Investment Strategies

The following are investment strategies that I have gleaned from various sources in the course of searching for a model that most fits my current status and needs. This page is my online resource (since I spend so much time in front of the monitor, it's easier to make sure I'm following my own investing guidelines this way).

The Dow 10 (a.k.a. "Dogs of the Dow") Strategy

The plan: scan the list of 30 stocks that make up the Dow Jones industrial average and find the 10 that have the highest dividend yields. Invest equal amounts in those 10 stocks. At the end of the year, sell the 10 stocks and repeat. (Or buy and hold, depending on YOUR philosophy.)

David and Tom Gardner's Foolish 4

Start with the Dow 5 (the 5 stocks of the Dow 10 with the lowest prices). Then eliminate the lowest-priced stock and double up on the second-lowest priced. See The Motley Fool for more details.

The Cornerstone Growth Strategy

Created by James O'Shaughnessy, this method says that you should search for and invest in stocks with the following characteristics:

1. Low P/S ratio

2. 5 consecutive years of earnings growth

3. Among largest price gainers last year

Matt Seto's Investment Philosophy In my own words

Matt Seto's approach consider both qualitative and quantitative quality checks; each type will be identified below.

1. Assess the intangibles (corporate & management quality, product quality, market penetration & timeliness, corporate reputation, etc.) (QUAL)

2. Consider stocks with a debt-to-equity ratio of less than 25%

3. Consider stocks with low inventory levels and high inventory turnover

4. Consider stock with high cash flows, exhibiting cash flow per share of 2+ times earnings and a cash-to-price ratio of 10-to-1 or better

5. Consider the book value and its relationship to the current price (higher, lower, equal?)

6. Consider stocks with a working capital per share less than the stock price per share

7. P/E

8. Earnings growth of 20%+ yearly

These are the "icing on the cake" items that don't make an investment, but make one more attractive, according to Matt.

9. NOTE: THIS APPLIES TO TECH STOCKS: Consider stocks with a price-to-research ratio b/w 5 and 10 and less than 15

10. Consider stocks with a low level of short interest

11. A dividend

The final steps involve assessing the company's profitability, including:

1. A return on equity of 35% or more. An ROE of 10-15% would be a minimum. NOTE: Make sure they haven't boosted the ROE by jacking up the debt-to-equity ratio.

2. For growth stocks, study the growth rate, the price-to-research ratio, and the P/E. For value plays, evaluate the P/E, cash flow-to-price, book value, yield, and price-to-research ratio.

William J. O'Neil's Investment Philosophy

Find and purchase stocks meeting the following criteria:

1. C - current earnings per share. Restrict purchases to companies showing an increase of earnings of at least 25%.

2. A - annual earnings per share. Annual compounded growth rate of earnings should be from 25+% in the previous 5 years.

3. N - new. Look for companies with a new product/service, management, industry conditions, and a NEW high in price.

4. S - shares outstanding. Fewer shares outperforms more.

5. L - leader OR laggard. Seek out one of the 2 or 3 best stocks in an industry group. Seek stock with a relative price strength greater than 80.

6. I - institutional sponsorship. Make sure institutional buyers have an active interest in the stock (ownership).

7. M - market. Stay in phase with the market.

Benjamin Graham's Investment Philosophy

1. Dividend history: 20 year continuous growth

2. Earnings: 20 year continuous positive growth

3. Liabilities: 50% of assets or less

4. Assets: Twice (2x) liabilities

5. Debt vs. Net Assets: Debt is less than or equal to (Assets * 1.1)

6. P/E: P/E is less than or equal to 25, P/E is less than or equal to 15 for 3 years

7. P/B: P/B is less than or equal to 1.5

8. P/E * P/B: Less than or equal to 22.5

9. Annual sales or Assets: $50,000,000 (minimum) NOTE: This is my figure; in his day, Graham used $100 million for an industrial company

10. Yield: Greater than or equal to 3%

11. Annual Growth Rate: Greater than or equal to 10%

In addition, Graham mentions that long term debt should not exceed working capital ("net working assets").

Graham's most famous student, Warren Buffet, has modified these principles slightly. Probably the biggest additions are a market dominance requirement (60% - 80%) and a growing, untapped maketplace.

Graham's value calculation: Value = Current (Normal) Earnings * ( 8.5 + 2 * [projected 7-10 year growth rate] )

The Dow Dividend Approach (ala Motley Fool)

1. At the beginning of the next year, identify the 10 DJIA stock with the highest dividend yields. Purchase them.

Robert Sheard's Unemotional Growth Model

1. At the beginning of the month, check the Value Line Investment Survey for the 100 stocks rated 1 for timeliness.

2. Check the month's first Monday issue of Investor's Business Daily in the stock rankings by earnings-per-share growth.

3. Highlight the tops 5 OR 10 stocks that are on both the IBD list and The Value Line timeliness list.

4. Purchase the stock in even dollar amounts through a deep discount broker.

5. Repeat the procedure monthly, rebalancing as necessary.

Art Bonnel's Strategy

Look for stocks showing the following 4 characteristics before any other analysis:

1. Increased earnings on a quarterly and yearly comparison basis

2. A current ratio of 2-to-1, minimum.

3. Extremely low debt (measured by debt-to-equity).

4. Management ownership of 5%-15%. Not to exceed 40%-50%.

After a stock has met those four parameters, he compares based upon technical aspects and factors such as P/E. If a stock fails to meet one of those parameters, it is sold.

The Douglas Theory

This comes from Leslie Douglas, a partner in Folger Nolan Fleming Douglas in Washington, DC, via James K. Glassman's column in the 4/27/97 Washington Post Business section.

At the start of every year, invest equal amounts in the five largest (by market cap) companies who are listed on the NASDAQ.

After a year, adjust, replacing any stocks that have fallen out of the top five.

Khyron's Investment Plan

1. I'll start by retiring all my debt, especially high-interest credit card debt.

2. Accumulate an emergency savings fund equal to 1 year's worth of current employment earnings.

3. a. After completion of the emergency fund, roll over 3 months worth of savings into a general savings fund.

b. Continue this pattern indefinitely.

4. a. Rebuild the emergency fund, replacing the 25% that was rolled over into the general savings fund.

b. Continue this pattern indefinitely.

5. a. Roll over 3 months worth of the savings from the general savings fund into stock, high-yield, bond, and other aggressive investments in an IRA.

b. Continue this pattern indefinitely.

6. Direct remaining disposable income into munis and a Keogh plan (or 401(k) if I'm not as fortunate as I predict I'll be).

7. Once I've maxed all my savings plans, IRA, and other tax-deferred plans, I'll buy individual stocks. The ones I'm currently considering are:

Awesome resources abound. Most of the ideas presented above can be found in the following publications. READ THEM!:

• Money Magazine
• Fortune Magazine
• Kiplinger's Personal Finance Magazine
• Worth Magazine
• Smart Money Magazine
• The Wall Street Journal
• The Washington Post Sunday Business Section
• Investor's Business Daily
• "The Intelligent Investor" by Benjamin Graham. A true classic in investing books.
• "The Whiz Kid of Wall Street's Investment Guide" by Matt Seto