Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Can and Cant of Investing Part 2

|Includes: JNJ, Altria Group, Inc. (MO)

In the first part what can not be done was discussed. It is more important to know what you can not do and that’s why part 1 was about what an investor can't do. Like Munger says I just want to know where I'm going to die so I don't visit there. Reading and rereading Part 1 will help you accomplish that. In the next 3 paragraphs what you CAN DO will be explained. Many skeptics do not think it is that simple but I can assure you that it is.

The most important thing you CAN DO is choose the proper security that fits your personality. My personal favorites are consumer staples for 3 main reasons 1) they have strong brand loyalty. This article has been delayed because one of my "investments" have been 36 season tickets for the Cleveland Cavaliers basketball team since they added Lebron James, (which being they reached the NBA finals and tickets were sold from anywhere between 4 and 8 times face value and the investment was favorable. See why I do not invest in "small caps".) When attending the games I noticed people paying 6 dollars for Bud Lite and Miller Genuine Draft which is 4 or 5 times the retail value of the product. There are not too many products where the person is willing to spend 4 or 5 times the retail value under any circumstances. Certainly this product is inflation proof given the fact customers spent many times over retail for it. And the fans didn't say give me a beer, they said give me a Bud Light, Bud or MGD. When customers call a product by "brand name", you know you have a "moat" and not a commodity. They are consumable and affordable: If we have a recession or depression even the poorest households in America will be able to afford a beer (and might need one to relieve their financial stress). And once they buy one it is not like a computer where once one is purchased it will not be needed again awhile. Most people drink more than 1 at a time. The first 2 reasons lead to the third 3: predictable earnings with a High ROE: The overall beer consumption in the country is not growing I agree. But if you are already 7 foot 4 do you need to be "taller"? Anheuser Busch's earnings is fairly predictable and their free cash flow help them have a high Return on Equity and their aggressive stock buyback program just keeps enlarging the shareholders percentage of a great business which controls 50% of the American beer market and is poised to expand globally. There are also 100 years of annual reports to read and it is doubtful that "technology" will influence the beer industry. So finding a strong brand (contrasted to a commodity business), which is consumable and affordable generally has predictable earnings with a high return of equity has the greatest probability of growing their earnings in the next 5-10 years. While NO one can predict the future with certainty, choosing a business with the characteristics stated above will give you the highest percentage of estimating future earnings.

The second important thing an investor CAN DO is get in a stock at the "right price'. In my book Consume, Consume and Consume More I do a case study where my "personal formula" for estimating intrinsic value is explained in full detail. The 5 companies in the case study met my parameters in step 1 but in my case study the proper price to pay for them is explained. Ironically Johnson and Johnson in the text is NOT considered a buy at 60.50 but now is a "steal" at 62. Again you can not predict the future but you CAN purchase the security which is on "sale" relative to its intrinsic value

The third thing that an investor CAN DO is have the conviction to add to their positions as the stock drops. My original purchase of Altria (NYSE:MO) was 40 and after I continued to add to my position my current basis is now 27(before the Kraft spin-off). Johnson and Johnson was an original purchase at 65 and using my 7% rule added to my position between 60.25 and 61. My adjusted basis now is 61.50. Ironically Warren Buffett added to his position in the first quarter as well. What other business lets you "partner up" with the greatest investor ever who has made 100 billion dollars investing in the stock market? Keep doing your research and when the "greatest" "agrees" with your predictions then BACK UP THE TRUCK. Is any stock that Buffett buys a "sure thing"? No. Remember NO one can predict the future of the market. But if you are willing to hold Johnson and Johnson over the next 5-10 years the chances of making 10%+ annually on your investment at the present price levels at SOME POINT exceed 95%. All you can do is get your money in when the odds are highest. Don't let the skeptics tell you what is not possible. Remember the Chinese proverb "Man who say something can not be done Should not interrupt Man doing it".