How much financial bloodbath is needed before we comprehend that there is no safe and stress-free shortcut to investment success?
When do we learn that most of our mistakes involve greed, fear, or impractical anticipations about what we own?
In due course, successful investors begin to distribute assets in a goal directed mode by adopting a realistic Investment Strategy… an ongoing security choice and monitoring method that is guided by convincing outlooks, selection rules, and Management guiding principles.
If you are thinking of trying a strategy for a year to experience if it works, you’re due for another blow up alongside the head! Feasible Investment Strategies transcend cycles, not years, and viable Equity Investment Strategies consider three disciplined activities, the first of which is Selection. Most familiar strategies ignore one of the others.
How should an investor determine what stocks to buy, and when to buy them?
Many successful investors have found that the “Buy Value Stocks Low (er)” approach works better. A Google search produces a diversity of criteria that help to identify Value Stocks, the standards being low Price to Book Value, low P/E ratios, and other “fundamentals”.
But you would be amazed how the definitions can vary, and how few include the word “Quality”. In the late 90’s, it was rumoured that a famous Value Fund Manager was asked why he didn’t buy dot-coms, IPOs, etc. When he said that they didn’t qualify as Value Stocks, he was told to change his definition…or else.
How do we create a confidence building Stock Selection Universe?
Purely operating on visionless faith with one of the common definitions may be too simplistic, particularly since many of the numbers originate from the subject companies. Also, some of the numbers may be challenging to get quickly, and it is vital not to get bogged down in never-ending research.
Here are five filters you can use to come up with a selection universe of higher quality companies, and you can obtain all of the data inexpensively from the same source:
1. An S & P Rating of B+ or Better. Standard & Poor’s is one of the major financial data providers to the investment community, and its “Earnings and Dividend Rankings for Common Stocks” combine many fundamental and qualitative factors into a letter ranking that speaks only to the financial viability of the rated companies. Potential market performance is not a consideration.
B+ and above ratings are considered Investment Grade. Anything rated lower adds an hint of avoidable speculation to your portfolio. A group of people do adequate research for you.
2. A History of Profitability. Though it should seem like apparent, buying stock in a company that has a history of profitable Operations is less risky than acquiring shares in an unverified or unproven entity. Profitable operations adapt more readily to changes in markets, economies, and business growth opportunities. They are more likely to produce profit opportunities for you quickly.
3. History of Regular Dividend Payments. The payment of regular dividends, and periodic rises in rate paid, are convinced signs of economic viability. Corporations will go to great lengths, and endure great hardships, before electing either to cut or to omit a dividend. There is no need to focus on the size of the dividend itself; Equities should not be purchased as income producers. The additional benefit of using dividend payment as one of your selection criteria is the clear indication of financial stress that a cut communicates.
4. A Realistic Price Range. You will find that most Investment Grade stocks are priced above $10 per share and that only a few trade at levels above $100. If you have a seven-figure portfolio, price may not matter from a diversification standpoint, but in smaller portfolios, a round lot of a $50 stock may be too much to risk in one position.
An unusually high price may be instigated by an unusually high degree of Sector or company specific speculation while an tremendously low price may be a good advice signal. With no real structural size limitations, most investors feel comfortable with a range between $10 and $90 per share… but they would avoid most issues at the higher level.
5. A NYSE Listed Security. Not certain that the listing requirements for the NYSE are still more restrictive than elsewhere, but it is useful to be able to focus on just one set of statistics since most of the data you need frequently is reported by Exchange.
Your Selection Universe will become the backbone of your Equity Investment Program, so there is no room for creative adjustments to the rules and guidelines you’ve established… no matter how strongly you feel about recent news or rumour.
Now you can focus on operating procedures that will help you diversify properly by position size, Industry, etc., and on guidelines that will help you identify which stocks should be watched closely for purchase when the price is right. Keeping in mind that you want to sell each Equity Position at a target profit ASAP, you’ll want to establish appropriate buying and selling rules.
For example, smart investors never consider buying a stock until it has fallen at least 20-30% from its highest level of the past 52 weeks, so they include those that are close or at this price level on a “Daily Watch List”. Then, they select those that they would be willing to add to equity portfolios if they fall a bit more during the trading day. Your actual “Buy List” changes every day in both symbol and limit price.
You will need to apply consistent and disciplined judgment to your final selection process, but you can be confidant that you are choosing from a select group of higher quality, well-established companies, with a proven track record of profitability and owner awareness.
Furthermore, as these companies whirl above and below your purchase price, you can be more confident that it is merely the nature of the stock market and not an imminent financial disaster.
By the way, never say no to a profit when the upward movement equals 10-15%, and you’ll be able to do it over, and over, and over.
This information is for Learning purposes only. We are indeed not financial mentors. It should not be considered legal or financial advice. You should consult with a financial advisor or other professional to find out what may be the finest for your individual needs and risk tolerance.
Please do your own research.