My simple, safe(?), strategy for stock picking

[JTrout]

Using Value Line Investment Survey-
Stocks must have safety rating of 1 or 2.
Must have financial stability of A++ or A+.
Must have Earnings Predictability of 80 or better.
EPS must have increased in at least 13 of last 15 years
Profit Margin not shrinking.
P/E ratio below the companies historical P/E average.
Price closer to the 52 week low than the 52 week high.
Value Line 3 - 5 year projection at least 10% annual total return.

This obviously puts me in blue chip value stocks.
Most importantly to me, I think, is that it has kept me away from some disasters that I otherwise might have bent to the overwhelming wave of optimists (WCOM and LU come to mind).
In my limited experience, it has provided satisfactory results in up and down markets.


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Please give me your opinions-
How safe/effective do you think it is?
Are there any glaring things I'm overlooking?
Do you think this strategy will outperform the mkt. long term?
(long term being 5+ years)

Have I been lucky to date, and would I be better off investing in Vanguard funds?

I do enjoy picking my own stocks, making my own decisions, but I don't have an enormous amount of time, nor possibly the required mental capacity, to invest in completely researching.

If this strategy, or something similar would be close to = in risk/return to Vanguard Index Funds,
then I would prefer picking my own.

Thank you in advance for all comments, criticisms, improvements.

I want to minimize long term risk, and still have the potential to do better than 8-10% per year.

[SunOfBeach]

You could backtest your strategy reasonably easily, and then see how it would have done going back as long as possible. Did you datamine to get this and/or try to specify a whole bunch of models, or is this the one/only thing you've tried? The latter would be better in terms of the validity of any future backtesting (other than the mining bias that exists already due to it being a value strategy).

Generally speaking, though, I think what you have here is at least reasonable.

[PRE]

I think this is very good.

[gull]

I doubt you will beat the market. Most people don't.

I see no reason at all to take on unrewarded, diversifiable risk by owning only a few stocks. This will hurt your risk-adjusted returns.

[PRE]

[ QUOTE ]
I doubt you will beat the market. Most people don't.

I see no reason at all to take on unrewarded, diversifiable risk by owning only a few stocks. This will hurt your risk-adjusted returns.

[/ QUOTE ]

I couldn't disagree more.

[JTrout]

I have not back tested this, or used any data mine to get to this strategy.
It basically evolved through reading books with a slant toward value investing, as well as looking at what numbers I failed to pay attention to in stocks that otherwise looked to be a good deal.
Example,
stock is at 52 week low, obviously P/E low, projected 3-5 year return high, but
the financial stability is average, and the profit margins have shrunk.
I'm not touting this as the best thing, just what I'ved gravitated toward to minimize risk and keep me from making any big mistakes from hopping on a bandwagon.
One thing about this way, you must have some patience, and you need to have cotton in your ears when it comes to certain plays. (i guess that's two things!)
These stocks didn't get to be close to their 52 week low because everyone is thrilled with them, but
hopefully the other numbers (safety, financial stability, history of strong earnings) will override the short term bad news that has the stock down.

I appreciate all the comments so far. I'm here to learn.

[pig4bill]

If you like Value Line (I don't, personally) you might look at their mutual fund line. There might be a fund similar to the kinds of stocks you like, then you can check it's chart over time.

[JTrout]

What is it you don't like about V-L?
If it's their timing ranking, I don't use it either.
I just like having so much info on one page, and that it is available to me.
I do think that they are too optimistic as a whole.

If it's how they get their safety ratings, or financial strength ratings, please let me know.
My whole strategy starts with these two numbers.

As to mutual funds, if I were to go that route, I'd put it into Vanguard Index Funds and be done with it.

As I see it, for me at least:

Vanguard Index Funds-
Advantages:
Simple, easy strategy that would mirror the market and outperform the majority of investors.
Provides an easy way to regularly contribute. (This I feel is important to me, because I'd be more likely to get in the habit of contributing monthly to this option than I would to contribute monthly to a stock portfolio.)
Most informed people would advise me to take this strategy over stock picking.

Disadvantages:
I don't have high expectations for the market return over the next 10 years.
I don't see the market P/E expanding; more likely shrinking a little.
I hate the idea of having any investment dollars in some of the stocks that make up the index- companies with high multiples and no earnings.
It's not as much fun, nor as challenging.


Stock picking strategy-
Advantages:
Investment dollars will be in blue chip companies with a long history of success.
Very good chance to do considerably better than market average.
Puts to use the (limited) knowledge that I've acquired.
Promotes continued learning.
I'm confident in my decisions.

Disadvantages:
Goes against advise of many people MUCH smarter than myself.
Potential to do worse than market average.
I may be too confident in my strategy, without a full understanding of how to value stocks.
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I think the back-testing idea is outstanding, but I'm unlikely to do it because I don't know exactly how, and probably don't have the tools at my disposal to do it.

I would bet that the returns are outstanding.
(See, I said I was too confident! [img]/images/graemlins/tongue.gif[/img])

Pulling numbers completely out of my arse (I mean brain):
I think the Vanguard Index Strategy would provide an annual return between 4 and 10% over the next 20 years.
I think the blue chip value strategy would return 8-15% annually.

Am I nuts? [img]/images/graemlins/laugh.gif[/img]

[donkeykong2]

i dont think this is enough information. if you want to beat the market you need something more sophisticated, i think this is like going to high stakes poker and play a tight abc game... you might get lucky but it s not really a great concept.

[IdealFugacity]

Here is the good aspect of your plan:

It is a relatively intuitive way of picking solid, blue chip, value stocks, as you suggested.

Here is the bad aspect of your plan:

It is a relatively intuitive way of picking solid, blue chip, value stocks, as you suggested.


How much of your portfolio will follow this plan? Large-cap Value should definitely not be 100% or 60%, and probably not 40%, of a well-diversified portfolio's US EQUITY allocation (so even LESS of your overall portfolio)

This 'plan' will be ok if you are going to put 15-30% (max) of your assets towards it; did you intend this to be the case?