In Worth Stock Investing, Quality is Job One

By Philip Usher


How much monetary bloodshed is obligatory before we realize that there is no safe and straightforward shortcut to investment success? When do we learn that almost all of our mistakes involve greediness, fear, or impractical expectations about what we own? At last, successful investors start to allot assets in a goal directed manner by adopting a practical Investment Strategy... A continual security selection and monitoring process that is guided by realistic expectations, selection rules, and management guiding principles. If you're thinking about trying a technique for a year to see if it works, you're due for another smack up alongside the head! Doable Investment Techniques transcend cycles, not years, and workable Equity Investment Systems consider three disciplined activities, the first of which is Selection. Most familiar systems ignore one of the others.

How should a stockholder figure out what stocks to buy, and when to purchase 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 revealed that the "Buy Worth Stocks Low (er)" approach works better. A Google search produces a selection of factors that help to spot Worth Stocks, the standards being low Price to Book Value, low P/E ratios, and other "fundamentals". But you would be stunned by how the definitions can change, and how few include the word "Quality". In the late 90's, it was rumored that a well-known Price Fund Executive was asked why he wasn't purchasing dot-coms, IPOs, and so on. When he revealed that they didn't qualify as Worth Stocks, he was told to change his definition... Or else.

How will we create a confidence enhancing Stock Selection Universe? Simply operating on blind faith with one of the common definitions might be too simplistic, especially since plenty of the numbers come from the topic firms. Also, some of the figures may be hard to get quickly , and it is necessary not to get engrossed in unending research. Here are 5 filters you can use to come up with a variety universe of superior quality firms, and you can get all the data cost effectively from the same source: 1. An S & P Rating of B+ or Better. Standard & Poor's is a major fiscal info provider to the investment community, and its "Earnings and Dividend Rankings for Common Stocks" mix many fundamental and qualitative factors into a letter ranking that speaks only to the money viability of the rated corporations. Potential market performance (a guessing game anyhow) is not a consideration. B+ and above ratings are considered Investment Grade. Anything rated lower add a factor of pointless speculating to your portfolio. A staff of thousands does your research for you.

2. A Record of Profitability. While it should appear obvious, buying stock in a company that has a record of profit-making operations is less risky than acquiring shares in an unproven, or start up entity. Profitable operations adapt more enthusiastically to changes in markets, economies, and business growth possibilities. They are more likely to provide profit opportunities for you swiftly.

3. A Record of Regular Dividend Payments. The payment of regular dividends, and continual increases in rate paid, are certain signs of economic viability. Firms will go to some effort, and endure great difficulties, 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 earnings producers. Another advantage of using dividend payment as one of your selection factors is the clear sign of fiscal 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've got a seven-figure portfolio, price may not matter from a diversification viewpoint, but in smaller portfolios, a round lot of a $50 stock could be too much to chance in one position. An abnormally high price could be due to an abnormally high level of sector or company specific speculation while an inordinately low price could be a good caution signal. With no real structural size constraints, 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 don't know that the listing requirements for them NYSE are still more restrictive than somewhere else, but it is helpful to be well placed to focus upon only 1 set of statistics since most of the information you need continually is reported by Exchange (Market Figures, Issue Breadth, and New Highs vs. New Lows).

Your Selection Universe will become the spine of your Equity Investment Program, so there is no room for creative changes to the rules and tenets you have established... Regardless of how strongly you are feeling about late news or rumour. Now you can focus upon operating procedures that will help you diversify properly by position size, industry, etc, and on guidelines which will help you identify which stocks should be observed closely for buying when the price is right. Not forgetting that you need to sell each Equity Position at a target profit A.S.A.P, you'll be wanting to build acceptable purchasing (and selling) rules. For example, I never consider purchasing a stock till 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 might be ready to add to equity portfolios if they fall rather more during the trading day. Your precise "Buy List" changes every day in both symbol and limit price.

You'll need to apply consistent and trained judgment to your last selection process, but you may be confidante that you're selecting from an exclusive group of superior quality, well-established companies, with a confirmed past record of profitability and owner awareness. Additionally, as these firms gyrate above and below your purchase price (as they definitely will), you can be more assured that it is merely the character of the exchange and not a close fiscal disaster... And that ought to help you sleep nights.

BTW, never say no thanks to a nice profit when the upward movement equals 10%, and you will be able to do it again, and again, and again.




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