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There Are Good Rules And There Are Bad Rules.

Discussion in 'Investing Strategies' started by Tropo, 20th Feb, 2012.

  1. Tropo

    Tropo Well-Known Member

    17th Aug, 2005

    Whilst having breakfast I came across this blurb from an individual who is wanting to move from the sell side of the industry to the advisory/money management.

    These are his rules for investing -
    1. Industries are under-analyzed, relative to the market on the whole, and relative to individual companies. Spend time trying to find good companies with strong balance sheets in industries with lousy pricing power, and cheap companies in good industries, where the trends are not fully discounted.
    2. Purchase equities that are cheap relative to other names in the industry. Depending on the industry, this can mean low P/E, low P/B, low P/S, low P/CFO, low P/FCF, or low EV/EBITDA.
    3. Stick with higher quality companies for a given industry.
    4. Purchase companies appropriately sized to serve their market niches.
    5. Analyze financial statements to avoid companies that misuse generally accepted accounting principles and overstate earnings.
    6. Analyze the use of cash flow by management, to avoid companies that invest or buy back their stock when it dilutes value, and purchase those that enhance value through intelligent buybacks and investment.
    7. Rebalance the portfolio whenever a stock gets more than 20% away from its target weight. Run a largely equal-weighted portfolio because it is genuinely difficult to tell what idea is the best. Keep about 30-40 names for diversification purposes.
    8. Make changes to the portfolio 3-4 times per year. Evaluate the replacement candidates as a group against the current portfolio. New additions must be better than the median idea currently in the portfolio. Companies leaving the portfolio must be below the median idea currently in the portfolio.

    As hard as I try I couldn’t find one that pertained to either trend or money management.
    What I did see what a lot of homilies and feel good statements that make investors feel as if they know something about what is happening.
    But left them hanging by the short and curlies when it comes to actually being able to survive in the market
    Chris T.
  2. Matthew38

    Matthew38 Member

    17th Feb, 2012
    I agree it really does read like the investment blurb for a managed fund rather than a clearly articulated trading strategy.
  3. hollysurly

    hollysurly New Member

    9th May, 2012
    Brooklyn,New York

    "Jeremy Grantham's investing strategies for 2012

    GMO outlines its four broad strategies for investing in 2012 and beyond.

    -- Maintain a bias toward quality. Investors often define "quality" stocks as those that have high returns on equity. GMO's definition is more substantive, including firms with high and stable profitability, low debt levels and shares that exhibit comparatively low volatility.
    Market braces for federal budget battle
    Is the "jobless recovery" over?
    Stocks poised for a 25 percent plunge?

    "Quality gave back a bit of its outperformance [in the fourth] quarter, but the game is in the early innings still," GMO says in its latest report. "High quality stocks still trade at attractive levels, and the general defensive posture of quality still remains appealing given all of the uncertainties surrounding global prospects, dysfunctional governments, and horrific bond yields."

    -- Maintain a bias toward value stocks in Europe, Australasia and the Far East (EAFE). Like quality, value can be hard to define and often lies in the eye of the beholder. GMO looks for low earnings multiples and price-to-book values like everyone else. But the money manager also makes adjustments to its model based on company quality, which helps it avoid low-quality stocks that are cheap for good reason.

    "We've also begun to bias our international portfolios toward value," says GMO. "One cannot characterize this as a 'big bet,' but valuations are such that we are beginning to see attractive spreads between growth [stocks] and value [stocks] in international equities."

    -- Reduce exposure slightly to emerging markets. GMO funded some of its flows into EAFE investments from emerging market equities. "Continued concern surrounding China's economic bubble and a likely inability to deflate it without contagion effects gave us pause," GMO says.

    -- Continued bearishness on bonds. "We are literally running out of superlatives to describe how much we hate bonds," GMO says. "Yields are pitiful, dangers of even a slight recovery that could wreak havoc for long-duration portfolios loom, and monetary policies globally certainly have added to the specter of rising yields."

    Keep in mind that as good as GMO's record has been, it characterizes itself as a contrarian firm. By definition, such investors "run into burning buildings," in firm's words. It's one thing to take GMO and Jeremy Grantham's analysis into account when tweaking or rebalancing your own long-term portfolio. It's quite another to try and replicate their success."