80% Success with Stock Selection
15% Annual Portfolio Return
Simple Procedures
Carefree Portfolio Maintenance
KISS Investing (Kiss It Simple and Safe)
1. You buy a company earning $1 per share ($1 EPS)
2. You buy that share for 20 X EPS ($1.00) = $20.00
3. The company grows earnings to $2 per share (EPS = $2)
4. You still sell it for 20 X EPS (20 X $2 =$40)
5. It's worth $40 and your money has doubled!
That's the secret.
The Two Most Important Tests of a Company's Value
1. What is the potential reward?
2. How much risk must I take to obtain it?
The Only Two Times You Should Sell a Stock
1. You want or need the money.
2. The company fails to perform as you predicted.
"Fails to perform as you predicted" means the quality deteriorates or the return potential deteriorates.
You hold a quality stock until you want or need the money unless the quality or potential return deteriorates.
Approximately one in five of the stocks you pick will develop unforeseen problems and need to be sold.
The Two Strategies of Portfolio Management
1. Defense - Has the quality deteriorated?
2. Offense - Has the return potential deteriorated?
Defensive portfolio management deals with making sure the growth you found and forecast is actually occuring. There will always be short term interuptions in growth which result in buying opportunities, but stocks with long term, serious problems must be caught early and delt with decisively by selling them.
Offensive portfolio management deals with grossly overvalued situations and is less urgent to pursue. Here your focus is to capture excess profit when a stock temporarily becomes overvalued by REPLACING it with another stock of equal or grater quality and greater return potential.
Missing a defensive portfolio management problem can result in serious harm to the return of your portfolio, whereas missing an offensive portfolio management problem only results in a little lost extra profit. You'll still own a quality stock.
Speculation vs. Investing
The difference between a speculator or day-trader and an investor.
A graph shows several years of weekly high - low price changes for a company that has been steadily growing its sales and earnings.
There was a lot of price fluctuations on a week to week basis, but the trend was clear. The price went up over the long term. Price follows earnings.
Speculators or day-traders try to predict the short term price directions and prosper by buying low and selling high. They don't need growth stocks. Long term investors do.
Long term investors use strategies to find these growth stocks and then pick purchase entry points and ride the long term upward trend in price.
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