|Q&A With Harry Domash by Charles E. Kirk
Once again, I've very excited to share a Q&A with you with a leading
outside expert who has graciously taken the time and effort to share their
wisdom with us.
I'm often asked how I decide who to interview for these Q&A sessions
and my goal is very simple - I want to interview people who I know will
offer something of value and who will ultimately help us take our
investing and trading to the next level. Ultimately, if I've personally
benefited from something they've done or shared, especially over a long
period of time, they are put at the top of the Q&A invitation list. Harry
Domash has been at the top of that list for some time.
For the past 5 years, Harry's
columns at MSN have been some of my favorites. Harry often
provides an investable concept or theme and then offers a stock screen
and/or method to take advantage of that idea on your own. It's a unique
format and a personal favorite of mine because his work is focused on
helping investors succeed rather than simply telling them what to do. Case
in point, Harry's book "Fire Your Stock Analyst," is among my most
recommended readings for good reason because it basically provides
a step by step process that enables any investor to analyze potential
investment opportunities and ultimately become a much better investor.
In this Q&A, we will talk about Harry's approach, stock screens, and
more. I'm sure you'll find it helpful!
Kirk: Hi Harry. Welcome to the Q&A. When
and how did your interest in the market begin?
Harry Domash: Hi Charles, thanks for taking the time to
interview me. As you know, Iím a regular reader of The Kirk Report.
While Iíve always been interested in the market, I didnít look at in a
serious way until the early 1990s. Although the Web didnít exist, thatís
when I discovered that on-line services such as CompuServe and AOL
provided timely access to all sorts of individual stock and overall market
data that, up to that point, I didnít know were available to individual
At first, I was intrigued by the possibilities of technical analysis. I
subscribed to the magazine ďTechnical Analysis of Stocks & Commodities,Ē
and devoured books on the topic, including ďTrading For A Living,Ē by
From my reading I learned of technical analysis programs such as
Metastock, TradeStation and TeleChart from Worden Brothers. I settled on
Metastock because you could modify standard indicators and combine them
with other indicators to create just about any type of trading system that
you could imagine.
I would be embarrassed to tell you how many hours I spent devising and
backtesting trading systems. But, eventually, I devised a trading strategy
that I liked.
It used the Commodities Channel Index or CCI along with a bunch of
customized modifications. I still use it to generate the DJI, S&P 500,
Nasdaq and Russell 2000
timing signals that I give away for free on my Winning
But, alas, in the market, nothing works all the time. I grew frustrated
when my trading system failed to predict sudden downdrafts, such as those
triggered by an earnings miss. So, to improve my odds of success, I
started adding fundamental indicators to the mix.
Kirk: Can you tell us a little bit about how you learned to
become a successful investor?
Harry Domash: I got a lot of ideas from books such as Martin
Zweigís ďWinning on Wall Street,Ē and William J. OíNeilís ďHow To Make
Money in Stocks,Ē as well as hearing money manager Louis Navellier at
various seminars. Over time, I also filched ideas from the likes of Warren
Buffett, David Dreman, James P. O'Shaughnessy, David Edwards and many
others who were careless enough to leave their time-proven strategies
unguarded on bookstore shelves and on Web sites waiting for me to swipe.
Over time, I mashed their concepts together to come up with the
strategies that I follow today.
Kirk: How did those early experiences grow into a lifetime
Harry Domash: By this time, the Web was happening and I was
amazed by the amount of valuable information that was readily available
online. But, I realized that all of the investors that I knew were still
picking stocks by following tips and hunches, the same way they did it
before the Internet.
So I started giving seminars to computer clubs, investing clubs, just
about anyone who would listen, about how to use the Internet to make
better investing decisions. Eventually, I started teaching investing
classes on a regular schedule.
Those classes led to my investing tutorial columns in the San Francisco
Chronicle newspaper, then in Business 2.0 Magazine, and eventually on MSN
After a while, I realized that many investors didnít want to spend the
time required to find, research and analyze stocks on their own. Theyíd
rather have somebody hand them a list of stocks to buy, and tell them when
Seeing a need, I started my Winning Investing newsletter in early 1998.
Kirk: What was instrumental in your development to becoming a
Harry Domash: Before the Web took over, I subscribed to an
online database called Telescan that allowed you to download a variety of
fundamental reports for most stocks. It was by experimenting with
Telescanís information that I was able to devise many of the strategies
that I use today. Particularly, the ability to quickly evaluate large
numbers of potential stock candidates in a short period of time.
Kirk: For those who don't read your weekly columns and
newsletter, please provide us with a basic overview of how you approach
Harry Domash: I follow two different strategies, one for growth
stocks, and another for high dividend stocks.
For growth stocks, I follow a bottom-up approach. That means that I
donít worry about what which way the economy is headed, or which
industries or sectors have the best outlooks or are moving into, or out of
favor with the big money.
Instead, I look for individual stocks that meet my selection criteria.
For starters, they must be profitable, cash flow positive companies that
are growing sales and earnings at least 20% year-over-year, and hopefully,
faster. I also require low debt, institutional support, and a strong price
chart. For stocks meeting those requirements, I analyze financial
statements searching for ďred flagsĒ warning that an earnings
disappointment is on the way.
Although I said that I donít worry about the economy, I do pay
attention to what the market is doing. Growth stock investing requires at
least a flat market, and works best in an uptrending market. In a down
market, these stocks donít move up as much on good news as the drubbing
they take on bad news. So, the risk/reward equation works against you.
For high dividend stocks, I do start with the economy and industry
outlooks. The stocks that pay high dividends, such as real estate
investment trusts, energy pipeline operators, banks, ocean going ship
operators, and the like, tend to move as a group in response to industry
or economic conditions. Then, when an industry passes muster, I try to
find the players within that industry with the best dividend growth
prospects. Unfortunately, analyzing high dividend stocks is more
subjective than analyzing growth stocks and doesnít lend itself to
Kirk: Would you say you are now more a value or growth oriented
in your approach?
Harry Domash: Growth, hereís why.
Value investors look for former growth stocks that tripped up, but will
eventually recover. But successful value investors donít try to pick a
stock at the bottom. Instead, they determine what a stock will be trading
at when it recovers, and if the reward/risk equation works, they buy. They
know that the stock might go even lower before it recovers, and theyíre
willing to wait as long as it takes, often years.
As a newsletter publisher, Iíve found that my subscribers get really
annoyed if a stock that they bought on my advice drops and stays down for
more than a couple of months. So, value investing doesnít work for my
newsletter, consequently I donít do it.
Kirk: A guiding principle, you believe that investors should
remember COSC which stands for "concentrate on the strongest candidates."
Can you explain what this is and why it is so important?
Harry Domash: A common mistake many beginning investors make is
to pick a couple of stocks and then try to find a reason to buy them. I
think that itís better to start with a large group of stocks, say 20, and
then pick the strongest one or two candidates from that list. But most of
us have day jobs and canít spend the time that it takes to analyze the
financial statements of 20 stocks.
So the COSC strategy involves eliminating a stock as soon as you find
one thing wrong. For instance, say you only want positive cash flow
stocks. So you would eliminate cash burners as soon as you discover them.
Same thing with stocks with weak price charts, or stocks carrying high
debt. Every time that you cut one stock, that gives you that much more
time to evaluate the rest.
By the time youíve tossed all the stocks with obvious flaws, youíll
probably only have two, three or four of your original 20 left that youíll
have to analyze in detail.
Kirk: What is the best way for an investor to concentrate their
time on the strongest candidates?
Harry Domash: Start by compiling a list of candidates. That can
be from a screen, from gurus that you see on TV, or from someone you meet
at the gym. Whether you get your ideas from Warren Buffett or from a
screen, put all of your stocks through the same evaluation process.
Please read ďFind
Great Stocks In Two Minutes or LessĒ that describes how to hone
your list down to the most promising candidates.
Kirk: In your
MSN column you typically share screens that you've designed to
achieve specific objectives and/or cover themes (like
5 stocks to catch today's oil boom). Obviously, you like to use
a variety of different stock screens to achieve specific objectives, but
if you were forced to choose just a handful of screens to use, what would
they be and why?
Harry Domash: One of
my favorite screens is based on James P. OíShaughnessyís
Cornerstone Growth Strategy. Despite the name, itís really a combination
of value and momentum.
Another of my favorites is based on a Merrill Lynch survey of
institutional investors about how they pick stocks.
growth stock screen that I use all of the time. But I donít
remember which column I wrote that describes the screen.
Kirk: Although I know it may entirely depend on the objectives
you've set for a particular stock screen, generally speaking what are your
go-to criteria and/or most popular elements found within your favorite
Harry Domash: Basically, I always look for strong historical
and forecast earnings growth, and strong profitability, usually using
Return on Assets (ROA). By strong, I mean at least 20% historical earnings
and revenue growth and at least 25% forecast earnings growth for the next
fiscal year. For ROA, I require at least 10, and higher is better.
Kirk: Are there any criteria that you avoid using and/or have
found unhelpful in your research?
Harry Domash: Historical P/E, based on the trailing 12-months
earnings doesnít mean much. Same thing for price/book, anything based on
trading volume or analystsí buy/sell ratings. Well, let me modify that
last part. I donít think that ďstrong buyĒ rated stocks will outperform
ďholdĒ or ďsellĒ rated stocks, but for low-risk screens, I do rule out
ďsellĒ rated stocks. I figure that analysts are usually overoptimistic. So
the fact that they are advising selling signals added risk.
Kirk: I know you use stockscouter ratings in your system
(something I have also talked about several times in the past). How
helpful has that rating system been to you and your stock screens?
Harry Domash: I havenít done any meaningful research on my own.
However, John Markman and possibly others at MSN Money have, and theyíve
found the ratings helpful. The nice thing about StockScouter, is that it
looks at a lot of factors that you canít screen for on your own.
Kirk: In your experience in developing stock screenings, what
are some important things that you have learned so far that would have
surprised you initially as a new investor and/or someone who doesn't use
Harry Domash: For starters, thereís an art to screening. When
you run your first screens, youíll probably turn up too many or too few
stocks. Then, when your screens do turn up the right number of hits,
youíll find that you donít like any of the stocks. So, thereís a lot of
trial and error involved before you get the hang of it.
Kirk: I know you use MSN's Deluxe Screener, but what other
stock screening tools do you find helpful?
Harry Domash: I used to use the Wall Street City and Reuterís
screeners, which were both good. But both are gone now. The
Portfolio123 screener is the best I know of
on the Web, but it costs about $40 per month. I donít use any of the
screeners that mainly rely on technical indicators.
Kirk: How do you track the screens you create and how do you
evaluate their performance?
Harry Domash: I used to track the returns of every screen I
developed, at the end of every week, on a giant spreadsheet. But Iíve
given up on trying to use screens, per se, to build portfolios. So, I no
longer track them, except if Iím going to write a follow-up for a MSN
column. Then, I just go back and see how the stocks originally picked by
the screen have worked over time.
Kirk: So, is it fair to say that when you've tried to develop
portfolios from specific screens, they've been unsuccessful? Why do you
think that is?
Harry Domash: For starters, you have to understand my
perspective. All of my screens are intended to be used to come up with
stock picks for my Winning Investing newsletter and/or Dividend Detective.
With that in mind, there are two factors that prevent me from using screen
First, my screens usually have a momentum aspect that produce "high
beta" portfolios. These portfolios tend to outperform in a strong market
and underperform when the market turns down. Since the market can change
from strong to weak in an instant, you have to be prepared to dump the
portfolios on short notice. However, Winning Investing targets investors
who want to hold stocks for periods ranging from three or four months,
minimum, up to years. Dividend Detective targets even longer-term
investors. So, the short-term outlook required for screen-generated
portfolios doesn't work.
Second, within the portfolios that my screens turn up, the performance
is often driven by two or three rockets. The remaining picks often record
lackluster results, and some may record serious losses. So, again, putting
such portfolios in Winning Investing doesn't work.
Bottom line: For me, it works best to use a screen's results as a list
of candidates that I can then put through the same fundamentals tests that
I apply to any stock. I know that it sounds like a "canned disclaimer"
when I add a sentence saying that to the end of my screening columns, but,
in fact, that is what I really believe.
Kirk: Some of the screens I've used turn out quite a few
candidates (especially when economic times are good). What are some
tactics you use to narrow down the results of a stock screen that turns
out so many stock ideas?
Harry Domash: I usually just tighten up the profitability (ROA
or whatever) specs, maybe also the chart strength (e.g. relative strength
or distance above 50- or 200-day MA). For those two factors, higher is
Kirk: Stock screening is good both for identifying new
investment ideas but also to create short-sell ideas and/or avoid lists. I
know you've created at least one
looking for doomed stocks, but what are some screening suggestions you can
share for investors looking for stocks to short and/or to build "must
avoid these stocks" watchlists?
Harry Domash: Besides for the Doomed Stocks screen that you
mentioned, Iíve never been successful at creating a screen for shorts.
Somehow, simply reversing the criteria for finding good stocks doesnít
work. But, Iím still trying.
Kirk: In my experience, you're right - you can't simply flip
the criteria and come up with stocks that go down. Like you, my work in
this regard is very much a work in progress. At your website you do
two death lists. How are these different from the Doomed Stocks
Harry Domash: The momentum Death List is the same formula as
the Doomed Stocks list. I think it works pretty well, but I havenít tested
it for several years (maybe since 1997). I havenít tracked the Death By
Debt listís performance. In fact, Iím still fiddling with the parameters.
Of course, debt is much more important in times like this than in normal
economies, so itís probably working pretty good now.
Kirk: You clearly recommend that investors who use the screens
you share as "candidates for further research, not buy lists" as I
do with the screens I share. To give us some idea of the next step after
you run a stock screen, please select one of screens from your
market workshop and then briefly talk about how you would
narrow down the screen's results to an actionable investment idea.
Harry Domash: I always start by looking at the price chart. If
the stockís in a downtrend, I stop there. If not, I check the revenue
forecasts on Yahoo! If analysts arenít forecasting at least 20%
year-over-year growth for this fiscal year and next fiscal year, I stop
there. Next, I apply the tests described in the
Two Minute Check.
Kirk: I know from reading your book "Fire Your Stock Analyst!,"
(among my recommended readings list), investors should take the following
11 step approach to analyze a stock:
Step 1: Analyzing Analysts' Data
Step 2: Valuation
Step 3: Establishing Target Prices
Step 4: Industry Analysis
Step 5: Business Plan Analysis
Step 6: Assess Management Quality
Step 7: Financial Strength Analysis
Step 8: Profitability & Growth Analysis
Step 9: Detecting Red Flags
Step 10: Ownership Considerations
Step 11: Price Charts
That's a lot of steps to go through, and in a general way I'd like to
talk about some of important points you make about these. First, as a
general principle, what are some basic things investors should be looking
for in analyst research and opinions?
Harry Domash: As far as analysts go, I would never follow their
buy/sell ratings per se. In my book, I use analyst ratings as a
Sentiment Index. Basically, if a lot of analysts have ďstrong
buyĒ ratings; that means that market expectations are high, and likely to
be disappointed. The more analysts making the ratings, the more well known
the stock, and the higher the expectations.
Conversely, if analysts are mostly negative, expectations are low,
which means it will be easy for the stock to beat expectations. Same thing
if only a couple of analysts are covering a stock. So my Sentiment Index
is a contrary indicator. The stronger the sentiment, the riskier the
Along those lines, I also think itís important to watch the number of
analysts making buy/sell recommendations on a stock. In my view, a stock
price reacts to the supply/demand equation, just like most products. For
stocks, the supply doesnít change much; itís the ďfloat.Ē The demand is
the main variable. Whether at buy or sell, analyst reports make more
investors aware of a stock, thus increasing demand.
Itís good to own a stock that analysts are just discovering. The ďsweet
spotĒ is when the number of analysts covering a stock moves from one or
two up to three or four. Once you get above five or six, adding more
analysts doesnít make much difference.
Kirk: Value-investor John Dorfman (see
previous Q&A) said that stocks advance by "exceeding
expectations" and that his favorite stock screen point to low-expectation
stocks. Does your research confirm this point of view?
Harry Domash: Yes! I couldnít agree more. Stock price action is
all about expectations. Valuation ratios such as P/E and P/S simply
describe the marketís expectations for a stock. High valuations mean high
expectations and vice versa.
Kirk: In the book you cover several formulas for valuation
analysis, but seemed to focus on a company's implied growth rate. How does
one specifically figure this out?
Harry Domash: The point of looking at implied growth is to see
what annual earnings growth would be required to justify a stockís current
P/E. I got the idea from Nicholas Gerber of Ameristock Funds.
The implied growth formula that I use is just a Benjamin Graham
intrinsic value formula turned upside down. The calculation uses the
current corporate bond rate, which is 6% or so.
Using that number, you can calculate implied growth by multiplying the
P/E by 0.68, and then subtracting 4.25. For instance, if the P/E is 50,
the formula gives you an implied 30% annual earnings growth rate, which,
by the way, is not sustainable for most stocks. If you donít want to do
the math, you can look it up on page70 of my book, ďFire Your Stock
Kirk: Just to be clear - how do you define overvalued?
Harry Domash: Iím not big on defining overvalued. As I
mentioned before, valuation simply puts a number on the marketís
expectations for a stock. That said, sometimes valuations get so
ridiculous that you canít ignore them. For instance, a forward P/E (based
on next FY EPS) of 100 would be overvalued.
Otherwise, in my experience, stocks rarely go down because they are
overvalued. Yes, sometimes analysts downgrade a stock based on valuation,
but thatís usually a buying opportunity because the stock will probably
pop back up. Stocks usually go down because they miss current growth
expectations, or the firm reduces forward guidance (its growth forecasts
for next Q or next year.). When that happens, valuation doesnít matter.
Low P/E stocks drop just as much high P/E stocks.
Kirk: You believe it is important for investors to establish a
target price (you provided a 7 step formula in the book and a 5 step
formula in this previous
article). After you set them, however, when do you know it is
time to reduce and/or increase your initial target? In my experience,
price targets can be dangerous things because they tend to bias your
analysis and cloud your forward judgment because you expect the target to
always be hit.
Harry Domash: In my book, I said that price targets were
mandatory for value investors and a good idea for growth investors.
Because of the reasons outlined in the Valuation question, I have stopped
using price targets for growth stocks. For value stocks, you would simply
recalculate the target using your current growth and earnings forecasts.
Kirk: You've said in your book that growth investors will "do
best by picking candidates in fast growing industries" and that you "can
score the biggest profits by pinpointing the eventual winner in a
still-fragmented emerging industry." What are some rules of thumb for
Harry Domash: Usually, over time, one or two companies end up
dominating an initially fragmented industry. The dominatorsí shareholders
often win big and the others lose out. The eventual winners are usually
the firms with the fastest revenue growth, the highest gross and operating
margins, and the highest ROAs.
Kirk: How do you pinpoint an industry's best investment
Harry Domash: Again, I look for the fastest revenue growth and
the highest ROA.
Kirk: In your book you recommended investor to use a business
plan scorecard. Essentially, you would award one point for each category
where a company has a significant advantage and subtract one point where
it is at a disadvantage (no score is given when the category is not
relevant.) 11 categories are provided: brand identity, other barriers to
entry, distribution model, access to distribution, product useful
life/product price, access to supply/number of suppliers, revenue stream
predictability, number of customers, product cycle, product/market
diversification, & growth by acquisition. Obviously, this kind of research
takes tremendous amount of time and effort. Do you really think investors
have the time and information in takes to undertake this kind of in-depth
Harry Domash: I tried to make my book a basic text that serious
students of stock analysis would find useful. I think Iíve succeeded on
that score because I know that it is used in many college level courses.
However, I know that most individual investors have ďday jobsĒ and
donít have the time to do all of that analysis. However, for me, Iíve
found that once aware of the scorecard factorsóthey unconsciously creep
into my analysis. What Iím saying is that you donít have to fill in the
scorecard. Once you know whatís in it, youíll do the scoring in your mind
whenever you encounter relevant information.
Kirk: You've said that "management quality is probably the
single most important determinate of a company's success." But, as you
know it is difficult to screen for management quality. How do you identify
Harry Domash: Youíre right, you canít screen for management
quality. However, you can get clues from the quarterly report press
Does the company report everything, including cash flow, or do they
just include snippets of information. While every firm sometimes has
non-recurring expenses, good managements keep them to a minimum. So look
at the percentage of non-recurring expenses over time. Normally, operating
cash flow should significantly exceed net income. If it doesnít,
management may be doing creative accounting to make reported income look
The one thing you canít rely on is how company execs sound in a
conference call. In my experience, the ones who sound the most honest on
the call turn out to be the biggest liars. While the conference call info
is important, itís best to read the transcripts rather than listening to
the call. Youíll save a lot of time by doing that.
Seeking Alpha is doing a great job of providing free conference
Kirk: Do you still think the use of a company bond rating is
helpful in the determination of financial strength (especially with issues
concerning faulty ratings by these agencies during the latest credit
Harry Domash: Yes, I know that bond rating agencies screwed up
badly in the mortgage mess. But still, analyzing financials is their day
job. So, consider bond ratings as another tool in your analysis toolbox,
not the final answer.
Speaking of the mortgage mess, anyone with half a brain should have
seen that coming. I live in a relatively small town, but I knew plenty of
people who were making money by flipping houses. At the end, they were
buying with no cash. Sometimes it pays to turn off your computer and just
look at whatís happening around you.
Kirk: You have advised investors to look for the following red
flags: slowing sales growth, increasing accounts receivables, rising
inventory levels, increasing incomes due to pension plans, capital
expenditures lag depreciation write-offs, and temporarily low income tax
rates. However, when these red flags show up, isn't it already too late to
Harry Domash: The only ďred flagĒ anyone notices is slowing
sales growth. Most analysts and almost all investors totally ignore the
other ďred flags.Ē In fact, I canít tell you the number of conference
calls Iíve listened to where Iíve waited in vain for an analyst to ask
about rising receivables or inventory levels, the two most obvious signals
warning that bad news is on the way.
Kirk: How important are insider and institutional ownership to
your analysis? A lot of investors look for stocks with insider buying, can
you provide some rules of thumb as they pertain to insider and/or
Harry Domash: Yes, very high insider ownership, say 60 percent
or so, often indicates that private equity investors are waiting for the
right time to unload their holdings. Of course, in some cases, the
founding owners still hold big hunks of shares. So, you have to see who
the shareholders are before you make a decision. You can see that in the
Ownership section of MSN Money.
When I first started doing fundamental analysis, we looked for
significant insider ownership to assure that company execs wanted the
share price to go up as much as we did. Now, all top execs have their
personal wealth tied to their firmís price action one way or another. So,
whether their share ownership looks significant or not on Yahoo! doesnít
Same thing with insider trading. We used to evaluate that to see if
insiders were buying ahead of good news or dumping ahead of bad news. Now,
everybody knows that everybody is watching the insider trading numbers, so
the insiders know how to manipulate them.
Regarding institutional ownership, that is an important signal as to
what the smart money thinks. Low institutional ownership, say below 30 or
40 percent, tells you that the big players are avoiding the stock. So
Kirk: Although it is in the last area of your 11 step approach,
you say that "you can often avoid unnecessary losses by looking at a
company's stock price chart before you buy." In fact, in your book you
made two recommendations I thought were quite interesting. First, you
think that value candidates should be trading below or near their 200-day
moving average and not more than 10% above the average. Is this a
qualifier you would place on all value-focused screens? Why or why not?
Harry Domash: Yes, the premise of value investing is that you
are buying out-of-favor stocks. A stock is not out of favor if itís in a
strong uptrend. Stocks trading more than 10% above their 200-day MAs fit
Kirk: You also recommend growth investors to avoid buying
downtrending stocks and any stock that is trading within its "the risk
zone." What is this risk zone and how do you know when a stock is trading
Harry Domash: Many technical types will tell you that a stock
with a parabolic stock chart is risky business. By parabolic, I mean that
its share price is rising at an ever increasing rate. I used the term
ďrisk zoneĒ to mean that stocks were overextended along those lines. I
defined the risk zone as trading at least 50% above its 200-day MA.
However, based on some recent research that Iíve done, I think that 50% is
too restrictive. Now, Iím more inclined to move the risk zone boundary up
to 60 or 65%.
Kirk: At this point we've now talked about how you screen and
properly analyze those stocks, but let's talk about the most important
part of the transaction - knowing when to sell. I know you understand how
important this part is because even you've said that "deciding when to
sell is just as important as analyzing purchase candidates." So, what are
your favorite sell signals?
Harry Domash: For value investing, you sell when your stock
reaches its price target or you realize that your original buying premise
isnít going to happen.
For growth stocks, ideally, you would spot a ďred flagĒ in a quarterly
press release that would get you out before the stock dropped. But that
doesnít happen all of the time. Your next best sell signal is when a
competitor announces bad news or cuts guidance. Analysts, company execs,
and other gurus will tell you that the competitorís problem was company
specific. But it probably isnít, so sell.
Another possible advance warning is when your stock announces a major
acquisition. Such an event usually triggers a small selloff on the
announcement. But itís better to take that small loss. Chances are, only
bad news lies ahead.
Missed earnings or cut guidance usually hits a share price hard in this
market. So, itís tempting to decide that the market overreacted and that
the stock will recover. It might do a short-term ďdead cat bounceĒ a day
or so later, but it may not. As heart wrenching as your current loss is,
things will probably get worse. So, sell after any bad news.
Kirk: As I've told you before, your website is one of my
personal favorites. Between your market workshop, stock analysts
checklist, free tutorials, etc. you also produce two newsletters -
Winning Investing &
Detective - for those who don't want to take the time or effort to
do proper stock screening and analysis. In the past year, can you talk
about your overall performance in both newsletters compared with the
Harry Domash: Our Winning Investing newsletter has four stock
portfolios. Hereís our
detailed return info for each portfolio as of December 14
(thatís the day we finish our December issue) for the years 2004-2007.
Those returns are reasonably good. The newsletter itself contains
return data on currently held stocks, but I havenít tabulated overall
returns (including sells) for this year, but Iím assuming that the returns
wonít be pretty.
Dividend Detective is a website, not a newsletter. Nothing gets mailed
except billing notices. It covers 100 or so high-dividend stocks. Some are
rated buy, others are Ďdo not add,í and some are rated Ďsell.Ē While it
does have model portfolios, itís mainly a resource for dividend investors.
While I know that return info is important, I havenít figured out how to
compile the data in a time-efficient manner. However, thatís on my ďto doĒ
Kirk: Looking over the past year, please tell us about your
most successful pick and how you discovered it.
Harry Domash: Of the stocks we sold over the past year, salt
miner Compass Minerals (CMP),
which gained +154% (counting dividends), did the best. But we held
it for three years, so Iím not sure thatís what youíre looking for.
In terms of year or less holds, casual shoemaker Crocs (CROX),
up +144%, which we sold in July 2007, did the best. Next best was
bank security system provider Vasco Data Security (VDSI),
which we sold in November 2007. It had gained +102%. We found both
the way we find most growth stocks, via a screen.
Kirk: What was your worst performer recently and looking back
was there something you could have done to avoided it?
Harry Domash: 3-D model maker Stratasys (SSYS),
which we sold in February at a -28% loss,
was our biggest recent embarrassment. We added Stratasys to our Growth
portfolio on October 15, 2007. At that time, everything looked good from
our perspective. There were no ďred flagsĒ of any kind.
But, just two weeks later, on October 31, Stratasys reported strong
September quarter results but said its December quarter would fall short
of earlier forecasts. We could have sold on November 1 at a 15% loss. But,
we violated one of our main selling rules, thinking that the market had
overreacted to the bad news.
As is the case for most of our big losses, we ignored our own rules.
Kirk: One of unusual things about your newsletter is that
sometimes you recommend very speculative situations. As someone who
stresses hard work, research, and structured analysis and screening, I
find this very interesting. To what degree do you think highly speculative
investing (sometimes even in thinly traded stocks) has its place within
Harry Domash: We tell our subscribers to put their serious
money in our 18% Solution and Mattress Stuffer dividend portfolios. But,
everyone wants to have something to talk about in the locker room. Itís
hard to brag about a natural gas pipeline operator that jumps maybe 3%, in
a good month.
So we have our Growth portfolio for growth stocks that meet all of our
usual selection criteria. But our Speculators are for fun. Thatís where we
put Crocs and other potential rockets. Itís for play money only.
Kirk: It is readily apparent to me that you think stock
dividends are more important to investors than they've been in the past.
Can you explain why this is and how investors should build portfolios with
this criteria in mind?
Harry Domash: In the 1980s and 1990s, technology was coming of
age. You had Microsoft, Intel, Oracle, Amazon.com, Cisco Systems, and tons
of other great growth plays. You could make lots of money by jumping on
those fast growers.
But now, there are few fast-growing emerging industries. Solar stocks
come to mind, but everybody has already jumped on that bandwagon and itís
hard to make money when youíre the last one to join the parade.
Sometimes we find a small medical device maker with a great new product
and good growth prospects. But that field is so competitive that before
you know it, General Electric or another big player has jumped in, killing
the growth prospects for the small guy that developed the idea.
That scenario makes dividend stocks appealing. For starters, they are
the only stocks that actually pay you to own them. With growth stocks, you
only make money when you sell at a higher price than you paid.
Many relatively conservative dividend stocks pay 5% to 7% or so yields
(yield is 12-monthsí dividends divided by the price you paid for the
shares). Usually, they are relatively slow growers, maybe growing earnings
8% to 12% annually. But do the math. Long-term that earnings growth rate
should translate to similar stock price appreciation. So, the dividend
yield plus share price appreciation adds up to a 13% to 19% or so annual
While new investors think they can do 30% by picking the right growth
stocks, those of us who have been around the block a few times know
Kirk: Obviously, you're a stock picker at heart and its
apparent that you think the way to achieve long-term wealth is through
individual stocks. What do you think about lazy portfolio strategies using
Harry Domash: I like ETFs. We have a few in the Fund section of
Winning Investing and I own them myself. But in the end, ETFs are index
plays. They work well when you want to ride a particular trend, say solar,
Brazil, agriculture, or energy.
In a more general sense, you get into the issue as to whether itís
possible for any investor to beat the indexes over time. If you believe
that it is possible, than, obviously, you need to buy individual stocks.
Kirk: Those who invest in ETFs have to allocate their
portfolios to outperforming sectors. Do you still use the
hot and cold screens to locate the most attractive sectors?
Harry Domash: Itís still important to spot the strong sectors.
However, now, with the help of the MSN Money or Morningstar ETF
Performance Trackers, you can use the ETFs themselves to spot whatís hot.
column explaining that process.
Kirk: If you don't mind, please take us through a "normal" work
day for you. I know you don't trade stocks, but how do you organize and
spend your time in a typical day?
Harry Domash: Like most who enjoy ďbeing their own boss,Ē I
work a huge numbers of hours. If you count watching CNBC and Bloomberg,
reading the Wall Street Journal, and checking my e-mail as work, I start
around 6 am. Otherwise, I usually sit down at my computer around 9 am.
Besides for the usual breaks, and an hour or so for a walk on the beach,
many days, I work until 11:00 or 11:30 pm.
Besides for that, I donít have a typical day because I work to
deadlines. If I have a column due, I work on that as long as it takes. The
week before Winning Investing goes out, I work almost full time on
screening, researching, and analyzing stocks. I should tell you that my
wife Norma also does screening and participates in the analysis. In fact,
all Winning Investing changes must be unanimous decisions.
For the week or so surrounding the first of each month, I work on
finding and analyzing stocks for Dividend Detective.
Kirk: In doing all of your investment research, what are your
"can't live without" tools and websites?
Harry Domash: I have all my portfolios set up on Yahoo and that
is my source for news on all stocks of interest. I also use Yahooís
analyst earnings and revenue forecasts. To keep up with analyst
pronouncements, I use Briefing.com. Its e-mail alerts are especially
helpful. For screening, I mostly use the MSN Money screener. I also use
Morningstarís analyst reports and Morningstarís fund screener.
When Iím doing research for a column, I often use Reuters Knowledge,
which is a pay site that provides access to analyst reports, news, and
fundamental data about almost all stocks.
Kirk: Through your newspaper, MSN columns, website/newsletter,
I'm sure you come into contact with a wide range of investors. In your
experience what are some characteristics you find in those who are the
most successful? Likewise, what things do you find in those who are
destined for failure in the market?
Harry Domash: The investors that appear to me to be successful
are those that can objectively process and act upon new information
without bias. These investors know that they are often wrong and are
always willing to listen to ideas from others. Most professional money
managers fall into that camp.
Conversely, very few individual investors can do that. Most filter all
new information through preconceived notions and only accept what agrees
with their existing view. Often, they let their political or social views
influence their investing decisions. They are sure that they are smarter
than anyone else and posses unique abilities to ferret out winning stocks.
If you gave them a list of Warren Buffett stocks, they would be confident
that they could cherry pick the list and out do WB.
Kirk: In your career, what were some key lessons that had the
most positive influence on you?
Harry Domash: Iím not sure who said this; it could have been
Woody Allen. But whomever it was said that the key to success in any
endeavor is to keep showing up every day. That has certainly been true for
Before I did investing, I started two other successful businesses from
scratch. In all three cases, there were always plenty of reasons why my
ideas wouldnít work and there were many days when it seemed as though
failure was at hand. Success came from just showing up every day.
Kirk: In your opinion what is the very best way to learn how to
become an investor?
Harry Domash: Study, study, study. Read, go to investing
seminars, learn from the pros that are already doing it.
Kirk: A common element I find in all successful investors and
traders is that they are always working on expanding their knowledge and
improving their strategies. What have you been working on lately in this
Harry Domash: My search for the Holy Grail never ends.
Currently, I am working on a risk/success predictive scoring system for
quantifying the medium term (3-6 months) outlook for stocks. I keep
voluminous records on the data that existed when I made previous buy/sell
decisions. Basically, my scoring relies on what worked, and what didnít
work, in the past. I am working on separate scoring systems for dividend
and for growth stocks. Amazingly, Iíve made some decent progress on the
dividend part. The growth stock partónot so good, but I just made several
changes that I hope will help.
Kirk: At this point of your career who do you look up to for
inspiration and guidance?
Harry Domash: Nobody in particular. I pay most attention to
academic or professionally done reports that examine how different factors
affect future stock performance. Basically, Iím still searching for what
works, and what doesnít.
Kirk: If you had it to do over again would you choose a
different career path?
Harry Domash: Yes, I would probably have skipped engineering
and gone directly into finance.
Kirk: Finally, if you had one piece of advice to share with all
investors and traders, what would it be?
Harry Domash: Be sure to take that daily walk on the beach.
Kirk: Thank you Harry. We appreciate the insight and look
forward to reading your perspectives in the future.
Those of you who would like to read Harry are encouraged to visit his
book, and MSN columns. Harry's a great resource and one that I'm sure
you'll find helpful.