Topic: Value Stocks

Increase your value investing returns by making better stock picks—here’s how

approaches to investment decision making

Our TSI Network rating systems for stock picks will help fuel your value investing returns.

Our value investing approach follows the basic model set by the old-fashioned Benjamin Graham/David Dodd approach (from their noted book Security Analysis). Basically, it tries to identify well-financed companies that are well-established in their businesses and have a history of earnings if not dividends. They are likely to survive most economic setback that comes along, and thrive anew when prosperity returns, as it inevitably does.

Many of the stocks we recommended meet our value-investing criteria. And a key component of our value-investing system is our ratings system, which identifies stocks with positive prospects and lower risk, potentially leading to better value investing returns.


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What to know about value stocks to boost your value investing returns

Academic studies suggest that on average, value investing produces better results than growth investing. But these studies mostly look back on what would have happened in a particular historical period, if you followed a particular set of rules. Most distinguish between growth and income investing by looking at average p/e’s (share-price-to-earnings-per-share ratios). They assume high p/e’s are a marker for growth stocks and low p/e’s are a marker for value stocks. As any serious value or growth investor can tell you, it’s more complicated than that.

If a stock seems like an exceptional bargain in relation to earnings or asset values, it may suffer from hidden risks. The stock can plunge when those problems begin to take their toll.

For that reason, value investments may only be cheap due to hidden problems.

Improve value investing returns by using our rating systems for picking stocks

We base our TSI Network ratings on a system we’ve developed over the years. We use it to assign “quality points” based on nine key factors that successful investors use in value investing to determine a company’s ability to survive a business setback and go on to greater success when conditions improve.

Below are the nine factors and the points they earn:

● One point for a long-term record of profit.
● One point for a long-term record of dividends.
● One point for industry prominence—two points for industry dominance.
● One point for an attractive balance sheet, with adequate equity and working capital, and manageable debt.
● One point for Canada or U.S.-wide operations, or two points for multinational operations. You may want to invest in firms that are concentrated geographically, but geographical diversification cuts risk.
● One point for being able to serve the needs of all shareholders. To merit this point, firms must be free of excess government regulation, free of too much dependence on a single supplier and free of insider abuses.
● One point for freedom from business cycles.
● One point for the ability to profit from a secular trend, or two points for the ability to profit from two or more secular trends. Secular trends (such as the global move toward economic liberalization and free trade) go far beyond mere business cycles; they reflect ongoing changes in the world.
● One point for offering products or services that profit from habitual behaviour.

Here’s how we assign Successful Investor value-investing ratings:

Companies with 11 or 12 points fall in the top Successful Investor rating category: Highest Quality. Those with eight to 10 points are Above Average. Six or seven points mean they are of Average quality. If a stock has just four or five points, it carries Extra Risk (that is, more risk than average); two to three points, Speculative; one or no points, Start-Up.

Knowing when to sell and when to hold is important to your value investing returns

Here are some guidelines to consider before you sell:

Be quicker to sell low-quality stocks, and slower to sell shares of high-quality stocks.

Before you sell, ask yourself this: does the stock have a poor outlook? Or, do you want to sell because it just doesn’t fit your portfolio? If neither condition applies, and you just think it has gone up too far or too fast, then you should ask yourself if selling will improve your portfolio, or if you just want to tinker with it.

Avoid portfolio tinkering, especially when it comes to selling stocks that you feel have gone up too far and too fast. One key fact about big winners is that they tend to go up further and faster than most investors expect, and they keep doing it for years, if not decades. If you sell them when they’re just getting started, you may never experience the joy or profit of having a big winner in your portfolio.

Would you recommend value investing to a beginning investor?

A true value investment can rise for a long time. Have you ever sold a stock like this too soon? What made you sell it?

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