for the 12 months rolling ahead. The effect of using trailing figures on, for example, a company growing at 25% per annum on a prospective PER of 15 (a PEG of 0.6) would be to increase the PEG to 0.75.

For future growth rates they work on a two year average, which is less conservative than my approach when EPS are accelerating and more conservative when they are decelerating.

The key point of agreement between us is the application of a calibrated measure (the PEG) to figures that have been prepared on a consistent basis. Their conclusions are that companies with a PEG of under 0.5 are a raging buy and tempting up to 0.65. Above 1.0 they are a definite sell. Their limits are harsher than mine, but the thrust of their conclusions is very similar.

I also agree with many of The Motley Fool's other selection criteria - high margins, good relative strength and cashflow. They also, very sensibly, look for EPS growth of over 25% and directors holdings of 15% or more. I am much less convinced by their insistence on low daily turnover of shares and a low share price.

I enjoyed The Motley Fool Investment Guide's earthy common sense approach, unfettered sense of fun and breezy style. It was a pleasure to read a book by two young investors who plainly agree with me that the stockmarket is both a highly lucrative and extremely enjoyable arena.

The Motley Fool UK Investment Guide by David Berger Published by Boxtree 3rd Revised edition edition, published in 2002

Back to: Recommended books for advanced readers