3. Follow scandal. "Bausch & Lomb has dominated lens care for years, but it was never cheap enough for me to buy. Disaster struck in 2006 when its products were tied to eye infections. The market overacted. In two months, the price went from $70 to $45, where I bought it. I got $65 when it went private last year. Scandals create fear…and ideal times to buy."
4. Look for cash. "Carlos Slim's main business at Telefonos de Mexico (TMX, $33) is landline telephones, and it's dying, but it still generates tons of cash--some $2.6 billion last year by my estimates. Slim is using that cash to consolidate communications throughout Latin America. He has assembled cable and broadband operations outside of Mexico that he will spin off into a separate company in 2008. I'll buy more shares as long as it's in the low $30s."
5. Buy franchises. "Guinness, Air Jordans, Gold Cards--when a company has a solid franchise, it's tough for competitors to take their sales. The cost of replicating the brand or distribution network of Diageo (DEO, $82), Nike (NKE, $60), or American Express (AXP, $42) also keeps newcomers out. Another good franchise is Quest Diagnostics (DGX, $47), which has a chunk of the lucrative lab-testing services."
6. Sustainable growth trumps fast growth. "As cliché as it sounds, a slow and steady company wins the race. Looking forward, I know that the baby boomers' bodies are wearing down. As they do, they will create a predictable and sustainable demand for orthopedic joints. That's why I like Zimmer (ZMH, $75), a company that makes artificial knees, hips, shoulders, and elbows. I estimate 12 to 13 percent earnings growth in the next few years. It's a wise investment when it trades in the mid-$60s."
7. A dull company can be an exciting stock. "I know that it's difficult to get excited about roads, highways, tunnels, and bridges, but the demand for all of them continues to grow. Granite Construction (GVA, $29), a civil contractor, will eventually get a chunk of the anticipated spending to upgrade our infrastructure. It's a buy when it's below $33. I estimate they're probably worth more like $56 based on their future business potential."
8. Beware the torpedo stock. "An exciting story that stokes high expectations and attracts tons of money is toxic. The interest creates bubbles: Stock prices reach levels that far surpass the actual value of the company's assets and its business. Those bubbles then create torpedoes. The classic case is Cisco Systems (CSCO, $24) circa spring 2000. Shares dropped from $80 to $38 by the end of the year and eventually slipped below $10 in 2002. I never bought it, and I tend to avoid technology companies because they're too difficult to predict. From 2000 to 2002, when the stock market dropped an average of 14 percent a year because of the tech washout, my fund kept its losses to 4 percent."
9. Be greedy when others are fearful. "I learned to zig when the market zags by watching Warren Buffett. It's zagged a lot lately and I'm using that to my advantage. Payroll processors like Paychex (PAYX, $31) and Automatic Data Processing (ADP, $40) are rarely cheap enough to buy. They are highly predictive--processors earn off the 'float' while holding customers cash checks--and have outstanding customer retention rates. You just about need a recession to get a reasonable entry point. Rising unemployment hurts revenue while falling interest rates eat into earnings…temporarily. I'm a buyer of Paychex under $32 and ADP at $38."
