My Stock Market Buying Policy

I outline below the buying policy that I apply to my buying decisions. I think of these as 'buying rules' that I should conform to unless I have very good reason to do otherwise.

Think twice about investing in Initial Public Offerings (IPOs) and recent start-up companies with less than five years of operating performance.

Avoid buying shares in single resource (mining, oil) stocks.

Limit share purchases in capital intensive companies. They are companies requiring large capital investment that has to be renewed over time for the company to remain competitive.

Buy shares in companies with strong earnings stability (usually >75%).

Buy shares in companies with substantial return on equity and capital employed (> 15%); but consider whether earnings from recent acquisitions have not yet flowed through.

Buy shares in companies with a strong economic moat or competitive edge.

Buy shares in quality companies when their P/E ratio is substantially below the last one or two historical financial-year averages - hence providing a margin of safety.

Take into account the dividend yield of the company under consideration in order that the overall portfolio dividend yield remains above four per cent.

Check out debt management risks associated with the company when making buying decisions.

Carefully consider any qualitative information available on the company.

Ascertain what the company does and whether this fits with my values. If I don't understand what the company does, don't buy it.

Aim to achieve a 15% internal rate of return (IRR) over five years on each share purchase.

Plan on holding purchases for at least five years or longer/forever unless the selling policy comes into play.

If finances and market timing allow, use a staggered approach to buying with the aim to achieve up to three purchases in order to stagger any future sales.

Record in a diary the quantitative and qualitative reason(s) for each share purchase, whether the purchase was in line with my purchasing policy - and if not, why not.

Return from My Buying Policy to Investment Plan