Our ‘system’ for picking stocks limits your risk, limits your commission expenses, and has worked well for our subscribers over the past 75 years. This stock picking system helps you identify well-managed companies that will grow over time.
Many stock trading systems consist of charting technical parameters to determine buy and sell points for a specific stock. Chartists will plot such things as moving averages, stochastic oscillators, relative strength lines, Bollinger Bands® and other exotica looking for clear buy and sell signals.
Our stock picking ‘system’ doesn’t try to outsmart every other investor by flashing ‘buy’ and ‘sell’ signals for perfect entry and exit points for a stock. Our ‘system’ is meant to help you profit by buying into the natural growth that most well-managed and well-established companies will enjoy over sustained periods of time.
Here are some of its main points:
Invest gradually. Your best defence against loading up on stocks just before the start of a market setback or ‘correction’ is to buy stocks gradually. You’ll invest at times when prices are lower as well as when prices are higher. This way, you can profit from what’s known as ‘dollar-cost averaging’. It beats the fruitless task of figuring which way the market will go in the short run.
Invest in the shares of well-established companies that are an essential part of the economy, and that can build repeat business. You don’t want to invest your retirement stake in companies that depend for profit on, say, finding a successor every few years to toys such as Gogos.
Buy stocks that you might want to hold on to indefinitely. This way you minimize trading costs and capital gains taxes. What’s more, these stocks often prosper most over a period of years or decades.
When looking at annual reports, pay closest attention to the financial statements and their footnotes. Pay some attention to Management’s Discussion and Analysis. Pay less attention to the words (especially in the president’s letter to shareholders), and least of all to the pictures.
Be skeptical of predictions—your own, as well as those made by the company itself, or outsiders. Predictions are worth considering, but as we always say, they’re the weak link in the investment process.
Pay as much attention to the size of a company’s assets as to its earnings. Assets are less liable to be misrepresented than earnings. They’re also more stable than earnings and are apt to hold up better in a slump.
Consider sales per share as well as earnings per share. You might call sales the raw material of earnings. 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, say, 10 or 20 times is sales, it probably isn’t a buy.
Diversify your holdings across the five main investment sectors. That is, stocks in finance, utilities, consumer products and services, manufacturing and resources. This will give you a range of holdings that include stocks 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. Instead, we try to identify stocks that are worth buying and holding for years, if not decades. You’ll mainly want to sell them when your investment objectives change. Naturally, that’s largely a function of your age and income.
The strength of our stock-picking system is that it doesn’t attempt the near-impossible task of outsmarting all 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 aims to profit by tapping into the natural growth that most well-established companies enjoy over long periods. Over the years, most of the successful investors we’ve met have told us that they practise a ‘system’ much like ours.
This is an edited version of an article that was originally published for subscribers in the January 13, 2017, 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 •1/17/17 •