Build a portfolio of solid companies that grows your wealth. Invest your capital only in the companies that check off all these boxes:
1. Valuation
Looking for valuations that have historically correlated to superior share performance over the next 12 months. Valuation is important but be aware that some companies are undervalued for a reason and valuations vary by sector too.
2. Growth
Revenue growth is key. This excludes many companies already.
3. Income
Invest in companies if they consistently raise dividends every year or if their yields rise by their prices falling.
4. Cash Return on Capital Invested
This is one of the most important factors. There is a strong correlation between stock performance and this cash flow measure. It provides companies with resilience.
5. Momentum
Invest in companies that have thrived in whatever market conditions. Do not guess when the market likes value or momentum companies. Instead, pick a stock that provides both.
6. Risk/Reward ratio
It’s a measure of how consistently a company hits its average return. It shows, if the historic downside risk is worth the upside reward. While history is no guide to the future, the past is still important. This measure shows consistency of returns and we like consistency.
Once a stock fits all strategic categories then look at a few other factors, including analyst forecasts, sector, geography, volatility, market cap and even news stories. But these are far less important than the overall strategy. Only about 1%- 2% of stocks qualify. Then pick the best only!
Once you picked a stock, hold it for a year and use a 25% trailing stop. After a year, check to see whether the stocks are still worthy of being invested in.
Over a longer period of time, this strategy has led to substantial outperformance of the market. Additionally, you do not have to worry about the stocks you invest in. You are able to leave your portfolio alone, content you’ve picked up solid companies that will work hard for your money.
Sven Franssen