Guide to Buying the Right Stocks (for Humans)

Screening

There are two ways to screen for stocks. You can either read through the business and financial news publications or SEC filings until a company comes across the radar that piques your interest, or you can go out and find them. To proactively screen you can use Finviz, Morningstar, Valueline, or Gurufocus.

Analysis

The average returns generated by owning the S&P 500 over the last 50 years were roughly 10% annually including dividends. To do better than that, you have to look for better than average companies where the stock is trading at undervalued prices. Value is an estimate based on many factors, but the following is a core framework of 12 tenets to help guide you. As with anything, the more you do this, the better you get.

  • Consistent Growth in Sales
  • Consistent Growth in Earnings
  • Consistent Growth in Book Value
  • Debt to Income Ratio under 5
  • Return on Equity Average over 12%
  • Operating Costs to Income under 75%
  • CapEx to Income under 75%
  • Gross Profit Margins over 25%
  • Price to Earnings Ratio under 12
  • $1 for $1 retained to market growth
  • Meet 15% baseline growth estimate
  • Never buy at 52 week high prices

Valuation Questions

Determining value comes down to a general estimate of the future aspects of the business. Once again, this is why consistency is vital. The stronger and more reliable a company’s past, the more easily predictable is its future. With that in mind, the high yield system uses a combination of traits to specifically determine value. Every single company is valued by a multiple of its cash, earnings, and equity values. After using the core tenets to narrow down your selection into a short list, ask these questions to complete your analysis.

Management

A good rule of thumb is that if you’re not outperforming the S&P 500 Index over a 10 year period, you should place the majority of your assets in an Index Fund, and if you want, speculate on trades with less of your assets.

  • Divide investment capital into equal dollar amounts
  • Build a stock portfolio (on cash) as you find bargains
  • Leverage stock portfolio to trade options and arbitrage (optional)
  • Hold winning stocks for at least a year
  • Selling losers before year end
  1. Never Invest On Borrowed Money
  2. Never Short-Sell Stocks
  3. Avoid BUYING Options
  4. Always Think Long Term

Accelerated Strategies

Leveraging your cash positions to trade for short-term gains is something that great money managers have always done.

  • Only trade stocks in companies that have already announced a merger deal. Never speculate as to the possibility of a merger.
  • Stick to all cash deals in stocks with trading volumes above 50,000 if possible.
  • Only buy when the rate of return is over 15% annualized.

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Jonathan Poland

Jonathan Poland

20+ years analyzing and forecasting complex assets at the highest level of the economy. These are notes from my journey. Learn more @ mrplnd.com