Stocks

How to Buy and When to Sell in Your Stocks Portfolio

Key #6 To Building a Successful Stocks Portfolio: How to Buy and When to Sell

Dr. Thomas K. Carr

We have come to the end of our process for building a winning stocks portfolio.  You now have a full course on how to find the best possible long-term investments.  This is the very same research system I use to find the best investments for my IXTHYS Letter and The IXTHYS Portfolio (www.ixthysletter.com).

By the time you get to this stage, you should have one or two companies that have passed through your various filters.  Any company that comes close but for whatever reason is not quite there yet – perhaps its HPLM is too high, or it has a negative earnings report it needs to work out – put on a watch list for monitoring.  As for any passing candidates, you know that they are companies with a strong track record of organically growing earnings and sales; they are currently undervalued; they have a strong mission statement and cultural values you agree with; they are technically poised to move out from a bullish base; they are well liked by the analysts; and they have supportive items in their newsfeeds.  With all that going for what companies now remain on your list, all that is left to do is to buy some shares and start building your stocks portfolio.

Now, it might be possible that no company has made it through your gauntlet of critical research.  Know this: it is perfectly fine, even after devoting hours to research, to having nothing on your “buy now” list.  Get out of the trader’s mindset that you always need to be working your funds in and out each day.  You don’t.  Cash is seed, and seed can remain vital a long time without being planted.  What you need is good soil, and if you don’t have any this week, try again next week.  In some markets, you might go a few months before finding anything investment-grade.  That’s okay.  This is a marathon, not a sprint.

How (and How Much) to Buy

stocks portfolioLet’s assume, however, that your research process has highlighted a stock that you want to buy for your long-term stocks portfolio.  Your task now is to buy shares at the next market open.  To do this, simply put in a “market on open” order (sometimes listed as “OPG”), limiting either the number of shares you want to buy, or the amount of capital you want to invest, and hit “transmit.”  Once you’re in, you’re in.  All the hard work is behind you.

As far as deciding how much money to put into each position, I recommend maxing your number of concurrent positions at 18.  Why 18?  First, I know from experience that anything more than that and I cannot adequately keep track of the companies I’m investing in.  This is important because you need to keep tabs on what you’ve bought so you know when it is best to close out the position.  Second, I know from experience too that any fewer than 18 causes undue volatility in my stocks portfolio.  Yes, you may need to begin your investing with fewer than 18 positions because you have less than $18,000 with which to open your first investing account.  That’s okay.  It’s a necessary inconvenience.  But your goal is to get fully invested with 18 stock and cash (if needed) positions in your stocks portfolio.

My experience with the number 18 is actually backed up by evidence.  In their 2011 book, Investment Analysis and Portfolio Management, Frank Reilly and Keith Brown report that “about 90% of the maximum benefit of diversification” is derived from equally weighted stocks portfolio’s holding 18 stocks.  Beyond that number, the benefit begins to diminish.

So with that in mind, when I want to buy a new stock I take my current cash account’s net asset value (i.e., the total of all cash, dividends, interest and current market value of the stocks I own) and divide it by 18.  I then invest that amount into the new stock I’m buying.  Interactive Brokers makes this step simple.  I simply type in the amount of market value I want to purchase, and the trading platform automatically calculates how many shares I’ll be buying at the open.

Once you have bought your first stock, you are an investor in the underlying company.  Of course, your relationship to that company has only begun.  While the company no longer needs to “prove itself” to you in terms of its growth, valuation, mission and momentum, it still needs to uphold its side of the relationship.  Remember, by placing your seed capital into the company’s coffers, you have “clothed yourself” in the culture of its business and its mission in the world.  You have married a part of your destiny to its destiny.  From here on, what the company does matters to your stocks portfolio and you.

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Momentum

The 6 Keys to Building a Winning Portfolio of Stocks – Part 5 of 6

“Momentum”

By Dr. Thomas K Carr

The following article is adapted from Dr. Carr’s forthcoming new book, “Stop Trading, Start Investing: the 6 Keys to Building a Winning Long-Term Portfolio”

In my previous articles in this series Pt 1 , Pt 2 , Pt 3 and Pt 4 , I looked at how “organic growth” that can be sustained over time, “fair value” as measured by the price to sales ratio, “relative weakness” in the stock price, and analysis of a company’s “mission statement” are all essential to finding great long-term investments in the stock market. In this article we are moving on to key number five: “momentum”.

All these articles are from a FREE BOOK I’m giving away to subscribers of my new service, The IXTHYS Letter (www.ixthysletter.com – coming in August, 2015). The book details at length everything you need to know to find winning stocks. If you want to know more about this new service, you can sign up here.

Once we get to this point, we should have five or six solid long-term investment candidates remaining on our short-list. This then brings us to the fifth and final key to finding the very best long-term investments currently on offer in the stock market: momentum. Everything we have done up to this point has been about finding great long-term investments. This final step is more about the short-term. Here we are looking for stocks that are positioned in such a way that they are likely to rise soon after we buy the stock. If the stocks on our short list of stocks are not positioned this way, we keep them on our watch list for regular monitoring, but we will not buy them until they are so positioned.

momentumMomentum as I define it, is not simply a matter of the stock price. The kind of momentum I’m talking about here comes in three different forms: momentum in the stock price, momentum in the opinions generated by the professional analysts who follow the company, and momentum generated by the financial media. Let’s look at each one of these separately.

 

Relative Weakness

The 6 Keys to Building a Winning Portfolio of Stocks – Part 3 of 6

“Relative Weakness”

By Dr. Thomas K Carr

The following article is adapted from Dr. Carr’s forthcoming new book, “Stop Trading, Start Investing: the 6 Keys to Building a Winning Long-Term Portfolio”

In my previous two articles in this series Pt 1 & Pt 2, we looked at how “organic growth” that can be sustained over time and “fair value” as measured by the price to sales ratio are essential to finding great long-term investments in the stock market.  In this article we are moving on to key number three.

The third key to finding the best stocks for investment is to look for stocks that show relative weakness.  Okay, this one may have you scratching your head.  Weakness?  Really?  Let me explain.

relative weaknessRelative strength in a stock is a function of the stock’s price per share.  Relative strength measures the amount of change in share price over a given period of time relative to a benchmark index (typically the S&P 500).  When a stock compared to its benchmark is moving up at a faster rate or down at a slower rate, it is said to have relative strength.  When a stock compared to its benchmark is moving up a slower rate or down at a faster rate, it is said to have relative weakness.

Stocks with relative strength can be great trading stocks.  Unfortunately, they make lousy candidates for long-term investing.  The reasons for this are numerous and complex.  But I don’t have to explain them to you.  I can simply show you.

Let’s take our base screen as we have set it up so far:

  • Price to Sales Ratio < 1.0
  • Earnings Per Share growth this year > 10%
  • Earnings Per Share growth the past 5 years > 0%
  • Sales Revenue growth the past 5 years > 0%
  • Sales Revenue growth quarter over quarter > 10%

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Fair Value Stocks

The 6 Keys to Building a Winning Portfolio of Stocks – Part 2 of 6

“Fair Value”

By Dr. Thomas K Carr

The following article is adapted from Dr. Carr’s forthcoming new book, “Stop Trading, Start Investing: the 6 Keys to Building a Winning Long-Term Portfolio”

In my previous article in this series that can be read HERE, we looked at how “organic growth” that can be sustained over time is essential to finding great long-term investments in the stock market.  In this article we are moving on to key number two.

fair valueThe second key to finding the best stocks for investment is to make sure that the stocks that show sustainable organic growth are also fair value; i.e., stocks that are trading at a fair price.  When you buy a stock, what you are buying is the right to share financially in the company’s current generation of net income (if the company pays a dividend) and in the company’s future growth prospects as appreciated by the market through rising share prices.  Since that right can be extremely valuable, you will always be paying a premium for it.  This is to say that, in most cases you are going to be paying more money per share than the company is actually worth now.  This premium is, in effect, your deposit on the right to participate in the future growth of the company the value of which, if you implemented the first key (“organic growth”) correctly, should be much greater than the premium paid.  Here in implementing the second key, what you want to avoid is paying a premium that overvalues that future growth and pay a fair value.

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Organic Growth

The 6 Keys to Building a Winning Stocks Portfolio – Part 1 of 6 “Organic Growth”

By Dr. Thomas K Carr

The following article is adapted from Dr. Carr’s forthcoming new book, “Stop Trading, Start Investing: the 6 Keys to Building a Winning Long-Term Portfolio”

The first key to finding investment-worthy stocks is to find companies that display organic growth.  I’ll explain what that phrase means in a moment.  First let me prove to you just how powerful a predictive indicator this first key is.  Typically, financial analysts measure growth by noting increases in both bottom-line (earnings per share) and top-line (sales revenue) numbers.  So what would happen if we took the companies in the S&P 500 that ranked among the top 20 for their 5-year earnings per share growth rates. And of those we took the top 5 ranked companies for their 5-year sales revenue growth rates.  If we bought only those companies at the beginning of each year, held them for one year.  Then ran the screen again at the end of each year and changed positions accordingly. What would our returns look like over time?  Take a look below in Fig. 5.  Here are the results over the past 15 years of buying only the best top-line and bottom-line growth companies among the S&P 500: (Click on the image to enlarge, then press the back button on your browser to return to the article)

stocks portfolio

Fig. 5: 15 Year Test of S&P 500 Growth Companies

You can see that while the S&P managed a total gain of around 70% (3.6% annualized with compounding), our top 5 growth companies gained more than 20 times that!  Had you invested only $2,000 in each of those 5 companies back on January 2nd, 2000, by December 31, 2014, you’d be sitting on a stocks portfolio account worth over $157,000!

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