Where do we go from here?

OK, so now even the staunchest of the tech bulls has thrown in the towel and realized the party is over in that sector.

Remember those really good parties you used to go to and the next day you saw what the house looked like? That’s where we are now with tech. It will come back, but don’t expect the old heroes to lead the parade, it will be a new crop that leads the next tech rally.

So 2+2 is again 4, not 5, or 6, or 10. Earnings do count. Many have belatedly realized that the Wall Street touts are no different than the shills that stand out in front of topless bars in New York City grabbing at you as you go by.

In short, back to reality.

Here is a good place for you to start when looking at stocks. Forget the hype, forget what your uncle tells you, don’t pay any attention to those fancy reports you get in the mail (unsolicited) telling you about the “next” Microsoft.

Make a promise to yourself. Don’t ever buy a stock again without first reading (at least three times) the annual report, the 10-k and the 10-q.

Find out what the company does, who the competition is, where will the growth come from, where your company stands in the pecking order, is management on the up and up – things like that.

The most important thing in the balance sheet is the sector marked “Cash Provided by Operating Activities.” For those of you reading this that have been in business for yourselves, we don’t need to explain this one. This is the altar you have already learned to worship at.

For all others, you’d better learn this one, and fast.

Also critical is learning to figure out free cash flow. This is the cash that is flowing into the company that is not already claimed for someone else (debt service, cost of goods sold, advertising etc.).

Free cash flow is essential for continued growth and expansion, otherwise you will have to borrow money to grow.

If you look at great stocks that have made great long-term holds, like Wrigley’s (NYSE: WWY), Exxon (NYSE: XOM), Berkshire-Hathaway (NYSE: BRK /a or/b), Merck (NYSE: MRK), and Smithfield Foods (NYSE: SFD), you will see that free cash flow numbers are impressive, and (always) growing.

Oh, you don’t want to do all this? Well, then, picking stocks for yourself probably isn’t for you.

It’s like anything else in life, if you do something well, then you must work very hard at it. If you are not willing to give the effort, then fuhgettaboutit – you will get creamed.

“I bought this stock because I heard about it on CNBC.”

“I bought this stock because it was hot.”

“I bought this stock because my barber told me about it.”

“I bought this stock because I like the product.”

All these lines are the sad stories that are being repeated over and over these days, for the simple reason that these poor souls did not do their homework.

Successful stock market investing is not so much about having a high IQ as it is being logical.

It was not logical for Cisco to sell for 100+ times earnings. Yet, many very bright people told us in 2000 that Cisco was still a good buy in the $80 area. This was not logical; it did not make sense.

Many people that bought Cisco right at the top could probably not write down more than five sentences about what they knew about the company.

The next time you want to buy a stock, sit down and write on a piece of paper what you know about the company. If you can’t get past four or five sentences, then you have not done your homework.

The beauty of most good long-term, buy-and-hold stocks is their simplicity. Look at Wrigley’s: They make chewing gum … they sell it … they dominate their sector … they have a great moat around their business.

Quite simply, what WWY really owns is the right to put their product right within your reach, as you leave the store.

How many times did you say at the checkout line “Oops, can’t afford gum today.” Eighty percent of what you see for sale at the gum display is Wrigley’s product, and of course WWY also has good management, a bullet proof balance sheet, and a brand name that is top-notch.

This is not rocket science; this is logic – simple logic that even such a dunce as I can understand.

Yet most of us will pass Wrigley’s by because lets face it, that doesn’t give you much to brag about in the locker room, or the cocktail party.

But you need to decide what you are investing for, profit or excitement. That, indeed, is the question.