A random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing

Rule 1: Confine stock purchases to companies that
appear able to sustain above-average earnings growth for
at least five years.
Difficult as the job may be, picking
stocks whose earnings grow is the name of the game.
Consistent growth not only increases the earnings and
dividends of the company but may also increase the multiple

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that the market is willing to pay for those earnings. Thus, the
purchaser of a stock whose earnings begin to grow rapidly
has a potential double benefit—both the earnings and the
multiple may increase.
Rule 2: Never pay more for a stock than can reasonably
be justified by a firm foundation of value.
Although I am
convinced that you can never judge the exact intrinsic value of
a stock, I do feel that you can roughly gauge when a stock
seems to be reasonably priced. The market price-earnings
multiple is a good place to start: Buy stocks selling at
multiples in line with, or not very much above, this ratio.
Look for growth situations that the market has not already
recognized by bidding the stock’s multiple to a large
premium. If the growth actually takes place, you will often
get a double bonus—both the earnings and the price-earnings
multiple can rise. Beware of stocks with very high multiples
and many years of growth already discounted in their prices.
If earnings decline rather than grow, you can get double
trouble—the multiple will drop along with the earnings.
Following this rule would have avoided the heavy losses
suffered by investors in the premier high-tech growth stocks

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that sold at astronomical price-earnings multiples in early
2000.
Note that, although similar, this is not simply another
endorsement of the “buy low P/E stocks” strategy. Under my
rule it is perfectly all right to buy a stock with a P/E multiple
slightly above the market average—as long as the company’s
growth prospects are substantially above average. You might
call this an adjusted low P/E strategy. Some people call this a
GARP (growth at a reasonable price) strategy. Buy stocks
whose P/Es are low relative to their growth prospects. If you
can be even reasonably accurate in picking companies that do
indeed enjoy above-average growth, you will be rewarded
with above-average returns.