J. Paul Getty's Stock Market Investment Strategies

A couple of weeks ago I chanced upon J. Paul Getty's book "How to Be Rich" in his very own art museum in Los Angeles, California, USA.

J. Paul Getty is an American industrialist / oil magnate who was the founder of multinational oil company, Getty Oil. At one point, J. Paul Getty was the richest man in the world.

In his book, he shared his stock market "secrets" in Part Four: The Art of Investment in a chapter called "The Wall Street Investor".

And having the same investment style as he, I couldn't agree more with the points that he put forth. Getty is more of an investor, rather than a speculator or trader.

What is the difference, you may ask?

In Mr. Getty's own words: 

"For as long as I can remember, veteran businessmen and investors - I among them - have been warning about the dangers of irrational stock speculation and hammering away at the theme that stock ownership are deeds of ownership in business enterprises and not betting slips."

Mr. Getty believes that "Get-rich-quick" schemes just don't work, otherwise everyone else would be a millionaire. He adds that this is true for the stock market, as well as any form of business activity.

Getty believes in growing with the business by buying low and holding on. It is possible to make money and a great deal of money in the stock market but it can't be done overnight. In his words: 

"The big profits go to the intelligent, careful and patient investor, not to the reckless and overeager speculator. Conversely, it is the speculator who suffers losses when the market takes a sudden downturn."

"The seasoned investor buys his stocks when they are priced low, holds them for the long-pull rise and takes in-between dips and slumps in his stride."

Very much similar to the value investors of today, J. Paul Getty believes in finding bargain, low priced stocks relative to measurable values of the business, and holding on for the long-term. He warns of investors, not to be fearful of bargains.

"Sound stocks, purchased for investment when their prices are low, and held for the long pull, are very likely to produce high profits through dividends and increases in value."

Another of Mr. Getty's tips is that no investor should buy a stock without knowing as much as possible about the company. One should not bank into companies he does not understand, and in his example, Mr. Getty mostly invested in oil stocks, because he is after all an oilman and this is what he knows best.

Another important tip from Mr. Getty is that it is not only enough to look at "individual firms, but also entire industries must be judged as to their ability to keep pace with the needs of the future. The investor has to be certain that neither the products of the company in which he invests in, nor the particular industry itself will become obsolete in a few years."

Finally, as brushed upon earlier, Mr. Getty mentioned 3 important, measurable values that determine whether a company is cheap or not:

1. Net realizable assets (per share)

2. Earnings

3. Dividends

Many would consider these metrics antiquated, but these are the basics nontheless, indispensible to common stock investing. These big 3 metrics have also been discussed in detail by Benjamin Graham, the mentor to Warren Buffett.

In Getty's words, "There are innumerable fine buys on the market today. Among them are many stocks with net realizable assets two, three, four and even more times greater than the stock exchange value of their issued shares."

I think, Getty's "Net Realizable Assets" is synonymous to the book value or net worth of the shares. This means, all the business assets (land, machinery, cash, inventories etc.) less the liabilities (bank loans, bonds, late payments).

To learn more about the easy way of calculating a company's book value or net worth, visit this link in one of our older posts:

http://pilifinance.blogspot.com/2013/09/how-to-value-stocks-basic-ie-asset.html

Aside from these 3, J. Paul Getty mentioned other quantitative and qualitative questions and characteristics that an investor must satisfactorily answer before investing sums of his money, a copy of these questions reproduced here:

"1. What is the company's history: Is it a solid and reputable firm, and does it have able, efficient, and seasoned management?

2. Is the company producing or dealing in goods or services for which there will be a continuing demand in the forseeable future?

3. Is the company in a field that is not dangerously over-crowded, and is it in a good competitive position?

4. Are company policies and operations farsighted and aggressive without calling for unjustified and dangerous over expansion?

5. Will the corporate balance sheet stand up under the close scrutiny of a critical and impartial auditor?

6. Does the corporation have a satisfactory earnings record?

7. Have reasonable dividends been paid regularly to stockholders? If dividend payments were missed, were there good and sufficient reasons?

8. Is the company well within safe limits in so far as both long- and short-term borrowing are concerned?

9. Has the price of the stock been moved up or down over the past few years without violently wide and apparently inexplicable fluctuations?

10. Does the per share value of the company's net realizable assets exceed the stock exchange value of common stock share at the time the investor contemplates buying?"

To close, J. Paul Getty always believed that selected - and he emphasizes the word selected - common stocks are indeed, excellent investments.