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The basis of a solid portfolio

My highest priority is that I don't lose money.  I invest for myself and a few friends, and I hate losing money, mine or theirs.  In order to prevent that, I have set up a defense system.

1. I begin with a strict screen.  There are hundreds of good companies out there.  I am not looking just for a good company.  I am looking for a great buy.

2. I buy companies with a high ROE.  By high, I mean at least 25%.  Generally a company cannot consistently achieve this without having an edge of some kind on their competition.  Companies with an astronomical ROE are eliminated.  I want to have a grasp on why they have a high ROE.  I set the screener for an ROE between 25 and 100.

3. I look for very low debt.  Companies that have slumps but no debt tend to bounce back fairly quickly.  I once read that leverage is the only way that a smart man can go bankrupt.  I never forgot that one!  I set the screener for debt to capital under 10%

4. I avoid penny stocks, illiquid stocks, closed end funds, and ETF's.  I want to buy a piece of a company that is producing something, and that I can sell as soon as I want to sell.  I normally set the screener for a price over $5 per share and a volume range over 100,000 shares per day.

5. I base my buy and sell times on historical Price to Earning ratios.

  • Price up, earnings up: If the earnings are growing then the price can go up without much change in the P/E ratio.  I will hold on and ride the wave.
  • Price up, earnings down or static: If the price goes up but the earnings don't change, I will sell when the P/E is at historical highs.
  • Price down, earnings up: If the earnings are growing and the price is dropping, I will probably buy.  I feel confident buying because I have already researched the company and know that it is solid.
  • Price down, earnings down or static. I will probably sell quickly.  Possibly an anomaly caused by an unusual situation, and so I may buy if it appears that  the drop in earnings is only temporary.
Using this method, I am presently holding NE, LPHI, CFSG, and XOM.  The P/E on XOM is almost up to 14, which is a little high for them.

I am watching WDC; IPXL; FSYS; HITK; AFAM; IDCC.

Disclosure: Long NE; LPHI; CFSG; XOM at time of writing.