In Value Stock Investing Quality is Job One
Below is a MRR and PLR article in category Finance -> subcategory Stock Market.
In Value Stock Investing, Quality Comes First
Summary
Building a strong stock selection universe requires more than blind faith in common definitions?"especially when relying on data from the companies themselves.Key Concepts
Value, stock, investing, equity, selection, strategy, portfolio, financial plan, NYSE, asset allocation, security, investor, IPO, dividend, income.Article
Understanding Investment Success
How much financial turmoil is necessary before we realize there’s no shortcut to successful investing? Mistakes often stem from greed, fear, or unrealistic expectations about our holdings. Successful investors gradually learn to allocate assets with well-defined goals, through a realistic investment strategy. This involves ongoing security selection and monitoring, guided by sound expectations, selection rules, and management guidelines. If you aim to test a strategy for just a year, you’re missing the point; viable investment strategies span economic cycles, not just years. A robust equity investment strategy prioritizes three key activities, with selection being the foremost.
Selecting the Right Stocks
How should investors decide which stocks to buy and when? As Will Rogers humorously put it: "Only buy stocks that go up. If they aren't going to go up, don't buy them." Many have taken this tongue-in-cheek advice literally, joining the "Buy High" group. In contrast, the "Buy Value Stocks Low" approach is more effective. A quick Google search reveals various criteria for identifying value stocks, like low price-to-book value and low P/E ratios. However, the definitions vary widely, often omitting "quality." In the late '90s, a well-known value fund manager famously resisted buying dot-coms and IPOs, being pressured to alter his definition of value stocks.
Creating a Confidence-Building Stock Universe
Relying solely on typical definitions to create a stock selection universe might be too simplistic, as much of the data comes from the companies themselves. Additionally, obtaining some figures can be time-consuming, and extensive research should be avoided. Here are five filters to find higher-quality companies efficiently:
1. S&P Rating of B+ or Better: Standard & Poor's ratings provide a comprehensive view of a company’s financial viability, combining fundamental and qualitative factors. Ratings of B+ and above are considered investment grade, and anything lower introduces unnecessary speculation.
2. History of Profitability: It's evident that investing in companies with a proven track record of profitability is less risky. These companies are more adaptable to market changes and more likely to offer profit opportunities.
3. Regular Dividend Payments: Frequent dividend payments and periodic increases indicate economic stability. Companies strive to maintain dividends, indicating financial health. Dividend cuts are a clear signal of financial stress.
4. Reasonable Price Range: Most investment-grade stocks range from $10 to $100 per share. In smaller portfolios, a high-priced stock may cause over-concentration. A share price too high or too low can signal speculation or underlying issues.
5. NYSE Listed Security: While NYSE listing requirements may not be as stringent as before, focusing on a common set of statistics simplifies analysis, offering consistent data on market stats and other metrics.
Building Your Investment Program
Your stock selection universe forms the foundation of your equity investment program. Stick to established rules and guidelines, avoiding creative adjustments despite any tempting news or rumors. Focus on procedures that help diversify by position size and industry, and set guidelines to identify stocks to monitor for purchase opportunities. For instance, I only consider stocks that have declined at least 20% from their highest level in the past year. I maintain a "Daily Watch List" of stocks near this threshold, preparing to add them to portfolios if they dip further. Your "Buy List" will change daily.
Applying consistent, disciplined judgment in the final selection process ensures you choose from higher-quality, well-established companies with a track record of profitability. As these stocks fluctuate, remember it’s the nature of the market, not a sign of impending disaster. This understanding provides peace of mind.
Conclusion
Always capitalize on a profit when a stock rises by 10%, allowing you to reinvest and repeat the process.
By focusing on quality and adhering to disciplined strategies, you position yourself for long-term investment success.
You can find the original non-AI version of this article here: In Value Stock Investing Quality is Job One.
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