Book Review and Interview: Gabriel Wisdom and Investing in “Fallen Angels”

When it comes to investing, many people are interested in trying to find the “right” stock. Gabriel Wisdom has found a great deal of success in looking for “fallen angels” — stocks that were once “hot” but have fallen out of favor. In his recent book, Wisdom on Value Investing: How to Profit on Fallen Angels, Wisdom provides helpful hints that you can use to help improve your investing performance. I recently spoke with Wisdom over the phone, and he talked about how you can profit from looking for these fallen angels.

“The old Wall Street used to refer to fallen angels to describe something that was very popular and overpriced for a time before it fell. We’ve updated the term to refer to stocks and bonds that have fallen — but that should be rising. Based on revenue and earnings growth, or on balance statements, these are investments that are on sale, and have a great upside potential over time.”

Wisdom describes value investing at its finest: Look for fundamentally sound companies that are undervalued, and invest in them for the long term. “It’s important, though, to distinguish between ‘fallen’ and ‘falling’,” Wisdom points out. “You want a security that has already come close to reaching its bottom.”

He also insists that investors need to look at markets in terms of cycles, and what happens during these cycles. “Just like cars, groceries and other items, there are good times to buy stocks and bonds, giving you a better deal. You need to study the market and ideally buy when things are on sale. Then you sell when everyone else is excited about what is happening.”

Knowing when to sell is an important part of investing. “It’s the hardest part of successful investing,” Wisdom says. “J. Paul Getty, possibly the first billionaire of his time, bought when people were complaining and sold when they were celebrating.” Wisdom offers three keys to knowing when to sell:

  1. Something has changed fundamentally so that the reason you bought is no longer valid.
  2. Your profits come sooner than anticipated. Wisdom recommends that you should at least sell half if you can’t part with the whole investment at once.
  3. A better investment opportunity comes along, and you need the capital to take advantage of it.

In addition to offering the above insights, Wisdom’s book also includes other helpful investing hints. The first chapter offers 10 traits of good bargain hunters, and provides you with great information on how to develop these traits. The book then takes you through bottom fishing, cheap and timely securities, Wall Street cycles, time arbitrage, and profit vs. panic. The book also includes a helpful checklist for effective investing. I like this checklist because it forces you to stop, take stock of the situation and make investment decisions (to buy or sell) based on something approaching rational thought, rather than a visceral reaction to what might be happening in the market.

You really can become a better investor if you pay attention to fundamentals, and look for investments that are underpriced but have good upside potential. You may not score big in a year or two, but you are more likely to see steady gains over the years if you employ some of the techniques in Wisdom’s book.

Disclosure: I received a free copy of this book for review.