Reality-Driven Investing: Statistics That Make a Difference

By Donald L. Hinman

Don Hinman is a long time business owner who found stock market investing frustrating. He considered himself to be a value investor, but could never find a way to determine value that would consistently deliver profits. Today there is so much information instead of making decision making easier, it often confuses an investor.
He set out to learn for himself the characteristics of a stock that would deliver profits to his stock portfolio year after year. He believed knowing what is relevant and what is not is essential when searching for stocks.
Success in the stock market is dependent upon finding high value stocks with low prices. Many will say it is hard for non-professional investor to do this. Actually once an investor knows the characteristics of a good stock the search for high value stocks is easy to do. Don comes to some surprising conclusions about fiscal and monetary policy.

• Language: English
• Publisher: Xlibris US
• Release date: Jan 27, 2014
• ISBN: 9781493164691

Donald L. Hinman

Don Hinman and his wife, Helen, live in Yakima, Washington. Helen is a retired school counselor. In the mid-1980s, she was honored by the National School Counselors Association for her work with special-needs students. They have two sons, Ron and Tom, and two grandsons, Quintin and Colton. They have raised twenty-one foster children and shared their home with nine foreign-exchange students. They have traveled throughout the world plus have visited in each of their exchange students’ home. Don is an insurance broker and the president of Mid-Valley Insurance Inc. He is the managing partner of H&H Property Management. H&H Property Management specializes in owning residential rental homes, apartment complexes, and office buildings. Don is the cofounder and chairman of the board of Yakima Neighborhood Health Services. Yakima Neighborhood Health Services is a large health, dental, and mental health clinic with multiple locations in the Yakima Valley. In 2015, at its national convention in Orlando, Florida, the National Association of Community Health Centers awarded Don the Aaron L. Brown Memorial Public Service Award. Don has served on the Yakima City Council.

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Copyright © 2014 by Donald L. Hinman.

Library of Congress Control Number:       2014900884

ISBN:                  Hardcover                          978-1-4931-6468-4

                            Softcover                             978-1-4931-6467-7

                            eBook                                  978-1-4931-6469-1

All rights reserved. No part of this book may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or by any information storage and retrieval system, without permission in writing from the copyright owner.

Rev. date: 01/23/2014

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CONTENTS

Years of Frustration

They Will Say You Can’t Do It, But You Can

You Need the Right Tools

Buying Stocks Is Like Buying a Business

Earnings and Value Are Connected

Growth of Earnings per Share Is What Sets Stocks Apart

Safety: The Missing Link

Making Sense Out Of Financial Statements

The Income Statement

The Balance Sheet

Cash Flow Statement

The Problem of Too Much Cash

The World Economy

Compare with Other Companies

The Cost of Money: The Basis of Value

Back-Testing: Proof It Works

The Back-Test

The Analysis Is There Room for Improvement?

Bad Day at the Horse Races

Are There Better Times to Buy or Sell?

Temptations Ruin the Best-Laid Plans

Zeroing In: Charts and Index Numbers

Short Sellers

The Importance of Research Over Common Knowledge

Stock Market and Presidential Terms

Historical Fiscal Policy Lessons

The Effect of Regulations

Understanding Monetary Policy

The Effect of Trade Policies

Putting It All Together

About Don Hinman

Written especially for Quintin and Colton, my grandsons.

YEARS OF FRUSTRATION

W HEN I STARTED investing in the stock market, I was a longtime, successful business owner. I like to think that one of the main reasons for my success is that I paid attention to my businesses’ financial reports and was an avid reader, which kept me updated with the latest developments, innovations, and knowledge. I assumed, in no time, I would be successful in the stock market. That is not what happened. I could never find a guiding set of principles that would successfully lead me into making profitable stock market decisions. Months turned into years as success eluded me. It was frustrating. My mistakes included the following:

•   Listening to tips and opinions of others and acting without questioning or even knowing if the information was valid.

•   Never paid attention to stock value. Actually, I didn’t have any idea how to determine value. Value, in my mind, was more about the market’s measurement of future potential than about the company’s actual financial record.

•   Never paid attention to financial reports.

•   Never saw the need to try to prove myself wrong. Never tested my theories. Didn’t have the skill or means to do so even if I wanted to do it.

•   Never paid attention to my own behavior. Never gave much thought to how I reacted to the news. I just reacted. Often, I was buying when I should have been selling. Selling when I should have been buying or holding.

•   Spent considerable time trying to understand my risk tolerance, thinking it may have had something to do with my lack of success.

•   Never bothered to learn about stock market behavior. I did have a lot of opinions, but no knowledge about how it actually worked.

•   Never wrote out an investment strategy.

•   Never paid attention to the business cycle.

•   Never knew the presidential election cycle was important.

•   Never tried using a computer or stock market software.

•   Lastly, I could never shake the doubt I didn’t have resources or knowledge to be successful. I listened to others telling me it was impossible for the average person to be successful in the stock market.

All this added up to not knowing the difference between a good stock and a poor one. I had just enough taste of success to keep me going, but I never really made any money. Confidence would be followed by frustration. I read a study of 450,000 savers by Aon Hewitt and Financial Engines that found most do-it-yourselfers failed to do well because they were either too aggressive or too conservative. This pretty much described me. I would decide to be aggressive. My results were still subpar. So I would switch to being conservative. The outcome was the same. Frustrating! I was more of a gambler than an investor.

Then I read the book blink by Malcolm Gladwell. The book never mentions the stock market. It did make the point—one needs to pinpoint the relevant information when making a decision. Not knowing and sticking to what is relevant leaves a person confused and unable to make a good decision. I set out to discover the specific information I should be paying attention to. Once I discovered what was relevant and what was not, I was suddenly experiencing a breakout. I started making money on the stock market.

My wife, Helen, gave me the encouragement to write down my thoughts. I am thankful she did. Writing forced me to organize my thoughts, to crystallize in my mind that which keeps me on a successful investing path.

THEY WILL SAY YOU CAN’T DO IT, BUT YOU CAN

T HERE IS A lot of information flowing in from all directions, bombarding us every hour of every day, from the Wall Street Journal , the Investor’s Business Daily , CNBC , in addition there is local newspapers, talk radio, plus all the hot tips and opinions that friends, neighbors, and coworkers offer. For me some of the information made sense, but nothing seemed to work when real money was put on the line. Failure after failure creates confusion, making it easy to give up trying to sort through all of it. I have heard it said, the easiest way not to be discouraged by the news is not to pay attention to it. In my opinion, this is not a good idea. I refuse to believe being a do-it-yourself investor is difficult and risky.

I have talked to many people about their investing experiences. Like many of them, my wife and I sought out a stockbroker. To us, it appeared brokers were the experts and could teach us to be good investors. Stockbrokers are quick to point out that the novice investor does not have the time or the expertise to be successful. The argument made sense; after all, stockbrokers do call themselves investment advisors. Soon it became clear they were salesmen working for a commission. Helen and I discovered their idea of what makes a stock a good stock was no better than ours. The recommendations they handed down to us were from either their company’s sales department or research department.

To convince us they should be in charge of our hard-earned money, each of the stockbrokers spent considerable time evaluating our risk tolerance. It was decided we had a low risk tolerance and were recommended stocks they labeled as conservative. Actually, the stocks were simply low-yielding and low-performing. Over the years, my wife and I have come to understand conservative to mean buying stocks with a high value at a low price. This was something totally different from the stocks our brokers recommended. They did not talk to us about what it is that makes up a stock’s value, nor did they try to compare a stock’s value with its price.

They did point out that the investors who did best were the ones who gave them money and did not pay attention to their portfolios. Helen and I spent a lifetime paying attention to our businesses, trying to build up assets. Asking us to not pay attention to our stock portfolio ran contrary to our instincts. After taking what seemed