Seven Key Rules
Keep following seven rules on your mind, on your desk and on the wall of your bedroom if possible. Read them at least once a week. When you are making an investment use this rules to evalute the quality of the investment.
- Always try to minimize loosing money. This involves making investments with minimal downside risks.
- Focus on acquiring and holding stocks with consistent dividend growth so the revenues can be compounded.
- Stocks are never undervalued. Stock is today worth what investors willing to pay for it, no more no less.
- No more than 20 symbols. Hard to keep track more than 20 companies. At least Half of them with high dividend pay companies.
- Evaluate each investment twice an year
- Have a predefined exit criteria for all the holdings.
- Always have a pool of cash ready
Numbers to Consider
- Company should have a high dividend yield. At least higher than the inflation.
- Consistent, moderate dividend growth – High dividend growth rates are not sustainable. Financial statements can be deceptive. Executives work goes to make them attractive for investors. But the dividend payment always tell the truth. Consistent growth of dividends is the hallmark of a good company. See at least 5 years of history.
- Debt / Capitalization should be less than 50%
- Coverage of at least 3 : 1. Cash flow of the company after taxes should be at least three times as the interest it pays
- Consistent, moderate annual earning growth 5 – 10%
- Payout ratio less than 60%
- Low Price / Sales ratio – Price of a share divided by the sales per share. Very fist prerequisite of business is revenue. If revenues are high compare to the stock price, profitability can be easily increased though cons controls and increased productivity. Minimum price to sales ration of 1.5.
- Low P/E Ratio – must be at minimum. This value should be less than the reciprocal of the long-term bond rate. If bond rate is 5% –> 100 / 5 = 20 –> PE value should be less than 20. If the price of the company is above this level. Then the stock is expensive. Evaluate the PE value of a stock relative to the PE value of the market. If a stocks PE has been 125% of the market, but now it sells at 80% of the market, there is a good chance that it is under valued at the moment.
- Buy shares less than it’s book value. Book value does not represent intangible values of the company such as the brand name.
- Growth in cash reservers or investments made by the company
- Less volatile sharp rice. Can calculate the standard deviations of the share price to find this.
Measurements of the Quality
- Company has Performed well during the troublesome economic environments
- How well acquisitions are absorbed and integrated into the company –> smart acquisitions
- Do best to avoid new businesses. Look for companies with long-term consistent moderate growth, long-term dividend yields, long-term growth of yield.
- Look for a company that produce real goods or services which serves peoples needs, has a reliable user demand. Avoid reseller companies.
- What you should really buy is a competitive advantage. Try to identify the competitive advantages a company has over others.
- Look for growth kickers. That could be selling for a low performing division or a new sub division with great potential
- Information available to everyone is not valuable anymore. PE ratio is not valuable as it was before
- TIme of max optimism is the best time to sell. the time of max pessimism is the best time to buy
- Don’t confuse genius with a bull market
- A list of stocks that you want to earn but which are not representing correct value at the moment. use this list during next correction/crash to buy
Sell when the dividend does not make sense to hold it for long team. make the decision based on the dividends. If we know that dividends are not going to keep rising, then it is time to sell. When dividends are affected, so is the share price.
Also when the share price increases it’s fair value, and the dividend yield relatively smaller to the other shares
One year goes with dividend increase. See the reason is one time occurring. If it fails two consecutive years, may be it is a good time to sell.
Document selling decisions and analyze them annually
If a company grows really fast with keep increasing sales, if those sales comes from the consumer credit, that may not be a sustainable business. When the debt cycle turns, customers will not be able to consume services as often.