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In Value Stock Investing, Quality is Job
One
By:Steve Selengut
How much financial bloodshed is necessary before we realize
that there is no safe and easy shortcut to investment success?
When do we learn that most of our mistakes involve greed, fear,
or unrealistic expectations about what we own? Eventually,
successful investors begin to allocate assets in a goal directed
manner by adopting a realistic Investment Strategy... an ongoing
security selection and monitoring process that is guided by
realistic expectations, selection rules, and management guidelines.
If you are thinking of trying a strategy for a year to see if
it works, you're due for another smack up alongside the head!
Viable 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? Will Rogers summed it up: "Only buy stocks that go
up. If they aren't going to go up, don't buy them." Many have
misread this tongue-in-cheek observation and joined the "Buy
(anything) High" club. I've found that the "Buy Value Stocks Low
(er)" approach works better. A Google search produces a variety
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 surprised how the definitions can vary,
and how few include the word "Quality". In the late 90's, it was
rumored that a well-known Value Fund Manager was asked why he wasn't
buying 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?
Simply operating on blind 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 figures may
be difficult to obtain quickly, and it is essential not to get bogged
down in endless 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 a major
financial data provider 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 (a guessing game anyway) is not a consideration. B+
and above ratings are considered Investment Grade. Anything rated
lower adds an element of unnecessary speculation to your portfolio.
A staff of thousands does your research for you.
2.A History of Profitability. Although it should seem obvious, buying
stock in a company that has a history of profitable operations is
less risky than acquiring shares in an unproven, or start-up 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.A History of Regular Dividend Payments. The payment of regular
dividends, and periodic increases in rate paid, are sure signs of
economic viability. Companies 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. A further
benefit of using dividend payment as one of your selection criteria
is the clear indication of financial stress that a cut communicates.
4. A Reasonable 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 caused by an unusually
high degree of sector or company specific speculation while an
inordinately low price may be a good warning signal. With no real
structural size limitations, I feel comfortable with a range between
$10 and $90 per share… but I would avoid most issues at the higher
level.
5.A NYSE Listed Security. I'm not sure that the listing requirements
for the NYSE are still more restrictive than elsewhere, but it is
helpful to be able to focus on just one set of statistics since most
of the information you need regularly is reported by Exchange
(Market Stats, Issue Breadth, and New Highs vs. New Lows).
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 rumor. 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, I never consider buying a stock
until it has fallen at least 20% from its highest level of the past
52 weeks, so I include those that are close or at this price level
on a "Daily Watch List". Then, I select those that I 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.
Additionally, as these companies gyrate above and below your purchase
price (as they absolutely will), you can be more confident that it is
merely the nature of the stock market and not an imminent financial
disaster... and that should help you sleep nights.
By the way, never say no to a profit when the upward movement equals
10%, and you'll be able to do it again, and again, and again.
Steve Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor:
The Book that Wall Street Does Not Want YOU to Read",
and "A Millionaire's Secret Investment Strategy"
How much financial bloodshed is necessary before we realize
that there is no safe and easy shortcut to investment success?
When do we learn that most of our mistakes involve greed, fear,
or unrealistic expectations about what we own? Eventually,
successful investors begin to allocate assets in a goal directed
manner by adopting a realistic Investment Strategy... an ongoing
security selection and monitoring process that is guided by
realistic expectations, selection rules, and management guidelines.
If you are thinking of trying a strategy for a year to see if
it works, you're due for another smack up alongside the head!
Viable 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? Will Rogers summed it up: "Only buy stocks that go
up. If they aren't going to go up, don't buy them." Many have
misread this tongue-in-cheek observation and joined the "Buy
(anything) High" club. I've found that the "Buy Value Stocks Low
(er)" approach works better. A Google search produces a variety
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 surprised how the definitions can vary,
and how few include the word "Quality". In the late 90's, it was
rumored that a well-known Value Fund Manager was asked why he wasn't
buying 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?
Simply operating on blind 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 figures may
be difficult to obtain quickly, and it is essential not to get bogged
down in endless 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 a major
financial data provider 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 (a guessing game anyway) is not a consideration. B+
and above ratings are considered Investment Grade. Anything rated
lower adds an element of unnecessary speculation to your portfolio.
A staff of thousands does your research for you.
2.A History of Profitability. Although it should seem obvious, buying
stock in a company that has a history of profitable operations is
less risky than acquiring shares in an unproven, or start-up 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.A History of Regular Dividend Payments. The payment of regular
dividends, and periodic increases in rate paid, are sure signs of
economic viability. Companies 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. A further
benefit of using dividend payment as one of your selection criteria
is the clear indication of financial stress that a cut communicates.
4. A Reasonable 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 caused by an unusually
high degree of sector or company specific speculation while an
inordinately low price may be a good warning signal. With no real
structural size limitations, I feel comfortable with a range between
$10 and $90 per share… but I would avoid most issues at the higher
level.
5.A NYSE Listed Security. I'm not sure that the listing requirements
for the NYSE are still more restrictive than elsewhere, but it is
helpful to be able to focus on just one set of statistics since most
of the information you need regularly is reported by Exchange
(Market Stats, Issue Breadth, and New Highs vs. New Lows).
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 rumor. 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, I never consider buying a stock
until it has fallen at least 20% from its highest level of the past
52 weeks, so I include those that are close or at this price level
on a "Daily Watch List". Then, I select those that I 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.
Additionally, as these companies gyrate above and below your purchase
price (as they absolutely will), you can be more confident that it is
merely the nature of the stock market and not an imminent financial
disaster... and that should help you sleep nights.
By the way, never say no to a profit when the upward movement equals
10%, and you'll be able to do it again, and again, and again.
Steve Selengut
http://www.sancoservices.com
http://www.valuestockbuylistprogram.com
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor:
The Book that Wall Street Does Not Want YOU to Read",
and "A Millionaire's Secret Investment Strategy"
PNP.com
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