The approach we are using is not the same as his. I have built in a couple safeguards and employed a screen or two that he has not, but the resulting list of stocks has characteristics like those he cites. I do not claim this method will provide better or safer outcomes than those he suggests. They are simply adapted techniques that make sense to us, seem to work pretty well so far, and let us sleep well at night. And they are consistent with other research showing performance about twice that of the market averages. (Unfortunately, as usual there are no guarantees with respect to future returns.)
What we do:
- Using an inexpensive online stock screening service (many being available, but the best one for us is free, through the Charles Schwab brokerage), we cull the thousands of common stocks for those that each have a debt to equity ratio of .33 or less, a one-year price increase at least 25% better than the S&P 500 Index, and a price to sales ratio of 0.50 or less.
- We then screen the one or two dozen candidates left after #1 and exclude any with negative earnings, negative free cash flow, or a dividend payout ratio above 0.50.
- Next, for the still remaining assets, we assure that the income and balance sheet info. used for the #1 screens is fairly recent. This can be done by just going to Yahoo Finance, entering the stock symbol of each stock, and clicking on the Yahoo menu for Balance Sheet or Income Sheet, respectively, then making sure the date shown for the data is no older than 6 months ago. Any with older dates are excluded from the final short list.
- Around every other week (or for a total of about 25 stocks a year), I pick the best of the candidates left after #1-3, based on such fundamental, value, or technical factors as the price to earnings ratio (not too high), the current ratio (not too low), whether or not there is a dividend or some other variable in the stock's favor, recent upward movement in the stock's price, price earnings to growth ratio (PEG), etc. (Step 4 could probably be skipped, and one might just pick randomly from the few candidates left after #1-3 without substantially hurting results but if one knows how to pick based on these additional criteria it helps a little, at least in giving a bit better sense of control. Learning the basics of such variables is not that hard. After all, I did it! Anyone interested is encouraged to do so as well. My expertise is hardly that of a professional, of course. Happily, the strategy does not demand it. A dedicated amateur should be able to master the fundamentals. Within a few weeks or months, one could, if so inclined, likely be comfortable dealing with any of the factors mentioned here, and more.)
- After each asset has been held for one year plus a day (to get long-term tax treatment by IRS), it is sold (unless still the best available), so the portfolio never gets much above 25. (A variation on this is to sell losing assets in the last few days before the end of a year's holding. To sell them earlier risks getting rid of ones that might bounce back, but the advantage of selling the losers shortly before a year plus a day is that they get short-term tax treatment and can more directly count against one's taxable income for that year, reducing one's tax bite with short-term losses.)