.: In Value Stock Investing, Quality is Job One
Category:Home / Finance / Stock Market Investing
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.
Article keywords: Value, stock, investing, equity, selection, worksheet, investment, portfolio, financial, plan, NYSE, fund, manager, asset, allocation, security, investor, IPO, dividend, income
Article Source: http://www.articles32.com
Steve Selengut
www.sancoservices.com
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"
.: New Stock Market Investing Articles
1). Difference Between Paper Trading And Live Trading!
Both paper trading and live trading are important steps to accumulate wealth through stock investments.
2). Stock Index Funds - What Is An Index Fund?
You may have heard of the term before, financial indexes, but just what exactly are they. Indexes, also known as stock market indexes, are the listings of stocks and any statistics that show a full of value of any given stock in the index. These indexes are generally used to show the character of all the stocks taken together.
3). Stocks - How To Know When To Sell
Stocks can be a great investment. Most people don`t really know when it`s time to sell though.
4). Some Fundamentals of Option Trading
Option trading is an ever increasingly popular form of investment. The wide spread use of online option trading has led to many newcomers to these risky, but potentially profitable opportunities. The following is a review of some of the fundamentals of Option Trading.
5). Future Option Trading - A Brief History and Overview
Future Option Trading is similar to the Stock Options Trading in many ways, but there are also some major differences. Some of the terminology used in Futures Trading also has a different meaning than the same term when applied to Stock Option Trading, and caution must be used to avoid confusion.
6). A Sample Option Trading Strategy
When you feel you understand a bit about the Options Trading Market, and are ready to give it a try, you need to spend a bit of time developing a strategy to guide your investment decision. It is important in doing this to understand the basic difference between a strategic decision and a tactical decision.
7). Fibonacci and Golden Ratio
The Fibonacci numbers Golden ratio can be used to describe the proportions of everything from nature to smallest building blocks. This is used by many successful investors to pick trends in the charts.
.: Top Stock Market Investing Articles
1). James Dines Predicts a Buying Panic in Uranium
Over the years, Dines successfully forecast the Internet mania, forecasting the giants of the tech boom, and forecasting the tech bust. A gold bug again, Dines also added uranium as the metal to watch over the coming years, saying, “This is my way of playing the whole coming energy boom."
Interviewer: You have been calling a bull market in uranium and, once again, you were the first voice in the now-growing crowd of uranium bulls.
2). Interesting Historical Facts About The Stock Market
Did you know that the 1987 crash was worse than the 1929 crash?
3). Openwave-Could the little company ever become king?
Openwave has a very unique and valuable business in the wireless data market. It has a dominate market share of 50% in both the browser and in the gateway transitions for mobile phones. Both products are a core element in the data cell phone market.
Our philosophy is to own the critical elements in markets that appear to have revolutionary growth. In January 2004 we wrote an article saying the wireless revolution has begun.
4). A Man Who Turned a $15,000 Stock Account INTO $3,296,000 Million AND WHAT I Learned From It
The lessons I learned from a trader who turned a $15,000 account into over $3 Million with JUST two stock trades.
5). Option Trading Tip - Buy Deep In-The-Money Options
Time decay and volatility are responsible for many a broken option trading account. Discover how to neutralize these 2 forces and achieve more consistent profits!
6). The Grand Daddy Boom in Uranium
Approaching his 50th year in the uranium business, the quiet but assertive Chairman and Chief Executive of Uranium Resources (OTC BB: URIX). Paul K. Willmott talked to us about the current uranium bull market. Willmott discussed the third uranium bull market he’s experienced with both exuberance and caution.
Interviewer: How do you feel about the rising.
7). Why Is Eric Sprott A Uranium Bull?
Eric Sprott may be Canada's answer to Warren Buffet. He's got the Midas Touch and currently manages more than $3 billion. We talked to Eric Sprott about uranium and why he is bullish on nuclear energy.
Interviewer:
Uranium had been inching higher from 2001 until a year ago. Since then, it has soared up the price chart. What is a realistic price for uranium and how high can you envision it reaching?
Eric Sprott:
There is obviously a shortage between current mine production and current uranium consumption.