Our ‘system’ for picking stocks limits your risk, costs little and has worked well for our subscribers these past 82 years. Here are some of its main points. Invest gradually. Prudent investors will remember that it’s safer to ease into the market by investing gradually.
Tried-and-tested system for stock profits
Invest in shares of well-established companies that are part of the core of the economy and that can build a repeat business. You don’t want to invest your retirement stake in companies that depend for profit on, say, finding a successor every year to ‘must-have’ toys such as Tickle Me Elmo.
Buy stock you might want to hold on to indefinitely. That way you minimize broker fees, the bid-ask spread (the difference between what a potential buyer will pay and what a potential seller will accept) and capital gains taxes. What’s more, these stocks often prosper most over years or decades.
When looking at annual reports, pay closest attention to the financial statements and their footnotes. Pay some attention to the management discussion and analysis section. Pay less attention to other words. Pay least attention to the pictures.
Adopt healthy skepticism about predictions—your own as well as those made by the company itself, or outsiders. Predictions are worth considering, but they’re the weak link in the investment process.
Pay as much attention to asset values as to profit. Management is less liable to misrepresent asset values than profit. Assets are more stable than profit and are apt to hold up better in business setbacks.
Consider sales per share as well as earnings per share. You might call sales the raw material of profit. If a money-losing company is selling for, say, 25 per cent of its yearly sales, it may be a buy (though only for aggressive investors). If it’s selling at 10 or 20 times its sales, by contrast, likely isn’t a buy.
Diversify your holdings across the main economic sectors. Owning shares in finance, utilities, consumer services and products, manufacturing and resources will give you a range of holdings. Diversify across sub sectors. This will include companies with stable businesses and stocks whose profits vary with the business cycle.
Our system doesn’t aim at figuring out when to buy and sell. After all, study after study shows no one consistently succeeds at market-timing. Instead, we try to find stocks worth buying and holding for years, if not decades. You’ll mainly want to sell them when your investment objectives change—which is largely a function of your age and income.
The strength of our system is that it doesn’t attempt the near-impossible task of outsmarting other investors consistently (which is what you have to do if you want to buy at the bottom and sell at the top). Instead, it seeks to profit by tapping into the natural growth that well-established companies generate over long periods. Over the years, most of the successful investors we’ve met have told us they practice a ‘system’ much like ours.
This is an edited version of an article that was originally published for subscribers in the September 16, 2022, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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The Investment Reporter •10/27/22 •