A New Way of Thinking about Stock Selection

Aparadigm is a framework or model. As we learn and experience, we begin to establish various paradigms relating to all aspects of our lives. Eventually, we establish a framework with which we’re comfortable. We begin to expect that certain ways of thinking or behaving will bring certain results, and we reach a certain comfort level between our actions and the reactions they will create. Sometimes the paradigms we establish serve us well for our entire lives. Other times,
we become dissatisfied with the results our actions create and it becomes necessary to create a new paradigm. When it comes to selecting individual stocks, 99.9 percent of investors and Wall Street analysts are operating using a dog-eared, shop-worn paradigm that is coming apart at the seams. They are all looking for the same thing: growth stocks with earnings momentum that will deliver strong earnings gains indefinitely into the future and enable these companies to justify their sky-high stock prices.
There are two problems with this paradigm: First, it’s been in existence for nearly 20 years and it’s getting a bit creaky. In fact, it’s probably on its last legs. The second problem with this paradigm is that it’s not new; it’s only a new version of other paradigms that have come and gone over the years. The late 1960s version, for example, was called the “One-Decision Stock Paradigm.” In this version, certain stocks had earnings that would grow forever, which meant their stock prices would go up forever. That, in turn, meant that investors would never have to sell the stocks. Thus, only one decision was necessary—to buy them.
That paradigm eventually collapsed when it turned out that some perpetual growth industries (like bowling) reached their saturation points far sooner than analysts expected; other perpetual
growth industries attracted competitors and price competition, thereby reducing profit margins (like calculators and CB radios); and economic recessions still surfaced from time to time, which had a tendency to affect all industries, turning growth stocks into normal, run-of-the-mill cyclical stocks. This way of thinking is new paradigm territory for 99.9 percent of investors and analysts. At first it may seem difficult and unusual, but if you have the courage to enter this new paradigm, you will find yourself in a fascinating new world where all sorts of new and exciting stock ideas will present themselves. You’ll also find that this new paradigm is sparsely populated, which at first may be uncomfortable. But eventually, seeing things that others do not see will eventually turn out to be the source of great excitement and satisfaction. You will understand things that others do not understand. At times, you’ll feel almost as if you can see the future, and
you will marvel at the inability of others to do the same.