However, in honor of April, both its fools and celebrants, I thought it might be fun for a change to suggest an experimental investing strategy based on another form of breaking out. It has great possibilities. I call it "Little Cap Big Mo with a Bo." One starts with nano-cap to micro-cap stocks ($50 million to $500 million market capitalization company stocks), screens for a specific range of price earnings (4-25), and limits the results further to only those with a dividend, three-month average daily volume 125,000 shares or above, 52-week price change of +25% or above, and a dividend payout ratio no higher than 0.5. From among the stocks meeting the above criteria, it seems best to select the top five, measured by their prices being the lowest percentage below the stocks' 52-week highs. Develop and maintain a portfolio of five stocks. (Do not include limited partnerships.)
Rebalance after the portfolio as a whole is up 5% or more, or after three months, whichever is first. As one may surmise from this qualifying data, the approach makes the most of both small capitalization (the "little cap" part of the strategy's name, since smaller market cap stocks tend to outperform large capitalization ones) and price momentum. In addition, there is a bonus, the dividends the portfolio provides. The yield adds to the total return. Further, smaller capitalization stocks that offer dividends generally have lower risk and better performance compared with their non-dividend paying cousins.
The final bonus part of the "bo" in the name comes from a modest use of margin debt. On average, micro-cap to smaller capitalization stocks have provided total returns since 1926 of about 11-12% a year. Those with dividends do somewhat better, so make that around 13%. I would tweak this a little with margin debt, buying enough new shares when the markets are down to assure that, after all expenses, one gets from this strategy around 15% a year or better, averaged over five years, enough to at least double one's money in that period of time.