My Best Stocks to Buy Strategy
Helps me to eliminate the rest!
I find the best stocks to buy using my value investing buying strategy 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.
These rules not only alert me to good stocks to buy, but also remind me about risk-prone stocks that would be problematic buys.
Buying Strategy Rules
Here are the 'buying strategy rules' that I refer to when considering whether to buy a stock. I would expect that most of these rules would be adhered to for any stock purchase.
- 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. These are the best stocks to buy.
- Buy shares in quality companies when their price earnings ratio is substantially below the last one or two historical financial-year averages - hence indicating a margin of safety.
- Buy shares in companies with a calculated fair value above the current stock price in order to achieve 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 for 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 strategy 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.
In Summary ...
Using these value investing principles to find the best stocks to buy allows me to invest with some confidence that I will achieve my investment goals.
The related articles below examine the importance and more details of each of the measures.
Calculated fair value - is a multiple of the equity per share and allows a comparison to be made with the current share price.
Price earnings ratio - is an easy-to-use indication of value that allows comparison of the current P/E ratio to previous average annual P/E ratios, and to highs and lows of the P/E ratio over the last few years.
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