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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Stop Trading & Start Investing

Stop Trading, Start Investing!

Dr. Thomas Carr

The following is adapted from my upcoming book, “Stop Trading, Start Investing” (due out in July, 2015):

stop tradingWith only a handful of possible exceptions, the greatest fortunes ever made in the stock market were not made by quick-turn traders. They were made by long-term investors. For every trader who manages to build a retirement nest egg from trading,, there are literally a hundred thousand stock market millionaires, and a thousand stock market billionaires. None of them made their fortunes by trading in and out of the markets. Rather, they earned their fortunes the old-fashioned way, by prudently investing in, and patiently holding long-term, a select list of high quality stocks.

Consider the following examples:

Until his retirement in 2003, Ralph Wagner managed the Acorn Fund which achieved an annualized return since its 1977 inception of 16.3%. Wagner’s investment philosophy is simple: find stable, long-term trends in the economy and invest in the best companies serving those trends. His value-driven, thesis-centered investing style worked very well. If you had invested just $10,000 with Wagner back in 1977, at his retirement just 26 years later, you would have had nearly $600,000 to your name.

stop tradingOne of my investment heroes is Sir John Templeton, founder of the funds family that bears his name. Templeton got his start in 1939 by putting $10,000 into some of the cheapest stocks on the New York Stock Exchange. He held everything for four years. During that time his original stake doubled twice. Then, armed with a $40,000 portfolio, Templeton took a more disciplined, value-oriented approach, eventually turning his assets into $300 million by 1954, and from there to several billion before he retired in 1992. Money Magazine called Templeton “the greatest global stock picker of the century.” Queen Elizabeth II knighted Sir John for his many philanthropic endeavors. Today, in the wake of his passing in 2008, Templeton’s legacy is the charitable work of his foundation which seeks to support Templeton’s Christian commitment to world peace and spiritual learning.

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