Lenny Dykstra Takes a Swing at Wall Street
Lenny Dykstra
09/06/05 - 12:20 PM EDT
I was known for playing baseball very aggressively, and my trading style is the same -- I'm forever seeking a competitive edge. But becoming a winner in the crucible of Wall Street wasn't a goal, a hobby or even a passing interest; for me, it was a necessity.
After the bloody post-2000 market crash, I found the value of my brokerage account cut in half and realized I'd paid dearly for some miserable "advice." In fact, it was that crash that gave me the drive to fire my brokers, move my money to the safe harbor of a passbook account and head for spring training with all the vigor of a teenage phenomenon gunning for the big leagues.
My thirst for knowledge about the market was slaked by the daily briefings of more than 30 newsletters, plus an unusual trade: private baseball tutoring from me for one-on-one coaching from a leading trading expert. I peppered my newfound mentor with questions until I was certain I had the necessary edge to win. The ability to barter baseball expertise for expert tutoring in investing -- encompassing virtually everything from moving averages to the potentially treacherous world of options -- was perhaps my best investment to date. I am thankful to this gentleman (who shall remain nameless) for his expert tutelage.
I also take Warren Buffett's advice to heart: "Be fearful when others are greedy, and greedy when others are fearful." I have Mr. Buffett's quote taped on my computer.
In the year I spent learning about the market and its many nuances, I determined that one of the major flaws in most brokers' style is a lack of diversity in their so-called diversified blue-chip funds. In understanding what went wrong with my brokerage account, I came to realize that the "first class" mutual funds that I was put into, from different fund families, nearly all invested in the
same stocks. So, for example, when
Sun Microsystems (SUNW Quote) or
AOL went down, all my funds went down.
False diversification was the critical element that helped my brokerage account post spectacular losses, seemingly in the blink of an eye. With that lesson under my belt, along with hours of books on CD and days of training with some of the best minds in the financial industry, I felt ready to step up to the plate, get in the box and take my swings.
A Pitch to Hit
Before I take a position in a stock, or before I put a company in the starting lineup, the company has to clear these three hurdles.
The stock's return on equity, or ROE, must be higher than the forward price-to-earnings ratio.
The stock must have an abundance of free cash flow, which is defined as money left over after the company pays its bills. This is very important because this really tells me if the company is making "real money."
The company must have a low level of debt, with a debt-to-equity ratio -- long-term debt divided by shareholder equity -- preferably below 1.0, but absolutely below 1.5. The ratio indicates the extent to which a company is leveraged and, thus, how vulnerable it is to an economic downturn. One caveat: I'll occasionally make exceptions on the debt-to-equity ratio for certain fast-growing companies if I have strong faith in the firm's potential upside.
Now, let's get in the box and take some swings. Leading off is
Symantec (SYMC Quote). Trading at $20.85 after merging with
Veritas, the selling is overdone. It has no debt, almost $3.5 billion in cash and just under $1 billion in free cash flow. If that's not enough, Symantec has a $3 billion stock repurchase plan that is ongoing through the end of the year. It keeps getting better; Symantec is exposed to the highest growth areas of software spending and has a leadership position in a consolidating market.
Batting second:
Dow Chemical (DOW Quote), trading at $43.21 as of Friday's close. This company is a monster. It prints money. The stock has been hammered and is not far from its 52-week low at $41.52. Why? What is the reason? Because it trades at 9.78 times trailing earnings?
Not! Or maybe it's because the ROE is 35.6%?
What a joke! But you know what? If they want to give this great company away, I will continue to add to my position.
Remember, those "operators" on Wall Street love to run stocks up so the public thinks everything is OK and it's time to get back in the market. It goes something like this: Mr. and Mrs. Smith get a call from their broker telling them Dow Chemical broke out -- i.e., that it's finally time to get back in the stock and buy. Then, Mr. and Mrs. Smith jump in and start buying. Now, guess what the operators on Wall Street do? You got it -- they sell, leaving Mr. and Mrs. Smith holding the proverbial bag.
If you trade options, Dow Chemical is the perfect candidate right now. But I must warn you -- 99% of the public loses when it comes to options. They lose because they try to hit the home run. They pay 50 cents for an "out of the money" call: that's comparable to trying to draw to an inside straight in poker; i.e., it's not happening. The winning option player buys a deep in-the-money call that goes out three or four months. Options are a great tool to use as leverage (to control a lot of shares for little money).
An investor who doesn't want to put up $43,210 to own 1,000 shares of Dow Chemical can buy a deep in-the-money call. That is the beauty of options: leverage! The investor can control 1,000 shares of Dow, all the way to the third Friday in January, for $4,700 by buying the January $40 strike. You only put up $4,700, and you have until the third Friday in January to exercise. By then, I think having the option (i.e., the right) to buy Dow Chemical at $40 will be a winner
The goal of this column is to help you better understand the market and, ideally, make some money. In addition, I'll share some reflections on life and baseball, as the anticipation and excitement surrounding the picking of stocks can parallel the anticipation and excitement of a pennant race. There are similarities in the subsequent ecstasy or agony, depending on outcomes.
Stocks, the pennant race, life. Stay tuned for more and stay focused.
Off the Field
Alas, life mimics sports, sometimes in perverse ways. Recently, Hurricane Katrina descended on the Gulf Coast, throwing 140-mph fastballs with unpredictable movement. She made Nolan Ryan and Steve Carlton seem like Little Leaguers.
The uncertainty, fear and ongoing devastation experienced by the people of New Orleans and surrounding areas borders on the incomprehensible. If there is anything positive to be found in the wake of the catastrophe, it's that Katrina reminds us what's
really important -- our health, our families, our security. For investors, the storm provides an important lesson about maintaining proper perspective.
