The F.I.R.S.T. System: Searching For the “Holy Grail” of Investing
by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, October 28, 2009: Issue #1125
When it comes to investing, how do you find the “Holy Grail?” Does it even exist?
Over my 19 years of stock market experience, I’ve searched high and low for the answers.
One of my first steps was to plow into technical analysis. I studied everything I could, believing that charts could predict a stock’s direction. I even became a trained technician, finishing two out of the three exams required to be a Chartered Market Technician. I never took the third. While I believe technical analysis is useful, it didn’t provide the answers I was looking for.
In 2005, Avalon Research Group hired me as a fundamental analyst. While at Avalon, I worked with two of the greatest contrarians in recent decades and passed the exam required to be a NASD-licensed financial analyst.
But you know what? As valuable and powerful as that education and knowledge is, the real answer is something much simpler…
Forget Fantasy Land… This is the Only Proven Method in the Real World
I’m often asked how I pick winning stocks… My big secret: I work very hard at it.
There is simply no substitute for hard work.
While “black box” technical programs spit out stocks that are supposedly destined to rise and some quantitative models claim sky-high accuracy, if you want to consistently pick winners, you need to do the research.
That doesn’t mean quantitative and technical analysis doesn’t work (I firmly believe they have their place, either to generate ideas or establish risk parameters). But if you want to make money in the stock market, you need to roll up your sleeves and do the work.
I wish it were more exotic than that. Heck, it would probably be easier to sell my products if I could convince readers that I had built an amazing robot that did nothing but provide me with ticker symbols whose prices will be 100% higher 30 days from now.
But that’s fantasy land. Here’s how it works in the real world…
The F.I.R.S.T. System – A Powerful Five-Step Stockpicking Strategy
I took the research format that I learned at Avalon and tweaked it for the healthcare sector. The methodology that I came up with is called the F.I.R.S.T. system – an acronym for my five-step process…
- Financials: I always begin my research by looking at the company’s financials. That’s particularly important when analyzing small-cap healthcare companies, as they’re often low on cash. I need to have a clear understanding of how much the company has, what it’s spending, how much it’s likely to generate and how large the profit potential is.
But I don’t just look at the balance sheet and cash flow. I create financial models, which estimate how much revenue the company’s products can bring in while I adjust variables such as market share and price.
- Interviews: Having focused on the healthcare sector for many years, I’m fortunate to have built up a vast network of excellent contacts. So my next step is to conduct interviews. I’ll speak to anyone and everyone in order to get a clear picture of a company’s strengths and weaknesses.
I visit companies and meet with CEOs and CFOs. I talk to hedge fund analysts and portfolio managers, research scientists, physicians, salespeople, even the warehouse foreman.
The reason is that you simply can’t learn everything you need to know about a company from a piece of paper, or a computer screen. So I go further by talking to people who really know the ins and outs of the product/company/industry.
- Research: This all-encompassing term simply means: reading everything I can get my hands on! Things like scientific papers, market and clinical trial data, blogs – anything that helps me determine if the company’s product(s) can be successful. Remember, I’m usually looking at small, early-stage companies that haven’t proven much yet. And while some have approved products and are profitable, many are still developing their first commercial product.
- Safety: A key component to my research is determining a drug’s safety. Many drugs have shown promise, but were deemed unsafe in clinical trials. When that happens, the company’s stock gets creamed.
These days, the FDA is very conservative and even if drugs are effective, it won’t approve them if there are safety concerns. This means I need to take extra care to ensure that we’re not in that situation. If I see a safety concern, I move onto the next company.
- Timing: I need a reason to recommend the stock now. It’s no use investing in a healthcare company, only for the money to sit idle for a year or more. I need a clear idea of what catalyst will push the stock higher – and when – so my subscribers have plenty of time to get in before the big event occurs. For example…
*** FDA approval: We’re currently awaiting this in early December on a stock that is already up 81% from where I first recommended it.
*** A lucrative partnership deal: This happened with Nektar Therapeutics (Nasdaq: NKTR) last month, sending shares 26% higher in two days.
Leave the Work to Me… And I’ll Beat the Market for You
Do I wish there was an easier, less labor-intensive process? Of course.
And the rewards are well worth the difficult labor.
But it doesn’t need to be hard work for you. That’s what I’m here for. So feel free to leave it up to me. I’ll be up late working anyway.
Hoping your longs go up and your shorts go down,
Marc Lichtenfeld
Any investment contains risk. Please see our disclaimer.
4 Responses to “The F.I.R.S.T. System: Searching For the “Holy Grail” of Investing”
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Marc is a senior analyst at Investment U. His investment career started out at the trading desk of Carlin Equities in San Francisco, CA, where he executed dozens of trades each day for his clients.
I appreciate your overview of the pre-recommendation process. What has happened to the glowing forecast for Accuracy? Via Xcelerated Profits December 2007 recommendation I bought this stock at $15.63. Since then we keep hearing “ARAY” is going to do better, it should really take off, etc. Should we not just dump this loser and take our loses so we can go on to better things?
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Looks like Lemon to me!!……I’ve seen a few like that lately….could be trend!
Forgive the flippant comments so far…..But!…
Just looking at the Insider Trading Activity….It looks like there has been quite a lot of Planned sell offs by “President International Investment Holdings Limited”….https://www.etrade.wallst.com/v1/stocks/ownership/insiders.asp
Maybe these just slip under the Radar as they are pre notified to the SEC I believe (I’m just a learner here, so any comments on SEC filings would be appreciated!!)….
You’re obviously a much more patient Investor than me….I would have cut my losses a long time ago!…..not that following me would be good for anyone’s portfolio!!…Cheers
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Marc,
I appreciate all the hard work you do. I just have one bone to pick with you about the FDA a government organization that is bought and paid for by the big pharma companies. Frankly I don’t know how you can rely on anything out of the FDA, CDC, or the WHO
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Mark,
Thanks for your note. Marc L writes that he can certainly understand your frustration with the government agencies, though he thinks some drug companies would argue that the FDA is too conservative.
Regardless of personal opinions, from Marc’s vantage point, he has to consider the FDA’s stance because Wall Street will. That’s what’s important in his job. He’s trying to figure out which companies will thrive and which will get stuck in the regulatory process, regardless of how things should be. It’s the way that it is and stocks react to the FDA’s actions.
Thank you,
Investment U
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