In Price Stockmarket Investing, Quality is Job One

By Philip Usher


How much financial carnage is obligatory before we realize there is no safe and straightforward shortcut to investment success? When do we learn that almost all of our mistakes involve greed, fear, or impractical expectations about what we own? Finally, successful speculators begin to allot assets in a goal directed demeanor by adopting a practical Investment Strategy... An ongoing security selection and monitoring process that is led by realistic expectations, selection rules, and management rules. If you are thinking about trying a technique for a year to determine if it works, you're due for another smack up alongside the head! Practicable Investing Strategies transcend cycles, not years, and viable Equity Investment Systems consider three disciplined activities, the first of which is Selection. Most familiar systems ignore one of the others.

How should a speculator figure out what stocks to buy, and when to purchase them? Will Rogers summed it up: "Only buy stocks that go up. If they are not going to go up, don't buy them." Many have misread this sarcastic observation and joined the "Buy (anything) High" club. I've discovered that the "Buy Price Stocks Low (er)" approach works better. A Google search produces a selection of factors that help to identify Worth Stocks, the standards being low Price to Book Value, low P/E ratios, and other "fundamentals". But you'd be surprised how the definitions can change, and how few include the word "Quality". In the latter 90's, it was rumored that a well-known Price Fund Manager was asked why he was not buying dot-coms, IPOs, for example. When he claimed that they did not qualify as Price Stocks, he was told to change his definition... Or else.

How can we make a confidence enhancing Stock Selection Universe? Simply operating on blind trust with one of the common definitions could be too simplified, especially since many of the numbers spring from the topic corporations. Additionally, some of the figures may be difficult to get quickly , and it's necessary not to get engrossed in endless research. Here are five filters you need to use to come up with a variety universe of better quality firms, and you can get all the info cheaply from the same source: 1. An S & P Rating of B+ or Better. Standard & Poor's is a major fiscal data supplier 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 feasibility of the rated companies. Potential market performance (a guessing game anyhow) is not a consideration. B+ and above ratings are regarded as Investment Grade. Anything rated lower add a factor of pointless speculation to your portfolio. A staff of thousands does your research for you.

2. A History of Profits. Although it should appear obvious, purchasing stock in a company that has a history of profitable operations is less dodgy than taking stocks in an unproven, or start-up entity. Profitable operations evolve more instantly to changes in markets, economies, and business expansion opportunities. They are more likely to provide profit chances for you quickly.

3. A Record of Regular Dividend Payments. The payment of regular dividends, and continual increases in rate paid, are sure signs of economic viability. Corporations will go to some effort, and endure great difficulties, before electing either to chop or to omit a dividend. There is no need to focus upon the scale of the dividend itself; Securities should not be purchased as income producers. Another benefit of using dividend payment as one of your selection standards is the clear appearance of monetary stress that a cut communicates.

4. A Reasonable Price Range. You'll find that most Investment Grade stocks are priced above $10 per share and that only a few trade at levels above $100. If you happen to have got a seven-figure portfolio, price may not matter from a diversification viewpoint, but in smaller portfolios, a round lot of a $50 stock might be too much to chance in one position. A strangely high price might be due to an abnormally high degree of sector or company precise speculation while an inordinately low price may be a good caution signal. With no real structural size constraints, I feel at ease with a range between $10 and $90 per share... But I'd avoid most issues at the higher level.

5. A NYSE Listed Security. I don't know the listing requirements for them NYSE are still more highly constrictive than some place else, nonetheless it is helpful to be in a position to focus upon just one set of statistical data since almost all of the info you want continually is reported by Exchange (Market Statistics, Issue Breadth, and New Highs vs. New Lows).

Your Selection Universe will become the spine of your Equity Investment Programme, so there's no room for creative tweaks to the rules and axioms you have established... Regardless of how strongly you feel about recently published news or rumor. Now you can focus on operating procedures that will help you diversify properly by position size, industry, etc, and on guiding principles that will aid you in identifying which stocks should be studied closely for purchase when the price is right. Remembering that you want to sell each Equity Position at a target profit Asap, you'll be wanting to create suitable buying (and selling) rules. As an example, I never consider purchasing 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 the ones that I would be prepared to add to equity portfolios if they fall rather more during the trading day. Your actual "Buy List" changes every day in both symbol and limit price.

You'll need to apply consistent and disciplined judgment to your last selection process, but you may be confidant that you are choosing from a select group of better quality, well-established companies, with an indisputable past record of profitability and owner awareness. In addition, as these corporations gyrate above and below your purchase price (as they absolutely will), you can be more assured it's simply the nature of the exchange and not a close financial disaster... And that should help you sleep nights.

BTW, never say no way to a decent profit when the upward movement equals 10%, and you are going to be able to do it again, and again, and again.




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