Buying Stocks also invloves Discipline
Steve Cook on Disciplined Investing


Have You Seen This?


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Have You Seen This?


   This Week’s Data


Chinese banks funding commodity speculation (must read):

    Some inspiration from Paul Tudor Jones on Monday morning:

    Money supply just keeps on soaring (hat tip to EF Hutton):

    More on the money supply/inflation argument (must read):



More ‘do what I say not what I do’ from Obama.  Anybody remember W firing a couple of State Attorneys General?

    Big business’ role in the decline of capitalism:

    The high cost of Obamacare:
    More analysis:

    International health comparisons:

  International War Against Radical Islam

    More on Obama and Iran:

The Market

    Despite stock prices being down last week, so was the VIX:
    The latest thoughts from TraderFeed:

     Investment Thoughts--Buying Stocks Also Involves Discipline

        Having spent three weeks discussing the virtues of a Sell Discipline, I should allocate at least one week to Buying.  Like Selling the most important part is not the method but the Discipline.  The first aspect is the selection criteria.  For us, the focus is on companies that pay dividends and will continue to do so.  We screen for companies that (1) pay a dividend, (2) have raised it consistently, (3) have a solid return on equity, earnings growth rate and decent, defensible margins, (4) a sustainable pay out ratio, (5) manageable debt levels and (6) cash flow that provides a dividend coverage ratio after debt and other fixed charges that will allow the company to  maintain its dividend.  In other words, we are looking for financially strong companies with a history of consistently raising its dividend.  That gives us a Universe of potential holdings.

    This part of the exercise, i.e. how you select those investments, is important because (1) it defines the criteria of the investments that will best serve your investment goals and (2) it provides an objective framework for determining when a stock you own no longer serves best those investment goals.  The point here is that you need to carefully define the characteristics of investments that fit your goals, critically screen all available alternatives to eliminate all that don’t fit and continue to monitor those that are selected to be sure that they continue to fit your criteria.  The result is that you understand completely why you own a stock and what factors you emphasize as you monitor it as part of your Portfolio. 

    The second aspect of the selection process is price. Just because a company fits your criteria, that doesn’t mean that the stock does.  In our case, we have created a Valuation Model in which we (1) estimate the future financial statements of the company, (2) factor in the secular trends in the economy including its real growth rate, the inflation rate and interest rates and (3) add in the historical absolute and relative P/E ratios for its stock as well as its beta [volatility].  The end result is a Valuation Range for each stock.  We use the same Price Discipline on the Buy side as we do on the Sell side, that is, we only Buy a stock when it is in the lowest 10% of its Valuation Range.  In our thinking, it makes no sense to find a company that fits our investment needs then pay too high a price for it.  That is a woeful misuse of investment capital.

    Bottom line: the most important virtue of our methods is the Discipline.  The point is not that our goals or criteria are best, the point is for each of you is have your own investment goals and selection criteria and stick with them religiously.  Nor is our Buy Price Discipline necessarily to be mimicked, the point is to have one, a simple one that you understand and can execute with ease.


Posted 06-22-2009 8:22 AM by Steve Cook
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