Here is his approach, as described in Janet Lowe's cited work and further discussed in John Train's books, The Money Masters (1980) and The Midas Touch (1987):
- Take the average AAA (or Aaa) corporate bond yield and multiply by 2;
- Assure that the earnings yield (the reciprocal of the P/E) of the candidate stock is greater than the result from #1;
- A company with a P/E of 10 will have an earnings yield of 10, one with a P/E of 5, will have an earnings yield of 20. If the AAA corporate bond yield is 10, the earnings yield of 10 (P/E of 10) will not do, as it must be twice the AAA corporate bond yield. But if it is 20 (P/E of 5), that works perfectly. A P/E of 4 equates to an earnings yield of 25, more than adequate when the AAA corporate bond yield is 10. Today the AAA corporate bond yield is around 5.5. Double that, and the earnings yield must be at least 11. Thus, the P/Es considered must be no greater than 9.09. (If my arithmetic is correct, to obtain the maximum allowable price to earnings ratio under this strategy, divide 100 by twice the AAA corporate bond yield.) Note: even if the formula from the AAA corporate bond yield would permit it, never invest in stocks with a P/E above 10.
- Considering only stocks with P/Es of 10 or below and such that the earnings yield is at least twice the AAA corporate bond yield, check the ratio of shareholders' equity to total assets. All acceptable candidate stocks must have shareholders' equity to total assets of 50% (.50) or greater.
- Create a portfolio of at least 30 such stocks.
- Hold each asset until it has appreciated 50% or more or until it has been held to the end of the second calendar year from date of purchase, whichever first (i.e. if bought May 13, 2003, sell by the end of December, 2005, at the latest).